PRJCT On EvA

Impact of eva and comparative study of gail,icici,jindal,airtel,maruti suzuki
2 IMPACT OF EVA ON MARKET PRICE
PERFORMANCE MEASURE What is a performance measure? A performance measure is a numeric description of an agencys work and the results of that work. Performance measures are based on data, and tell a story about whether an agency or activity is achieving its objectives and if progress is being made toward attaining policy or organizational goals. In technical terms, a performance measure is a quantifiable expression of the amount, cost, or result of activities that indicate how much, how well, and at what level, products or services are provided to customers during a given time period. Quantifiable means the description can be counted more than once, or measured using numbers. Activities mean the work, business processes and functions of Washington state government agencies. Results are what the agencys work is intended to achieve or accomplish for its customers.
What is Economic Value Added (EVA)?

A value-based financial performance measure A measure reflecting the absolute amount of shareholder value created or destroyed during each year A useful tool for choosing the most promising financial investments An effective protection against shareholder value destruction A tool suitable to control operations A measure highly correlated with stock prices A measure that can be maximized - EVA has not steering failures like ROI and EPS (maximizing these measures might lead to not optimal outcome; not max. shareholder value) An estimator for companys true economic value creation, unlike the traditional measures has focus on shareholder value creation A good basis for management compensation systems to motivate managers to create shareholder value A tool more useful than rate of return (ROI) in controlling and steering day-to-day operations A concept practically the same as Economic Profit (EP), Residual Income (RI) and Economic Value Management (EVM)
K C College of Commerce
A registered trademark owned by Stern Stewart & Co. supporting more than 250 large companies around the world
EVA Basic Premise

Managers are obliged to create value for their investors Investors invest money in a company because they expect returns There is a minimum level of profitability expected from investors, called capital charge Capital charge is the average equity return on equity markets; investors can achieve this return easily with diversified, long-term equity market investment Thus creating less return (in the long run) than the capital charge is economically not acceptable (especially from shareholders perspective) Investors can also take their money away from the firm since they have other investment alternatives
EVA also useful for small companies
Traditional performance measures used by small companies, such as sales or profits alone, are unable to describe the companys true business results and sometimes lead to wrong business decisions EVA calculation is simple, since only main data contained in income statement and balance sheet is needed EVA reflects companys performance in dollars Positive EVA indicates value creation Negative EVA indicates value destruction Series of negative EVA is a signal that restructuring in a company maybe needed
Things needed to Calculate Companys Economic Value Added Only following the information is needed for a calculation of a companys EVA:

Companys Income Statement Companys Balance Sheet
EVA Calculation Steps

1. Calculate Net Operating Profit After Tax (NOPAT) 2. Identify companys Capital (C) 3. Determine a reasonable Capital Cost Rate(CCR) 4. Calculate companys Economic Value Added (EVA) Step 1: Calculate Net Operating Profit After Taxes (NOPAT)
An alternative way to calculate NOPAT: Net Profit After Tax Interest Expenses =NOPAT Step 2: Identify Companys Capital (C) Companys Capital (C) are Total Liabilities less Non-Interest Bearing Liabilities: Total Liabilities (Less) total debts =Capital
Step 3: Determine Capital Cost Rate (CCR)
Owners expect some percent return* for using their money because less are not attractive to them; this is about the return that investors can get by investing long-term with equal risk (stocks, mutual funds, or other companies) this is called as ccr.
Note: CCR depends on current interest level (interest higher, CCR higher) and companys business.
Step 4: Calculate Companys EVA EVA = NOPAT - C * CCR
Conclusion

EVA is an appropriate management tool for small business Economic Value Added (EVA) is easy-to-calculate Periodical EVA calculation and analysis can be done with minimal effort because only few basic data have to be entered in a common spreadsheet EVA calculation is a starting point for improvement in financial and business policy Scarce capital resources of a small company can be more efficiently allocated using EVA than using intuition or traditional methods EVA implementation in a small company will result in a better business performance, because of better understanding the objectives (especially near the floor/operating activities)
EVA INTRODUCTION Economic Value Added represents value generating power of an organization. There are three factors to compute EVA. (i) Adjusted earning before interest after tax. (ii) Weighted average cost of capital and (iii) Capital Employed. A change in any of the three factors will change EVA. The various factors affecting the EVA can be put through a chart given above. The chart helps the management in concentrating attention on different factors affecting value. It is clear from the above chart that top management can take appropriate decision to create value in the following way: Deploy more and more funds to those activities where the amount of NOPAT generated by the activities is greater than the cost of capital. Withdraw fund from those activities wherein the amount of NOPAT is less than the amount of cost of capital unless there is strategic decision to lose in one activity in order to gain in another. Improve the operating efficiency of the organization to retain the same amount of NOPAT by possible continuous reduction of existing capital or / and continuous increase of the existing NOPAT with existing amount of capital. Optimize the capital structure through optimum debt equity mix in order to have the lowest possible weighted average cost of capital (WACC). Till now, in India the finance managers are not computing EVA to measure financial performance of an organization due to subjective function. In this study it has been tried to eliminate subjective function as far as possibleTraditional measures Traditional PM has mainly been financial measuring ratios such as ROI (Return on Investment), RI (Residual Income), and EPS (Earnings per share). These metrics accounts for the costs associated with capital and help firms spot areas in which capital is being invested unprofitably. Although these financial data have the advantage of being precise and objective, the limitations are far greater, making them less applicable in today's competitive market. Organisations, that have adopted the traditional PM, have experienced great difficulty in trying to fit the measures with
increasing new business environment and current competitive realities. While the traditional financial metrics are value-based, they are nonetheless lagging indicators. They offer little help for forwardlooking investments, where future earnings and capital requirements are largely unknown investments such as new product introductions and capital or new market entry. This will lead to narrow short-term decision-making based on bottom-line financial results. On the other hand, most of the criticism of traditional PM stems from their failure to measure and monitor multiple dimensions of performance, by concentrating almost exclusively on financial measure (Brignall and Ballantine, 1996). They solely concentrate on minimising costs and increasing labour efficiency while neglecting other operational performance measures such as quality, responsiveness and flexibility (Skinner, 1974) Therefore focusing on financials to the exclusion of all other factors can produce distortions such as low cost and high margin productions unnecessarily. However, despite the criticisms made on traditional financial measure, many companies still use them to measure performance. Many organisations, even until the end of 1970s, operate performance under central control, through large functional department. Thus, allowing managers to use slowreacting and tactical management control system such as 'budgets'. These budgeting measures mainly focus on short-term value creation as it only attempts to control and improve existing operations. However budgeting systems are inflexible for today's dynamic and rapidly changing environment organisations still continue to use them. This is because implementing new measures designed to manage strategy and not control is very difficult. Moreover, most companies motivate their worker through reward system. Rewards can be financial such as cash payments, bonuses or share options and non-financial such as promotion. Traditionally, employees are rewarded with bonuses at the end of the year once a specific target has been achieved. However, this reward system causes short-termism as employees are seen to narrow down their focus by just targeting the 'rewarded' goal. They may not take other factors, such as quality and service into consideration. Hence leading businesses to run without longterm vision.
