Security Analysis and Portfolio

Management
Assignment
ON

Event Study

Submitted to
Prof. K. Sunder Ram

Submitted by
Piyush Pranjal (1226109229)
Smita Sahu (1226109248)
Yogesh Lalwani (1226109260)
SEC-B

MBA (IB) - 2009-11

Event Study

An Event study is a statistical method to assess the impact of an event on the value of a firm.
For example, the announcement of a merger between two business entities can be analyzed to
see whether investors believe the merger will create or destroy value. The basic idea is to find
the abnormal return attributable to the event being studied by adjusting for the return that
stems from the price fluctuation of the market as a whole.

Event studies measure security price changes in response to events. Event studies have been
used in a large variety of studies, including mergers and acquisitions, earnings
announcements, debt or equity issues, corporate reorganisations, investment decisions
and corporate social responsibility. The event date can vary from one security to another in
the same study, with dates measured in "event time".

The organizations which we were given to choose from are Dabur India Ltd.(1:1 bonus),
HDFC Ltd.(5:1 stock split) and East India Hotels Ltd(Stake sale to RIL), ONGC(Stock split
followed by 1:1 bonus) and Havells(1:1 bonus).

We have taken into consideration two companies namely:-

 Dabur India Ltd.which had announced a bonus issue of 1:1.

 HDFC Ltd that had announced a stock split of 5:1

We will study the security price changes in response to these events.

Dabur India Ltd.

Dabur India Limited is one of India’s leading FMCG Companies. Building on a legacy of
quality and experience for 125 years, Dabur is today India’s most trusted name and the
world’s largest Ayurvedic and Natural Health Care Company. Dabur India's FMCG portfolio
today includes five flagship brands with distinct brand identities- Dabur as the master brand
for natural healthcare products, Vatika for premium personal care, Hajmola for
digestives, Real for fruit-based beverages, and Fem for fairness bleaches & skin care.

The Announcement

Dabur India Ltd had announced that the Board of Directors of the Company at its meeting
held on July 26, 2010, inter alia, had recommended issuance of one bonus share against each
share held by a member on the record date of issuance of bonus share. The Board approved
the increase in the Authorised Share Capital of the Company from 145 crores equity shares of
Re. 1 each aggregating to Rs. 145 crores to 200 crores equity shares of Re. 1 each
aggregating to Rs. 200 crores and consequential alterations in the Memorandum and Articles
of Association of the Company. The stock was trading at Rs.203.70, down by Rs.7.90 or
3.73%. The stock hit an intraday high of Rs.218 and low of Rs.203.50. The total traded
quantity was 17.58 lakhs compared to 2 week average of 1.65 lakhs. On 8th September, the
bonus shares were issued.

Here, we have taken the duration of study from 26th April to 24th September. The Event Date
is 8th September. A trend graph is shown below with inferences drawn and the related data.
While calculating we have taken the closing price of Dabur India Ltd.

Data-

Date Close Price

26-Apr-10 176.9
27-Apr-10 177.9
28-Apr-10 180
29-Apr-10 180.75
30-Apr-10 180.4
03-May-10 181.95
04-May-10 182.45
05-May-10 185.55
06-May-10 188.6
07-May-10 180.6
10-May-10 180.5
11-May-10 178.7
12-May-10 177.4
13-May-10 178.25
14-May-10 182.2
17-May-10 187.3
18-May-10 188.05
19-May-10 181.75
20-May-10 185.25
21-May-10 183.2
24-May-10 182.7
25-May-10 177.5
26-May-10 180.05
27-May-10 179.7
28-May-10 185.15
31-May-10 184.85
01-Jun-10 183.55
02-Jun-10 185.2
03-Jun-10 186.6
04-Jun-10 192.4
07-Jun-10 193.7
08-Jun-10 196.05
09-Jun-10 191.9
10-Jun-10 191.75
11-Jun-10 191
14-Jun-10 192.2
15-Jun-10 190.2
16-Jun-10 188.05
17-Jun-10 189.2
18-Jun-10 186.15
21-Jun-10 190.8
22-Jun-10 198.25
23-Jun-10 198
24-Jun-10 201.9
25-Jun-10 200
28-Jun-10 201.75
29-Jun-10 204.85
30-Jun-10 209.75
01-Jul-10 207.3
02-Jul-10 201.5
05-Jul-10 201.6
06-Jul-10 205.75
07-Jul-10 207.3
08-Jul-10 210.8
09-Jul-10 212.15
 12-Jul-10 212
13-Jul-10 212.35
14-Jul-10 213.35
15-Jul-10 212.2
16-Jul-10 212.95
19-Jul-10 209.2
20-Jul-10 205.6
21-Jul-10 206
22-Jul-10 208.75
23-Jul-10 211.6
26-Jul-10 203.7
27-Jul-10 203
28-Jul-10 199.95
29-Jul-10 196.35
30-Jul-10 197.6
02-Aug-10 197.45
03-Aug-10 195.9
04-Aug-10 198.4
05-Aug-10 201.6
06-Aug-10 203.15
09-Aug-10 201.5
10-Aug-10 202.55
11-Aug-10 201.45
12-Aug-10 197.65
13-Aug-10 199.8
16-Aug-10 201.1
17-Aug-10 203.75
18-Aug-10 204.65
19-Aug-10 205.8
20-Aug-10 206.15
23-Aug-10 206.85
24-Aug-10 210.35
25-Aug-10 208.25
26-Aug-10 209.05
27-Aug-10 205.95
30-Aug-10 204.9
31-Aug-10 209.4
01-Sep-10 211.85
02-Sep-10 213.1
03-Sep-10 211.5
06-Sep-10 211.7
07-Sep-10 215.95
08-Sep-10 107.6
09-Sep-10 108.4
13-Sep-10 108.4
14-Sep-10 108.15
 15-Sep-10 107.95
16-Sep-10 109.55
17-Sep-10 109.65
20-Sep-10 111.3
21-Sep-10 109.15
22-Sep-10 105.9
23-Sep-10 104.25
24-Sep-10 104.95

