Author: Shreya Mishra

Introduction

Salona Cotspin Limited is a prominent Indian textile manufacturer, founded in 1994. The company specializes in producing high-quality cotton and blended yarns, as well as knitted fabrics such as jersey and fleece, catering to the hosiery and apparel industries. Salona Cotspin places a strong emphasis on quality and sustainability, utilizing organic and recycled fibers, along with renewable energy sources such as wind and solar, and continually innovating in its products.

Objective

To calculate beta and observe its significance

y= a + b x

Where b is beta

Literature review

View 1

The Capital Asset Pricing Model (CAPM), independently developed by Sharpe (1964) and Lintner (1965), established beta as the fundamental measure of systematic risk in modern portfolio theory. Beta quantifies the sensitivity of an individual security’s returns to market movements, representing the covariance between the security’s returns and market returns divided by the variance of market returns. In the regression equation y = a + bx, beta (b) serves as the slope coefficient, indicating how much the dependent variable (stock returns) changes in response to a unit change in the independent variable (market index returns).

Sharpe, W. F. (1964). Capital asset prices: A theory of market equilibrium under conditions of risk. Journal of Finance, 19(3), 425-442. https://doi.org/10.2307/2977928

Lintner, J. (1965). The valuation of risk assets and the selection of risky investments in stock portfolios and capital budgets. Review of Economics and Statistics, 47(1), 13-37. https://doi.org/10.2307/1924119

View 2

The application of beta estimation in emerging markets, particularly India, has received considerable scholarly attention. Madhusoodanan (1997) examined the behavior and stability of beta coefficients in the Indian stock market, finding evidence of temporal instability in beta estimates. This research highlighted the importance of regularly updating beta calculations for accurate risk assessment, particularly relevant for companies like Salona Cotspin operating in dynamic sectors.

Madhusoodanan, T. P. (1997). Risk and return: A new look at the Indian stock market. Finance India, 11(2), 285-304.

The relationship between sector-specific characteristics and systematic risk has been explored by various researchers. The textile industry, where Salona Cotspin operates, exhibits unique risk characteristics due to its exposure to commodity price fluctuations, currency movements, and global trade dynamics. Understanding beta in this context helps investors assess how textile stocks respond to broader market movements captured by indices like NIFTY.

The regression model y = a + bx remains the standard approach for beta estimation, where statistical significance tests (typically t-tests) determine whether beta is significantly different from zero or one. This statistical rigor ensures that observed relationships reflect true systematic risk rather than random variation.

Data Collection

Data for the Nifty 50 and Salona Costpin Ltd. were downloaded from nseindia.com for the period from 1/12/24 to 30/11/25. Then, the Friday closing prices were determined, and the weekly returns of NIFTY and Salona Costpin Ltd. were calculated. Weekly returns of Nifty as x and the weekly return of Salona Cotspin Ltd were taken as y.

Data Analysis

Regression Statistics Summary

The regression analysis examines the relationship between the NIFTY index (x) and Salona Cotspin Ltd returns (y) using 50 observations.

Multiple R (0.7999): Strong positive correlation between NIFTY and Salona Cotspin, indicating that 80% of the variation moves together linearly.

R Square (0.6399): The model explains 63.99% of the variance in Salona Cotspin returns, showing good predictive power.

Adjusted R Square (0.6324): Confirms the model is not overfitted, with genuine explanatory power.

Standard Error (2175.40): Average deviation of observed values from the regression line.

ANOVA Results

F-statistic (85.33) with Significance F (3.18E-12): The extremely low p-value indicates the regression model is highly statistically significant. NIFTY has a genuine predictive relationship with Salona Cotspin returns.

Regression Equation

y = 7871.67 + 102.26x

Where:

y = Salona Cotspin Ltd returns
x = NIFTY index return

Statistical Significance: The p-value of 3.18E-12 confirms the relationship is genuine and not due to chance. Both intercept and slope coefficients are highly significant.

Model Fit: With R² of 0.64, the model explains approximately 64% of the variation in Salona Cotspin returns, indicating good predictive power while acknowledging that 36% of the variance is influenced by other factors.

Conclusion

The regression analysis demonstrates a statistically significant and strong positive relationship between NIFTY and Salona Cotspin Ltd. The model is valid and reliable, with the market index explaining approximately 64% of the variation in the company’s stock returns. The significant positive beta confirms that Salona Cotspin’s returns are systematically linked to broader market movements, making it sensitive to market-wide fluctuations.

References

Madhusoodanan, T. P. (1997) Risk and return: A new look at the Indian stock market. Finance India, 11(2), 285-304.

Roll, R. (1977). A critique of the asset pricing theory’s tests, Part I: On past and potential testability of the theory. Journal of Financial Economics, 4(2), 129-176. https://doi.org/10.1016/0304-405X(77)90009-5