EVA -history
EVA was developed by a New York Consulting firm, Stern Steward & Co in 1982 to promote value-maximizing behaviour in corporate manager. It is a single, value-based measure that was intended to evaluate business strategies, capital projects and to maximize long-term shareholders wealth. Value that has been created or destroyed by the firm during the period can be measured by comparing profits with the cost of capital used to produce them. Therefore, managers can decide to withdraw value-destructive activities and invest in projects that are critical to shareholder's wealth. This will lead to an increase in the market value of the company. However, activities that do not increase shareholders value might be critical to customer's satisfaction or social responsibility. For example, acquiring expensive technology to ensure that the environment is not polluted might not be of high value from a shareholder's perspective. Focusing solely on shareholder's wealth might jeopardize a firm reputation and profitability in the long run. EVA sets managerial performance target and links it to reward systems. The single goal of maximizing shareholder value helps to overcome the traditional measure problem, where different measures are used for different purposes with inconsistent standards and goal. Rewards will be given to managers who are able to turn investor's money and capital into profits efficiently. Researches have found that managers are more likely to respond to EVA incentives when making financial, operational and investing decision, allowing them to be motivated to behave like owners. However this behaviour might lead to some managers pursuing their own goal and shareholder value at the expense of customer satisfaction. Unlike simple traditional budgeting, EVA focuses on ends and not means as it does not state how manager can increase company's value as long as the shareholders wealth are maximised. This allowed managers to have discretion and free range creativity, avoiding any potential dysfunctional short-term behaviour. Rewards such as bonuses from the attainment of EVA target level are usually paid fully at the end of 3 years. This is because workers' performance is monitored and will only be rewarded when this target is maintained consistently. Hence, leading to long-term shareholders' wealth. Cola-Cola is one of the many companies that adopted EVA for measuring its performance. Its aim, which was to create shareholders wealth, was announced in its annual report. CocaCola CEO Roberto Goizueta accredited EVA for turning Coca-Cola into the number one Market Value Added Company. Coca-Cola's stock price increased from $3 to over $60 when it first adopted EVA in the early 1980s. In 1995, Coca-Cola's investor received $8.63 wealth for every dollar they invested.
Most companies refer to stock price increase as an outcome of implementing EVA. However, empirical studies have found that traditional accounting measure have provided a similar, or even better result in increasing stock performance (Dodd J and Johns J 'EVA reconsidered'). EVA is a financial measure based on accounting data and is therefore historical in nature. It has the same limitations as other traditional accounting measures and cannot adequately replace all measures within the company especially the non-financial ones. Due to the historical nature of EVA, manager can benefit in terms of rewards or be punished by the past history of the organisation (Otley, David Performance management 1999). Dodd J and Johns J see the balanced scorecard as one approach to overcome the potential problem of using a single financial measure such as EVA. How Companies Have Used EVA Name Timeframe Use of EVA The Coca- Early Focused business managers on Cola Co. 1980s increasing shareholder value AT&T Corp. 1994 Used EVA as the lead indicator of a performance measurement system that included "people value added" and "customer value added" IBM 1999 Conducted a study with Stern Stewart that indicated that outsourcing IT often led to short-term increases in EVA Herman Late Tied EVA measure to senior managers' Miller Inc. 1990s bonus and compensation system
4 Ms of EVA As a mnemonic device, Stern Stewart describes four main applications of EVA with four words beginning with the letter M. Measurement EVA is the most accurate measure of corporate performance over any given period. Fortune magazine has called it "today's hottest financial idea," and Peter Drucker rightly observed in the Harvard Business Review that EVA is a measure of "total factor productivity" whose growing popularity reflects the new demands of the information age. Management System While simply measuring EVA can give companies a better focus on how they are performing, its true value comes in using it as the foundation for a comprehensive financial management
system that encompasses all the policies, procedures, methods and measures that guide operations and strategy. The EVA system covers the full range of managerial decisions, including strategic planning, allocating capital, pricing acquisitions or divestitures, setting annual goals-even day-to-day operating decisions. In all cases, the goal of increasing EVA is paramount. Motivation To instill both the sense of urgency and the long-term perspective of an owner, Stern Stewart designs cash bonus plans that cause managers to think like and act like owners because they are paid like owners. Indeed, basing incentive compensation on improvements in EVA is the source of the greatest power in the EVA system. Under an EVA bonus plan, the only way managers can make more money for themselves is by creating even greater value for shareholders. This makes it possible to have bonus plans with no upside limits. In fact, under EVA the greater the bonus for managers, the happier shareholders will be. Mindset When implemented in its totality, the EVA financial management and incentive compensation system transforms a corporate culture. By putting all financial and operating functions on the same basis, the EVA system effectively provides a common language for employees across all corporate functions. EVA facilitates communication and cooperation among divisions and departments, it links strategic planning with the operating divisions, and it eliminates much of the mistrust that typically exists between operations and finance. The EVA framework is, in effect, a system of internal corporate governance that automatically guides all managers and employees and propels them to work for the best interests of the owners. The EVA system also facilitates decentralized decision making because it holds managers responsible for-and rewards them for-delivering value. The EVA Concept of Profitability EVA is based on the concept that a successful firm should earn at least its cost of capital. Firms that earn higher returns than financing costs benefit shareholders and account for increased shareholder value. In its simplest form, EVA can be expressed as the following equation: EVA = Net Operating Profit After Tax (NOPAT) - Cost of Capital NOPAT is calculated as net operating income after depreciation, adjusted for items that move the profit measure closer to an economic measure of profitability. Adjustments include such items as: additions for interest expense after-taxes (including any implied interest expense on operating leases); increases in net
capitalized R&D expenses; increases in the LIFO reserve; and goodwill amortization. Adjustments made to operating earnings for these items reflect the investments made by the firm or capital employed to achieve those profits. Stern Stewart has identified as many as 164 items for potential adjustment, but often only a few adjustments are necessary to provide a good measure of EVA.