Inference- On 7th September, the share price was 215.95. Bonus share were issued on 8th
September. The share price fell to 107.6, a change of 50.17%. The equity share capital of the
Company rose from 145 crores equity shares of Re. 1 each to 200 crores equity shares of Re.
1 each aggregating to Rs. 200 crores.

HDFC
HDFC was incorporated in 1977 with the primary objective of meeting a social need - that of
promoting home ownership by providing long-term finance to households for their housing
needs. HDFC was promoted with an initial share capital of Rs. 100 million. The primary
objective of HDFC is to enhance residential housing stock in the country through the
provision of housing finance in a systematic and professional manner, and to promote home
ownership. Another objective is to increase the flow of resources to the housing sector by
integrating the housing finance sector with the overall domestic financial markets.

The Announcement

Housing Development Finance Corporation Ltd had announced that the Committee of
Directors of the Corporation at its meeting held on July 14, 2010 had fixed August 20, 2010
as the "Record Date" for the purpose of ascertaining the names of the shareholders who
would be entitled to receive 5 (five) equity shares of the nominal face value of Rs. 2 each for
every 1 (one) equity share of Rs. 10 each held by them as on the said Record Date and the
names of the warrant holders who would be entitled to receive 5 (five) warrants for every 1
(one) warrant held by them as on the said Record Date. The stock closed the day at
Rs.3046.75, down by Rs.30.85 or 1%. The stock hit an intraday high of Rs.3083.90 and low
of Rs.3025.05. The total traded quantity was 60848 compared to 2 week average of 56830.

Here, we have taken the duration of study from 20th April to 24th September. The Event Date
was set as 20th August and was split on 18th August. A trend graph is shown below with
inferences drawn and the related data. While calculating we have taken the closing price of
HDFC.

Data-

Date Close Price

20-Apr-10 2700.9
21-Apr-10 2700.1
22-Apr-10 2728.55
23-Apr-10 2719.9
26-Apr-10 2827.4
27-Apr-10 2855.8
28-Apr-10 2810.4
29-Apr-10 2830.75
30-Apr-10 2821.9
03-May-10 2805.6
04-May-10 2820.3
05-May-10 2802.45
06-May-10 2758.25
07-May-10 2731.1
10-May-10 2792.45
11-May-10 2773.8
12-May-10 2779.1
13-May-10 2808.4
14-May-10 2778.55
17-May-10 2754.65
18-May-10 2742.4
19-May-10 2672.75
20-May-10 2713.75
21-May-10 2714.8
24-May-10 2663.9
25-May-10 2607.75
26-May-10 2690.6
27-May-10 2754.45
28-May-10 2776.1
31-May-10 2787.7
01-Jun-10 2705.9
02-Jun-10 2713.15
03-Jun-10 2737.05
04-Jun-10 2746.15
07-Jun-10 2677.45
08-Jun-10 2700.55
09-Jun-10 2705.15
10-Jun-10 2750.25
11-Jun-10 2798.1
14-Jun-10 2838.5
15-Jun-10 2859.35
16-Jun-10 2911.9
17-Jun-10 2931.4
18-Jun-10 2923.15
21-Jun-10 2984.2
22-Jun-10 2981.7
23-Jun-10 2994.3
24-Jun-10 3015.95
25-Jun-10 2936.65
28-Jun-10 2959.8
29-Jun-10 2901.65
30-Jun-10 2941
01-Jul-10 2915.3
02-Jul-10 2915.75
05-Jul-10 2939.25
06-Jul-10 2944.3
 07-Jul-10 2906.45
08-Jul-10 2935.5
09-Jul-10 2967.55
12-Jul-10 3002.5
13-Jul-10 3063.2
14-Jul-10 3077.6
15-Jul-10 3046.75
16-Jul-10 3020.7
19-Jul-10 3050.65
20-Jul-10 3012.95
21-Jul-10 2970.4
22-Jul-10 3016.8
23-Jul-10 2993.2
26-Jul-10 2959.65
27-Jul-10 2940.05
28-Jul-10 2895.3
29-Jul-10 2974.8
30-Jul-10 2981.25
02-Aug-10 3024
03-Aug-10 3052
04-Aug-10 3058.15
05-Aug-10 3028
06-Aug-10 3069.95
09-Aug-10 3116.5
10-Aug-10 3073.35
11-Aug-10 2999.75
12-Aug-10 2990.75
13-Aug-10 2997.85
16-Aug-10 2973.95
17-Aug-10 3011.45
18-Aug-10 621.2
19-Aug-10 644.1
20-Aug-10 639.7
23-Aug-10 628.65
24-Aug-10 625.15
25-Aug-10 619.5
26-Aug-10 627.55
27-Aug-10 622.35
30-Aug-10 628
31-Aug-10 625.15
01-Sep-10 622.5
02-Sep-10 632.05
03-Sep-10 630.6
06-Sep-10 634.85
07-Sep-10 632.7
08-Sep-10 630.3
 09-Sep-10 630.6
13-Sep-10 664.15
14-Sep-10 672.6
15-Sep-10 681.6
16-Sep-10 691.05
17-Sep-10 684.1
20-Sep-10 706.85
21-Sep-10 720
22-Sep-10 731.6
23-Sep-10 727.3
24-Sep-10 731.95

