Construction of commodity based

Index Group 2

Rishi ShahHaripreetha ParthasarathyAshok Kumar Reddyyerasi

Ravi MataliaVishal Gujarathi

All companies that had iron ore as one of its raw materials were obtained through prowess.

151 companies were identified

At the first level, companies whose raw materials constitute more than 40% of their expenses were selected. This would give a set of companies that are driven more by iron ore.

In order to create an index, companies with large market capitalization are preferred. A threshold of Rs. 5 billion was selected and only companies with market cap beyond this were taken to the next set.

These steps culminated into a set of 10 companies

Initial set of 151 companies

Raw material %

Market Capitalization

List of companies

High trading volumes are also important prerequisites for a company to be included in an index. This criterion was incorporated next into the analysis.

Trading Volumes

Bhushan Steel Ltd.

Electrosteel Castings Ltd.

Electrosteel Steels Ltd.

Essar Steel India Ltd.

J S W Ispat Steel Ltd.

J S W Steel Ltd.

Jindal Saw Ltd.

Jindal Steel & Power Ltd.

Steel Authority Of India Ltd.

Tata Steel Ltd.

The universe of 151 companies were narrowed down to 10 using a set of filter criteria

Correlation b/w Iron ore and market capitalisation : From jan 2009 Bhushan Steel Ltd. 0.777740506Electrosteel Castings Ltd. -0.008905151Electrosteel Steels Ltd. 0.145794942Essar Steel India Ltd. 1.8647E-16J S W Ispat Steel Ltd. -0.032543875J S W Steel Ltd. 0.422549384Jindal Saw Ltd. 0.621336811Jindal Steel & Power Ltd. 0.520906002Steel Authority Of India Ltd. -0.059099815Tata Steel Ltd. 0.530164489

Correlation b/w Iron ore and market capitalisation : From jan 2012Bhushan Steel Ltd. -0.515200849Electrosteel Castings Ltd. -0.261609186Electrosteel Steels Ltd. -0.570341985Essar Steel India Ltd. -1.42156E-15J S W Ispat Steel Ltd. 0.414481103J S W Steel Ltd. -0.353825661Jindal Saw Ltd. 0.541878339Jindal Steel & Power Ltd. 0.54247525Steel Authority Of India Ltd. 0.634020103Tata Steel Ltd. 0.664854022

1. Using the monthly iron ore prices, the correlation of the selected 10 companies were computed. This was done in two time frames- from Jan 2009-till date and from Jan 2012-till date.

2. Only the positively correlated companies were selected to be included in the index3. Finally, a set of 6 companies were selected to be a part of our index.

Correlation analysis Index creationSet of 10 companies

Correlation with iron ore was studied to select 6 companies for the index

Based on Free Float M.Cap Based on Total M.cap

CompanyCorrelation with Iron ore prices Free Float M.cap Weightage Total M.cap Weightage

Bhushan Steel Ltd. 0.8 30817.8 4.73% 97186.49 6.5%J S W Steel Ltd. 0.4 115977.9 17.80% 187212.06 12.5%Jindal Saw Ltd. 0.6 18033.4 2.77% 33389 2.2%

Jindal Steel & Power Ltd. 0.5 164539.3 25.25% 401511.12 26.7%Tata Steel Ltd. 0.5 268321.0 41.18% 403005.48 26.8%

SAIL 0.6 53847.2 8.26% 380008.33 25.3%

Index constituents were planned depending on flee float or total market cap

The % representation of the selected 6 companies could be based on either of the following two:

• Free float market cap• Total market cap

The major differences between the two methods can be seen in case of Tata Steel and SAIL.

Hence it can be seen that higher the market cap of a company (either free float or total), the bigger its share in the index.

companies price of share

no of shares(mn)

Free Float Factor

Free Float M Cap(Mn)

Weightage in Index

Bhushan Steel Ltd. 435.95 222.930359 0.3171 30817.83598 6.67%J S W Steel Ltd. 861.35 217.3472572 0.6195 115977.8712 25.10%Jindal Saw Ltd. 119.65 279.0555788 0.5401 18033.3989 3.90%

Jindal Steel & Power Ltd. 431.65 653.5906144 0.4098 115613.7549 25.02%Tata Steel Ltd. 418.7 458.3439283 0.6658 127772.7477 27.65%

SAIL 93.55 4062.087974 0.1417 53847.18036 11.65%

Total 462062.789

• Used goal seek to limit each script to 25%• This will ensure proper representation of companies with in the index.

Final Index is Built using Free Float M.Cap, by putting a Cap at 25% for each script

Index Vs the Iron Ore prices in the last one year

1/1/2012 2/1/2012 3/1/2012 4/1/2012 5/1/2012 6/1/2012 7/1/2012 8/1/2012 9/1/2012 10/1/2012350

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80Time series chart of Index using Free Float M.Cap and Iron ore price

Index using Free Float M.Cap

Date

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