Measurement of EVA Measurement of EVA can be made using either an operating or financing approach. Under the operating approach, NOPAT is derived by deducting cash operating expenses and depreciation from sales. Interest expense is excluded because it is considered as a financing charge. Adjustments, which are referred to as equity equivalent adjustments, are designed to reflect economic reality and move income and capital to a more economicallybased value. These adjustments are considered with cash taxes deducted to arrive at NOPAT. EVA is then measured by deducting the company's cost of capital from the NOPAT value. The amount of capital to be used in the EVA calculations is the same under either the operating or financing approach, but is calculated differently. The operating approach starts with assets and builds up to invested capital, including adjustments for economically derived equity equivalent values. The financing approach, on the other hand, starts with debt and adds all equity and equity equivalents to arrive at invested capital. Finally, the weighted average cost of capital, based on the relative values of debt and equity and their respective cost rates, is used to arrive at the cost of capital which is multiplied by the capital employed and deducted from the NOPAT value. The resulting amount is the current period's EVA. EVA Calculation and Adjustments As stated above, EVA is measured as NOPAT less a firm's cost of capital. NOPAT is obtained by adding interest expense after tax back to net income after-taxes, because interest is considered a capital charge for EVA. Interest expense will be included as part of capital charges in the after-tax cost of debt calculation. Other items that may require adjustment depend on companyspecific activities. For example, when operating leases rather than financing leases are employed, interest expense is not recorded on the income statement, nor is a liability for future lease payments recognized on the balance sheet. Thus, while interest is implicit in the yearly lease payments, an attempt is not made to distinguish it as a financing activity under GAAP. Under EVA, however, the interest portion of the payment is estimated and the after-tax amount from it is added back into
NOPAT because the interest amount is considered a capital charge rather than an operating expense. The corresponding present value of future lease payments represents equity equivalents for purposes of capital employed by the firm, and an adjustment for capital is also required. R&D expense items call for careful evaluation and adjustment. While GAAP generally requires most R&D expenditures to be expensed immediately, EVA capitalizes successful R&D efforts and amortizes the amount over the period benefiting the successful R&D effort. Other adjustments recommended by Stern Stewart include the amortization of goodwill. The annual amortization is added back for earnings measurement, while the accumulated amount of amortization is added back to equity equivalents. Goodwill amortization is handled in this manner because by "unamortizing" goodwill, the rate of return reflects the true cashon-yield. In addition, the decision to include the accumulated goodwill in capital improves the real cost of acquiring another firm's assets regardless of the manner in which the acquisition is accounted. While the above adjustments are common in EVA calculations, according to Stern Stewart, those items to be considered for adjustment should be based on the following criteria:

Materiality: Adjustments should make a material difference in EVA. Manageability: Adjustments should impact future decisions. Definitiveness: Adjustments should be definitive and objectively determined. Simplicity: Adjustments should not be too complex.
If an item meets all four of the criteria, it should be considered for adjustment. For example, the impact on EVA is usually minimal for firms having small amounts of operating leases. Under these conditions, it would be reasonable to ignore this item in the calculation of EVA. Furthermore, adjustments for items such as deferred taxes and various types of reserves (i.e. warranty expense, etc.) would be typical in the calculation of EVA, although the materiality for these items should be considered. Unusual gains or losses should also be examined and eliminated if appropriate. This last item is particularly important as it relates to EVA-based compensation plans. Strategies for increasing EVA

Increase the return on existing projects (improve operating performance) Invest in new projects that have a return greater than the cost of capital Use less capital to achieve the same return
Reduce the cost of capital Liquidate capital or curtail further investment in substandard operations where inadequate returns are being earned
Advantages of EVA EVA is more than just performance measurement system and it is also marketed as a motivational, compensation-based management system that facilitates economic activity and accountability at all levels in the firm. Stern Stewart reports that companies that have adopted EVA have outperformed their competitors when compared on the basis of comparable market capitalization. Several advantages claimed for EVA are:

EVA eliminates economic distortions of GAAP to focus decisions on real economic results EVA provides for better assessment of decisions that affect balance sheet and income statement or tradeoffs between each through the use of the capital charge against NOPAT EVA decouples bonus plans from budgetary targets EVA covers all aspects of the business cycle EVA aligns and speeds decision making, and enhances communication and teamwork
Academic researchers have argued for the following additional benefits:
Goal congruence of managerial and shareholder goals achieved by tying compensation of managers and other employees to EVA measures (Dierks & Patel, 1997) Better goal congruence than ROI (Brewer, Chandra, & Hock, 1999) Annual performance measured tied to executive compensation Provision of correct incentives for capital allocations (Booth, 1997) Long-term performance that is not compromised in favor of short-term results (Booth, 1997) Provision of significant information value beyond traditional accounting measures of EPS, ROA and ROE (Chen & Dodd, 1997)
Limitations of EVA EVA also has its critics. The biggest limitation is that the only major publicly-available sample evidence on the evidence of EVA adoption on firm performance is an in-house study conducted by Stern Stewart and except that there are only a number of singlefirm or industry field studies. DISADVANTAGES OF EVA: The following limitations to EVA:

EVA does not control for size differences across plants or divisions EVA is based on financial accounting methods that can be manipulated by managers EVA may focus on immediate results which diminishes innovation EVA provides information that is obvious but offers no solutions in much the same way as historical financial statement do
Also, the following two limitations of EVA:
Given the emphasis of EVA on improving business-unit performance, it does not encourage collaboration between business unit managers EVA although a better measure than EPS, PAT and RONW is still not a perfect measure
Brewer et al (1999) recommend using other performance measures along with EVA and suggest the balanced scorecard system. Other researchers have noted that EVA does not correlate as strongly with stock returns as its proponents claim. Chen & Dodd (1997) found that, while EVA provides significant information value, other accounting profit measures also provide significant information and should not be discarded in favor of EVA alone. Biddle, Brown & Wallace (1997) found only marginal information content beyond earnings and suggest a greater association of earnings with returns and firm values than EVA, residual income, or cash flow Finally, a key criticism of EVA is that it is simply a retreaded model of residual income.
EVA BASED PERFORMANCE MEASUREMENT: A CASE STUDY OF DABUR INDIA LIMITED
Traditional measures of corporate performance are many in number. Measures using common bases are Net Profit Margin, Operating Profit Margin, Return on Investment (ROI), Return on Net Worth (RONW), Earning Per Share (EPS) etc. Among these, again ROI is recognized as the most popular yardstick of overall performance. But it is often argued that, in general, these traditional measures fail to identify the true surplus. Economic Value Added (EVA) is advocated as a new measure of corporate performance that focuses on clear surplus in contrast to the traditionally used profit based indicators. For evaluation of the efficiency of any decision, value creation or value addition aspect is of utmost importance in the present backdrop of corporate governance. Although adopting a holistic approach safeguarding the interests of all stakeholders is being emphasized and rightly so, it should be kept in mind that value creation or value addition aspect is of prime consideration in the assessment of the corporate policy guidelines. If that is not satisfied, wrong signals will be emitted from securities market and the continuance of the operations of the entity will be at stake. In view of the above considerations, in the present paper an attempt has been made to analyse the financial performance of Dabur India Limited by using EVA.