Inference- On 17th August, the share price was 3011.45. Stock Split was done on 18th
August. The share price fell to 621.2, a change of 79.37%.

Learning

Housing Development Finance Corp Ltd (HDFC) announced a stock split. Each share of a
face value of Rs 10 would be split into five shares of face value of Rs 2 each. So what are the
implications for investors? Does it indeed increase their wealth? Is a stock split similar to a
bonus issue? What about the tax implications? Is their potential for tax planning?
Stock-splits

Stock splits are a relatively new phenomenon in the Indian context. It is important that
investors understand the reasons that companies may split their shares and how a stock split
is different from a bonus issue.

In a stock split, the capital of the company remains the same whereas in a bonus issue the
capital increases and the reserves decrease. However, in both actions (a stock split and a
bonus) the net worth of the company remains unaffected.

Let’s take the HDFC 5 for 1 stock split. This means following the stock split, the company’s
shares will start trading at one-fifth the price of the previous day. Consequently, you will own
five times the number of shares that you originally owned and the company in turn will have
five times the number of shares outstanding. Consider the following example.

The question that arises is if there is no difference to the wealth of the investor, then why
does a company announce a stock split? Generally, stock splits are announced to make a scrip
more liquid, more affordable to the average investor — since post the split, the share price
adjusts proportionately to the split ratio.

Here, it has to be reiterated that the shares only appear to be cheaper, it makes no difference
whether in the above example you buy one share for Rs 3,000 or five for Rs 600 each.
However, earlier the minimum ticket size was Rs 3,000, now it is a more affordable Rs 600.
As far as the tax implications for stock splits are concerned, there aren’t any. A stock split,
like a bonus issue, is tax neutral. However, when the shares are sold, the capital gains tax
implications are different that what is applicable for bonus issues. Here, the original cost of
the shares also has to be reduced. For instance, in the above example if the cost of the 100
shares at Rs 1,500 per share was Rs 1,50,000, after the split the cost of 500 shares would be
reduced to Rs 300 per share, thereby keeping the total cost constant at Rs 1,50,000.

Bonus shares
Bonus shares are shares issued free of cost to the shareholders of a company. As this is
essentially a book entry (reserves get capitalised), following a bonus issue, though the
number of shares increase, the proportional ownership of shareholders does not change.

Also, post the bonus, the share price should fall in proportion to the bonus issue, thereby
making no difference to the personal wealth of the share holder. However, more often than
not, a bonus is perceived to be a strong signal given out by the company and the consequent
demand push for the shares causes the price to move up.

As far as tax is concerned, since no money is paid to acquire bonus shares, these have to be
valued at nil cost while calculating capital gains.

The originally acquired shares will continue to be valued at the price paid at the time of
acquisition. An incidental tax planning benefit is that since the market price of the original
shares falls on account of the bonus, there may arise an opportunity to book a notional loss on
the original shares. This is known as bonus stripping. It may be noted here that through
Section 94(8), the Income-Tax Act has introduced measures to curb bonus stripping, but
strangely, the same are only applicable to mutual fund units and not to shares

Reference

 bseindia.com

 indiabulls.com

 dabur.com

 hdfc.com

 eih.com