Introduction
The term Economic Value Added (EVA) is a registered trademark of Stern Stewart & Co. of New York City (USA). Bennett Stewart in his book, The Quest for Value, used the term EVA with a symbol as super script, which is the normal practice of referring to any registered trademark whenever the term is used. Thus EVA is actually Stern Stewart & Co.s trademark for a specific method of calculating economic profit. The Quest for Value was published in 1991
Just earning profit is not enough, a business should earn sufficient profit to cover its cost of capital and create surplus to grow. Stated simply, any profit earned over and above the cost of capital is Economic Value Added. Traditionally the methods of measurement of corporate performance are many. Common bases used are: - Net Profit Margin (NPM), Operating Profit Margin (OPM), Return on Investment (ROI), Return on Net Worth (RONW) etc. Profit After Tax (PAT) is an indicator of profit available to the shareholder and Profit Before Interest After Tax (PBIAT) is an indicator of the surplus generated using total funds. ROI is still recognized as the most popular yardstick of profitability measurement. However, the traditionally used profit indicators are ineffective parameters in explaining whether the reported profit covers the cost of capital. Old profit concept fails to indicate clear surplus. The basic proposition is that the Return on Capital Employed should be greater than the Cost of Capital (i.e. ROCE > K0). Capital Employed highlights long term capital and cost of capital represents weighted average cost of capital. Traditionally, Profit After Tax is shown in the Profit & Loss Account to indicate the profit available to the shareholders, both preference and equity. Ability to maintain dividend is not a test of profit adequacy. Ability to generate Economic Value Added is the only test of profit adequacy. Any surplus generated from operating activities over and above the cost of capital is termed as EVA. It is a new measure of corporate surplus that should be shared by the employees, management and shareholders. EVA focuses on clear surplus in contradiction to the traditionally used profit available to the shareholders. It is used by companies as a performance indicator and also as a basis for executive compensation. Surplus should be derived by deducting cost of capital from profit before interest but after tax. EVA = NOPAT WACC X Capital Employed. Where, NOPAT means Net Operating Profit before Interest and after Tax. WACC represents Weighted Average Cost of Capital.
EVA BASED PERFORMANCE MEASUREMENT Capital Employed = Net Block + Trading Investment + Net Current Assets. It is free from subjective assumption that needs to be adopted while identifying profit and cost of capital. Cost of equity is derived on the basis of Capital Assets Pricing Model (CAPM). The founders of EVA traditionally use CAPM. Under CAPM Cost of Equity (Ke) is given by the following Where, Ke R f R = Rf + ( Rm Rf) = Risk free return.
= Market expected Rate m of Return = Risk Co-efficient. Both market return and Beta are highly volatile, and if annual market return and yearly beta of a company are chosen for finding cost of equity, abnormally high or low market related cost of equity may be obtained. To avoid this difficulty, one may apply Long run approach. While deriving EVA it becomes necessary to make certain accounting adjustments, which are required only for corporate reporting purposes. It is sometimes alleged that EVA talks too much about the shareholders value added rather than focusing on the interest of all stakeholders. But EVA is a powerful performance measurement tool and it is argued that if a company is able to serve its shareholders then it can better serve all other stakeholders also. Objectives of the Study This study has the following objectives: 1. To examine whether Dabur India Limited (DIL) has been able to generate value for its shareholders. 2. To compute the performance of the company by applying traditional performance indicator like ROI and the new corporate performance measure EVA.
Database and Methodology

The financial data of DIL, selected for this study has been collected from the published Annual Reports for the period 1998-99 to 2002-03. Capitaline-2000 Database Package has also been used for the collection of BSE Sensex and DIL Share Price data. Computation of EVA involves calculation of three figures, (i) Net Operating Profit Before Interest After Tax, (ii) Capital Employed and (iii) Weighted Average Cost of Capital based on CAPM. To compute market return long run averaged annualized daily return has been considered. The long run period should represent all cycles and abnormalities of the capital market. For the purpose of analyzing risk containment measures in Indian stock index futures market, J.R.Varma Committee used data for the period 1st July 1990 to 30th June 1998. The objective of taking a long sample period was to consider two full business cycles that will cover more than two interest rate cycles and two stock market cycles. Prof. Varma deliberated upon the reasons for inclusion of 1992 when index was influenced by the security scam. It is viewed that scam is a period of episodic volatility which could easily recur. Thus, for the purpose of determining market return, abnormality in the market index should not be eliminated. It should be filtered through increasing the sample size. So it is possible to consider BSE Sensex during 1st April 1991 to 31st March 2003 for determining Market Return. In this study Market Return has been considered as 18.56% p.a., which is average of 2808 annualized daily return from 1st April 1991 to 31st March 2003. It has been assumed that 10 year Treasury Gold Bond Yield i.e. 9% rate is the risk free rate in this study. To calculate Beta it has been considered BSE Sensex Return & DIL Share Price Return from 7th March 1994 to 31st March 2003 and result is 0.71. Survey of Literature Easton, P. Harris, T. and Ohlson, J (1992) observed that Economic Value Added (EVA) is an increasingly popular corporate performance measure one that is often used by companies not only for evaluating performance, but also as a basis for determining incentive pay. Like other performance measures, EVA
EVA BASED PERFORMANCE MEASUREMENT

attempts to cope with the basic tension that exists between the need to come up with a performance measure that is highly co-related with shareholders wealth, but at the same time somewhat less subject to the random fluctuations in stock prices. This is a difficult tension to resolve and it explains the relatively low correlation of all accounting based performance measures with stock returns at least on a year to year basis. Stewart (III), and Bennett, G. (1994) observed that EVA is a powerful new management tool that has gained growing international acceptance as the standard of corporate governance. It serves as the centerpiece of a completely integrated frame-work of financial management and incentive compensation. In essence, EVA is a way both to legitimize and to institutionalize the running of a business in accordance with basic microeconomics and corporate finance principles. The experience of a long list of adopting companies throughout the world strongly supports the notion that an EVA system, by providing such an integrated decision making framework, can refocus energies and redirect resources to create sustainable value for companies customers, employees, shareholders and for management. Rice, V.A. (1996) observed that previously we used several measurements to gauge our financial outlook from earnings per share to discounted cash flow and return on average assets. With EVA, I saw a way to meet our business objectives and create a new corporate culture. It permeates every level from boardroom to the shop floor. Bonuses of all managers are determined solely by whether variety achieves its EVA targets. At our company every decision and every action result from analysis that uses EVA principles. We focus on ensuring that every investment produces return that exceeds our cost of capital. We believe this approach enables us to directly align management and shareholders interest. Thenmozhi, M. (2000) In order to have an understanding of how the traditional performance measures are comparable to EVA, data of three financial years between 1996 and 1999 were chosen from 28 companies. Only 6 out of the 28 companies have positive EVA while the others have negative. The EVA as a percentage of Capital Employed (EVA/CE) has been found to indicate the true return on
capital employed. Comparing EVA with other traditional performance measures the study indicates that all the companies depict a rosy picture in terms of EPS, RONA and ROCE for all the three years. The study shows that the traditional measures do not reflect the real value of shareholders and EVA has to be measured to have an idea about the shareholders value. Ray, Russ (2001) observed that the missing link between EVA and improved financials is actually productivity. EVA can be a powerful tool. When properly applied, it allows a firm to ascertain where its creating value and where its not. More specifically it allows a firm to identify where the return on its capital is outstripping the cost of that capital. For those areas of the firm where the former is indeed greater than the latter EVA analysis then allows the firm to concentrate on the firms productivity in order to maximize the value created of the firm. Finally, as investors buy more shares in the firm in order to have more claims on its increased value, they automatically bid up and eventually maximize the firms share price. And as any good capitalist knows, maximizing share price is the name of the game in a free market economy. Thereafter marginal increases in value added can be attained by either decreasing the firms cost of capital or by increasing its productivity. DU PONT MODEL Return on Investment Net Profit Ratio Capital Turnover Ratio
Net Profit es
Sal
Sales
Capital Employed
Sales nses
Expe
Working Capital Assets
Fixed
Cost of Goods Sold
Selling & Distribution Expe nses Current
Current Assets Liabilities

EVA BASED PERFORMANCE MEASUREMENT The DU PONT model is a typical traditional model of measuring financial performance on the basis of accounting income concept. The idea behind the model is that the Return on Investment (ROI) is the best overall financial performance measure and all activities of an organization ultimately contribute to the ROI. For such an analysis much emphasis is laid on financial ratios based on four related financial aspects of business i.e. Profitability, Liquidity, Leverage and Activity. ROI represents the earning power of the company. ROI depends on two ratios (i) Net Profit Ratio and (ii) Capital Turnover Ratio. A change in any of these ratios will change the firms earning power. These two ratios are affected by many factors. A change in any of these factors will change these ratios also. The various factors affecting the ROI can be put through a chart given above. This chart is known as DU PONT Control Chart since it was first used by DU PONT Company of the USA. The chart helps the management in concentrating attention on different forces affecting profit. An increase in profit can be achieved either by more effective use of capital which will result in a higher turnover ratio or better sales efforts which will result in a higher net profit ratio. The same rate of return can be obtained either by a low net profit ratio but a high turn over ratio or vice versa. ECONOMIC VALUE ADDED MODEL Economic Value Added Adjusted Operating Profit Before Interest After Tax Prof it bef ore Inte rest
Income
Weighted Average Cost of Capital
Capital Employed
Int erest
Tax
Cost of Debt
Cost of Equity
Fixed Assets
Invest -ment
Working Capital
Expe nses with out Inter est
Interest Interest Rate Selling & Distribut ion expense s
Ta x Ra te Risk free Ra te
Curr ent As set s
Current Liabilities Adjustment for Systematic Rate
Cost of Goods So ld
Economic Value Added represents value generating power of an organization. There are three factors to compute EVA. (i) Adjusted earning before interest after tax. (ii) Weighted average cost of capital and (iii) Capital Employed. A change in any of the three factors will change EVA. The various factors affecting the EVA can be put through a chart given above. The chart helps the management in concentrating attention on different factors affecting value. It is clear from the above chart that top management can take appropriate decision to create value in the following way: Deploy more and more funds to those activities where the amount of NOPAT generated by the activities is greater than the cost of capital. Withdraw fund from those activities wherein the amount of NOPAT is less than the amount of cost of capital unless there is strategic decision to lose in one activity in order to gain in another. Improve the operating efficiency of the organization to retain the same amount of NOPAT by possible continuous reduction of existing capital or / and continuous increase of the existing NOPAT with existing amount of capital. Optimize the capital structure through optimum debt equity mix in order to have the lowest possible weighted average cost of capital (WACC). Till now, in India the finance managers are not computing EVA to measure financial performance of an organization due to subjective function. In this study it has been tried to eliminate subjective function as far as possible. TABLE 1 Performance Highlights: Traditional System (Amounts in Rs. Crore) Financial 1998- 1999200020012002Year After 99 01 Profit 50.1 00 77.43 77.92 02 64.44 03 85. Tax Add Interest Profit Before Interest After Average Tax Capital Emplo Return yed on Investment K C College of (%) Commerce 28.8 78.9 518.7 6 15.21 26.93 104.36 574.31 18.17 29.18 107.1 576.47 18.58 22.13 86.57 580.68 14.91 1 14.53 99.63 564.58 17.65
EVA BASED PERFORMANCE MEASUREMENT TABLE 2 Financial Performance of Dabur India FROM 1998-99 TO 2002-03 (Amount in Ltd.
PARTICULARS FY: 1998-99 Amou % nt OF Sales 914.77 Sale s Other Income 17.42 Material Cost Excise Duty FY: 1999-00 Amou % nt OF 1042.5 Sale 9 34.19 s FY: 2000-01 Amou % nt OF 1166.4 Sale 7 18.87 s FY: 2001-02 Amou % nt OF 1163.1 Sale 9 13.87 s
Rs. Crore)
FY: 2002-03 Amount % OF Sales 1232.3 8.3 42.29 5.95 2.41 31.35
458.49 50.12 526.95 50.5 538.47 46.1 515.61 44.3 521.19 37.01 4.05 42.24 4 4.05 59.36 6 5.09 60.61 3 5.21 73.37 2.49 21.98 2.11 29.06 2.49 29.94 2.57 29.67
Manufacturing 22.76 Expenses
Selling & 258.95 28.31 292.09 28.0 339.73 29.1 364.57 31.3 386.27 2 2 4 Administrati on Cost Employee Cost 54.88 6.00 63.14 6.06 77.69 6.66 84.49 7.26 93.81 Financial Expenses Depreciation & Misc.Expendit ure Written off Profit Before Tax Provision For 26.7 22.19 2.92 2.43 25.11 24.16 2.41 29.66 2.32 26.2 2.54 23.95 2.25 25.38 2.06 17.08 2.18 23.66
7.61 1.39 1.92
51.6
5.64 0.16
81.29 3.86
7.80 85.17 0.37 7.25 7.43 77.92
7.30 75.51 0.62 11.07 6.68 64.44
6.49 95.53 0.95 10.42 5.54 85.11
7.75 0.85 6.91
1.5 Tax After Tax 50.5 Profit
5.52 77.43
From the above table it is clear that Material Cost as a ratio to sales has come down from 50.12% in 1998-99 to 42.29% in 2002-03. It is possible due to increased yield ratio and efficient usage of raw and packing material. In few cases the company produced raw material for captive consumption purpose. Selling & Administration expenses as a percentage of sales increased from 28.31% in 1998-99 to 31.35% in 2002-03. Excise Duty and Employee Cost as a percentage of sales registered an upward trend during the study period. Financial Expenses as a percentage of sales registered a downward trend during the study period except the F.Y. 2001-02.
EVA based Performance Management System Cost of Equity under Capital Asset Pricing Model (CAPM): According to CAPM, the expected return on equity is given by the following equation:Ke = Rf + (Rm Rf). So, Ke = 9% + 0.71(18.56% - 9%) = 15.79% Where Ke = Cost of Equity, Rf = Risk free rate of Return, = Risk Co-efficient, Rm = Rate of Return on market index. Cost of Redeemable Debt: The cost of redeemable debt is calculated by applying the following formula: Kd = [I + (Rv Sv)/N) ]* (I-T) / [(Rv + Sv) / 2] Where: Kd = Cost of debt, I = Annual interest payment, N = Term of maturity period, Rv = Redeemable value of debt at the time of maturity, Sv = Sale value less discount and flotation expenses. Cost of Redeemable Debt is shown in the following table : Year Cost of Redeemable Debt (%) 199899 9.59 199900 9.59 200001 9.59 200102 9.59 200203 9.59
Cost of Other Debts: K0 = I (1-T) Where : K0 = Cost of other debts,
EVA BASED PERFORMANCE MEASUREMENT I T rate. TABLE 3 Cost of Other Debts Year Cost of Other Debt (%) 199899 6.17 199900 5.86 200001 9.68 200102 6.61 200203 8.99 = Average annual interest rate, = Companys effective corporate tax
Weighted Average Cost of Capital (WACC) According to The Chartered Institute of Management Accountants, London (CIMA) terminology the Weighted Average Cost of Capital as the average cost of the companys finance, equity, debentures, bank loans weighted according to the proportion each element bears to the total pool of capital, weighting is usually based on market valuations, current yields and costs after tax. But for EVA calculation purpose the WACC is computed by applying book value weights to cost of debt, cost of equity and cost of preference shares (if any). In other words, initially, cost of each source of capital is calculated separately. Then a weightage, representing the proportion of a particular source on the total invested capital is applied to compute overall cost of capital. We have calculated weighted average cost of capital in the following way. WACC = Ke * ESF / CE + Kd * LTD / CE + Kp * PSF / CE Where, WACC = Weighted average cost of capital, Ke = Cost of equity, ESF = Equity shareholders fund, CE = Capital employed, Kd = Cost of debt, LTD = Long term debt, Kp = Cost of preference share, PSF = Preference shareholders fund. The capital structure of the company from 1998-99 to 2002-03 is given overleaf
Ye ar Particul ars
Share Capital Reser ves & Total Surplu Less s Misc. Net Expen Worth 14.75 diture % Other Deben Loans Loan tures Funds Capital Employ ed The capital structure of the company from1998-99 to 2002-03 on the basis of Market Value is given below : TABLE 5 Capital Structure of DIL (Based on Market Value) Ye 19981999200020012002ar 99 00 01 02 03 Mar Pr Mar Pr Mar Pr Mar Pr Mar Pr ket op ket op- ket op- ket op- ket opValu ort Valu ort Valu ort Valu ort Valu ort Net Worth 1858 0.3 2336 0.4 1736 0.4 1587 0.4 1025 0.4 e 0.0 e ion e 7 e ion e ion 14.75%De 7.84 ion 1500. 0.0 1500. 0.0 1000. 0.0 500.0 0.0 1500. 9 7.65 5 9.58 ion 9.00 3 8.42 8 buntures 2799 (%) 00 00 3 Other 0.5 (Rs. 4 2031 (%) 0 0.4 (Rs. 3 1050 (%) 0.5 (Rs. 2 0.5 (Rs. 0.5 2740 (%) 00 (Rs. 3 1810 (%) 00 Loans 3.58 8 2.00 2 9.79 9 6.73 4 0.81 0 Loan 2949 0.6 2890 0.5 1960 0.5 2131 0.5 1100 0.5 lac) lac) lac) lac) lac) Funds 3.58 1 2.00 5 9.79 3 6.73 7 0.81 2 Capital 4808 5226 3697 3719 2125 The closing of DILs one share 9.23 in 1998-99 Employed 1.42 market price 9.37 9.65 5.73 was Rs. 65.20. The market value of the companys equity is obtained by multiplying the number.
TABLE 4 Capital Structure of DIL (Based on Book Value) 19981999200020012002-03 Boo Pr Boo Pr Boo Pr Boo Pr Boo Pro 99 00 01 02 k op k op- k op- k op- k pValu orti Valu orti Valu orti Valu orti Valu orti e on e on e on e on e on 2850. (%) 2852. (%) 2852. (%) 2855. (%) 2857. (%) (Rs. (Rs. (Rs. (Rs. (Rs. lac) lac) lac) lac) lac) 67 06 13 94 50 23299 2915 33368 37181 38251 .61 1.56 .09 .14 .58 26150 3200 36220 40037 41109 .28 3.62 .22 .08 .08 983.8 704.0 738.4 347.9 240.0 1 8 1 3 3 25166 0.4 3129 0.5 35481 0.6 39689 0.6 40869 0.79 .47 1500. 6 9.54 2 .81 0.0 1500. 0.0 1500. 4 .15 0.0 1000. 5 .05 0.0 500.0 0.01 00 3 00 2 00 3 00 2 0 27993 0.5 27402 0.4 18109 0.3 20316 0.3 10500 0.20 .58 29493 1 .00 0.5 2890 6 .79 0.4 19609 3 .73 0.3 21316 3 .81 0.3 11000 0.21 .58 54660 4 2.00 8 .79 6020 55091 6 .73 61005 5 .81 51869 .05 1.54 .60 .88 .86
EVA BASED PERFORMANCE MEASUREMENT of the outstanding shares (285.08950 lacs) by the Closing share price. The market value of Debt is assumed to be equal to the book value. In the same way it has been calculated for 1999-00, 2000-01, 2001-02 & 2002-03 respectively. The WACC of the company under CAPM from 1998-99 to 2002-03 is given below TABLE 6 WACC of DIL under CAPM (Based on Book Value) Ye 19981999200020012002ar 99 Pr (%) Pr (%) Pr (%) Pr (%) Pr 00 01 02 03 Particular (%) opopopopops Cost of 15. ort 15. ort 15. ort.6 15. ort 15. ort.7 0.4 .5 .6 Equity 79 ion 79 ion 79 ion 6 2 4 Cost of 9.5 0.0 9.5 .0 9.5 .0 79 ion 79 ion 9.5 5 9.5 9 .0 .0 Debenture 9 3 Other 6.1 0.5 9 5.8 2 9 .4 9.6 3 .3 9 6.6 2 9 .3 8.9 1 .2 Cost of 7 1 11. 6 13. 6 8 3 12. 1 3 14. 9 0 WACC 10. Debt 70 10 59 64 37 The WACC of the company under CAPM from 1998-99 to 2002-03 on the basis of Market Value is given below TABLE 7 WACC of DIL under CAPM (Based on Market Value) Ye 19981999200020012002ar 99 Pr (%) Pr (%) Pr (%) Pr (%) Pr 00 01 02 03 Particulars (%) opopopopopCost of 15. ort 15. ort 15. ort 15. ort 15. ort 0.3 0.4 0.4 0.4 0.4 Equity 79 ion 79 ion 79 ion 79 ion 79 ion 9 9.5 0.0 9.5 7 5 3 9.5 8 Cost of 9.5 0.0 0.0 9.5 0.0 0.0 Debenture 9 Other Cost 6.1 3 9 0.5 5.8 3 0.5 9 9.6 4 0.4 9 6.6 3 9 0.5 8.9 2 0.5 of Debt 7 6 8 1 9 WACC 10. 8 10. 2 12. 9 10. 4 12. 0 02 44 55 65 27 Basic EVA: It is a rudimentary form of EVA arrived at without making any adjustments. Basic EVA of DIL is as follows: TABLE 8 WACC as per CAPM (Weight based on Book value) (Amounts in Rs. Lac) Financial Year 1998- 1999- 2000- 2001- 200299 00 01 02 03 Average Capital 5187 57430. 5764 58068. 56457. Employed 6.25 795 6.57 375 505 WACC 10.7 11.1 13.5 12.6 14.3 0% 0% 9% 4% 7% Cost of Capital 5550 6374 7834 7339 8112 Employed .76 .82 .17 .84 .94 Profit After Tax 5010 7743 7792 6444 8510 .32 .16 .34 .34 .44 Add : Interest after 2879 2693 2918 2213 1452 tax .78 .08 .31 .44 .84 NOPBIAT 7890 1043 1071 8657 9963 .10 6.24 0.65 .78 .28 EVA 2339 4061 2876 1317 1850 .34 .42 .48 .94 .34 EVA on Capital 4.5 7.0 4.9 2.2 3.2 Employed (%) 1 7 9 7 8
TABLE 9 WACC as per CAPM (Weight based on Market value) (Amounts in Rs. Lac) Financial Year 1998- 1999- 2000- 2001- 2002-03 99 00 01 02 Average Capital 51876. 57430. 57646. 58068. 56457.5 Employed 25 795 57 375 05 WACC 10.02 0.44% 12.55 10.65% 12.27% % % Cost of Capital 5198.0 5995.7 7234.6 6184.2 6927.34 Employed 0 7 4 8 Profit After Tax 5010.3 7743.1 7792.3 6444.3 8510.44 2 6 4 4 Add : Interest after 2879.7 2693.0 2918.3 2213.4 1452.84 tax 8 8 1 4 NOPBIAT 7890.1 10436. 10710. 8657.7 9963.28 0 24 65 8 EVA 2692.1 4440.4 3476.0 2473.5 3035.94 0 7 1 0 EVA on Capital 5.19 7.73 6.03 4.26 5.38 Employed (%) From the above tables it is evident that the company has been able to create value for its shareholders but due to change weight, to compute WACC, amount of EVA has materially changed. Selection of weight is a very tricky area, because one can easily manipulate the WACC (%) and also change the amount of EVA. Without any accounting adjustment any company can easily compute basic EVA to know whether the company is value creating or value destroying roughly. But as per Stern Stewart recommendation to compute true EVA more than 160 potential accounting adjustments are required. In Indian scenario if we analysis deeply after considering Indian Accounting Standards and Corporate Laws certain accounting adjustments are necessary to compute true EVA. Important adjustments are: Stock valuation, Government grants of revenue & capital nature, Tax effect accounting, Prior period adjustments, R&D expenses, Amortization of Intangibles, Capitalization of asset linked foreign currency loss or gain, Provision for retirement benefits, Warranty claims, Prior period adjustments, adjustment for revaluation reserve and related depreciation and Off Balance Sheet Asset etc. After considering all the necessary accounting adjustments Disclosed EVA has been computed in the following way.
EVA BASED PERFORMANCE MEASUREMENT TABLE 10 Adjusted Capital Employed and Adjusted Net Operating Profit. (Amounts in Rs. Lac) Capital Employed Shareholders' Funds Loan Funds 14.75% Debentures Secured Long term Loans Loan Funds Others Total Loan Funds Less : Adjusment for foreign Add: Adjusted exchange Depreciation for Adjusted Capital foreign exchange Employed Average Capital Employed for Adjustment foreign exchange Exchange fluctuation loss For 1996-97 capitalised For 1997-98 For 1998-99 For 1999-00 For 2000-01 For 2001-02 For 2002-03 Total adjustment Adjusted Depreciation due to exchange fluctuation loss For 1996-97 capitalised For 1997-98 For 1998-99 For 1999-00 For 2000-01 For 2001-02 For 2002-03 Total adjustment Adjusted Net Operating Profit Profit After Tax Add : Interest Less : Foreign Exchange Loss Add: Adjusted Capitalised depreciation due Adjusted Net to foreign Operating loss exchange Profit capitalised K C College of Commerce 1997 1998- 1999-98 99 2192 2516 00 31299 9.07 6.47 .54 1500 1500 1500 392. 341.9 478.0 06 3 1350 1674 6 12917 9.81 1.82 .93 1540 1858 14895 1.87 3.75 .99 1251 1624. 1817. 144. 209.6 227.7 .72 48 86 79 9 9 3622 4233 44605 4.01 5.43 .46 3927 43470 9.72 .445 2000- 2001- 200201 35481 02 3968 03 4086 .81 9.2 9.1 1500 1000 500 487.2 1819. 1488. 1 12228 27 8563. 07 6599. .74 14215 92 1138 42 8587. .95 3.2 49 1993. 1980. 1925. 246.8 243.1 235.2 05 64 49 6 6 1 47951 4933 4776 .57 46278 4.9 6.3 4864 4855 .515 3.2 0.6
101. 72.77 61.65 52.23 38 906.2 804.4 714 1150 .34 8 645.4 1 572.8 508.3 3 2 378.9 8 341 8 377.4 4
44.25 37.49 633.7 562.5 4 451.1 1 400.4 9 306.8 3 276.0 4 337.5 9 301.8 4 207.0 7 185.8 8 3 161.2 1251 1624. 1817. 1993. 1980. 7 1925. .72 48 86 05 64 49 13.12 11.12 114.7 101.8 6 81.81 6 72.6 42.21 9.42 90.41 64.44 37.98 44.61 7.98 6.76 80.25 71.23 57.19 50.76 34.16 30.75 39.9 35.68 23.68 21.25 18.78 243.1 235.2 6 1 6444. 8510. 34 1055. 44 1062. 8 230.7 18 180.0 5 5 243.1 235.2 6 1 7512. 9627. 55 78
209.6 227.7 9 9 5010. 7743. 32 1845. 16 1460. 28 727.2 35 421.1 5 8 209.6 227.7 9 9 6338. 9010. 04 12
246.8 6 7792. 34 2018. 53 422.0 5 246.8 6 9635. 68
Accounting Adjustments Certain accounting adjustments are necessary for computation of Net Operating Profit After Tax (NOPAT) and Capital Employed because certain accounting policies adopted by a company may wrongly classify revenue, expense, assets and liabilities. Necessary accounting adjustments are discussed below: 1) Depreciation:- Depreciation on Fixed Assets have been provided on written down value method at rates specified in schedule XIV of the Companies Act. For assets impaired depreciation has been charged on pre- impaired amount. As regards fixed assets acquired out of loan taken in foreign currencies loss or gain on such loans at the year-end is adjusted to the value of such fixed assets and depreciation on the differential amounts of fixed assets arising out of exchange loss or gains on foreign currency loan are adjusted over the remaining life of the concerned fixed assets. But to calculate EVA interest on exchange loss or gain should be charged to P&L A/C not Assets A/C, so it has been adjusted to calculate Disclosed EVA. 2) Impairment of Assets:- The Company has identified impairable assets at the year end in terms of para 5 to 13 of AS-28 issued by ICAI and arrived at impairment loss therein being the difference between the book value and recoverable value of relevant assets. Impairment loss, so arrived at, has been adjusted against opening general reserve as per transitional provision laid down in para 124 of AS-28. This accounting policy has actual impact on EVA. 3) Investment: Investment being long term in nature (except for investment in Dabur International Ltd, Dabur Oncology Plc and Dabur Pharma Ltd. which are current in nature) is held at cost. Provision will be made as and when deemed necessary under AS-13 issued by ICAI.
4)
Deferred Entitlement on LTC: - In terms of the opinion of the Expert Advisory Committee of the ICAI, the Company has provided liability occurring on account of deferred entitlement towards LTC in the period in which the employees concerned render their services. So no accounting adjustments are necessary to calculate Disclosed EVA. EVA BASED PERFORMANCE MEASUREMENT
5) Inventories:- Stocks are valued at lower of cost or net realizable value. Basis of determination of cost remain as follows : Raw Materials, Packing Materials, Stores & Spares:- on FIFO Basis. Work-In-Process: At cost of input plus overhead up to the stage of completion. Finished Goods: At Cost of Input plus Appropriate Overhead. 6) Research and Development Expenses:- Contributions towards scientific research expenses are charged to the profit & loss account in the year in which the contribution is made. But due to lack of data it is not possible to segregate research expenses and development expenses. 7) Retirement Benefits: Liabilities in respect of retirement benefits to employees are provided for as follows: Leave salary of employees of the company on the basis of actuarial valuation. Gratuity liability on the basis of payment advice from Life Insurance Corporation of India from whom the companys gratuity trust has taken the Group Gratuity Insurance Policy. Liability for superannuation fund on the basis of the premium paid to Life Insurance Corporation of India in respect
employees covered under the superannuation fund policy. So no accounting adjustments are required to calculate disclosed EVA. 8) Reorganization of Income and Expenses: Sales and Purchase are accounted for on the basis of passing of title to the goods. Sales comprise of sale price of goods including excise duty and sales tax but exclude discount. Export sales are accounted for on the basis of date of bill of lading. All items of incomes and expenses have been accounted for on accrual basis. So to calculate disclosed EVA no adjustments are required. 9) Deferred Taxation: The liability of company is estimated considering the provision of the Income Tax Act 1961.Deferred Tax is recognized subject to the consideration of prudence, on time differences being the difference between taxable income and accounting income that originate in one period and capable of reversal in one or more subsequent periods. Tax effect accounting has the effect of spreading tax impact and estimating timing difference. This should be followed while determining EVA. 10) Foreign Currency Transaction: In respect of foreign branches /offices, revenue items have been converted at average of month end exchange rates during the year. Fixed assets have been converted at the rates prevailing on dates of purchase. Assets & Liabilities other than fixed assets are converted at the year-end exchange rate. Exchange gain or loss arising out of above is charged to profit & loss account. As regards fixed assets acquired out of loan taken are foreign currencies, loss or gain on such loans at the yearend is adjusted to the value of such fixed assets. But to calculate disclosed EVA it has been adjusted. Capital Employed and Net Operating Profit After Tax have been charged due to that adjustment. 11) Miscellaneous Expenditure:
Share issue expenses are being amortized over a period of ten years. Technical know-how fees paid to Technical Collaborators are being amortized over a period of five years. Strategic Management Consultancy expenses are being amortized over a period of five years. Deferred Employees compensation under ESOP are being amortized on straight line basis over vesting period. So no accounting adjustments are required to calculate disclosed EVA. Disclosed EVA is as follows: TABLE 11 WACC as per CAPM (Weight based on Book value) (Amounts in Rs. Lac) Financial Year 1998- 1999- 2000- 2001- 200299 Average Capital 39279. 00 43470. 01 46278. 02 48643. 03 48550. Employed 72 WACC 10.70 445 11.10% 515 13.59% 215 12.64% 56 14.37 % Cost of Capital 4202.9 4825.2 6289.2 6148.5 % 6976.7 Employed 3 Adjusted Net 6338.0 2 9010.1 5 9635.6 0 7512.5 2 9627.7 Operating Profit 4 EVA 2135.1 2 4184.9 8 3346.4 5 1364.0 8 2651.0 1 3 5 6 EVA on Capital 5.44 0 9.63 7.23 2.80 5.46 Employed (%) EVA BASED PERFORMANCE MEASUREMENT TABLE 12 WACC as per CAPM (Weight based on Market value) (Amounts in Rs. Lac) Financial Year 1998- 1999- 2000- 2001- 200299 Average Capital 39279. 00 43470. 01 46278. 02 48643. 03 48550. Employed 72 WACC 10.02 445 10.44 515 12.55 215 10.65 56 12.27 % Cost of Capital 3935.8 % 4538.3 % 5807.9 % 5180.5 % 5957.1 Employed 3 Adjusted Net 6338.0 1 9010.1 5 9635.6 0 7512.5 5 9627.7 Operating Profit 4 EVA 2402.2 2 4471.8 8 3827.7 5 2332.0 8 3670.6 1 5 3 EVA on Capital 6.12 1 10.29 3 8.27 4.79 7.56 Employed (%)
TABLE 13 ROI versus EVA performance indicators of DIL Financial Year 1998- 1999- 2000- 2001- 200299 ROI (%) 14.43 00 17.34 01 19.44 02 14.18 03 19.21 WACC (%) 10.02 10.44 12.55 10.65 12.27 2.27 3.28 Basic EVA on Capital 4.51 7.07 4.99 Employed( %) 4.26 5.38 Basic EVA on Capital 5.19 7.73 6.03 (Weight based on Employed( %) book Value) Disclosed EVA on 5.44 9.63 7.23 2.80 5.46 (Weight based on Capital Value) market Employed( %) 6.12 10.29 8.27 Disclosed EVA on 4.79 7.56 (Weight based on Capital Employed( %) book Value) (Weight based on table shows that divergence exists The above between the performance results given by traditional market Value) measure (based on ROI) and percentage of EVA on Capital Employed both basic and disclosed. The Return on Investment (ROI) does not reflect the real value addition to shareholders wealth and it is not possible to judge the efficiency of any decision, value creation or value addition aspect is of utmost importance in the present backdrop of corporate governance but EVA based performance measurement system give an idea clearly about the
shareholders value addition or value destruction. The company has been successfully able to create value for its shareholders during the study period. Conclusion Performance measurement systems that were successful in the past are becoming obsolete and in some cases are dysfunctional and obstructive to improvements. A dynamic and more competitive environment requires dynamic benchmarks to get a clear picture of whether the firm is a value generator or a value destroyer. The EVA based performance measurement system is the basis on which the company should take appropriate
decisions related to the choice of strategy, capital allocation, merger & acquisitions, divesting business and goal setting. While deciding resource allocation it becomes necessary to appreciate the EVA impact of such decision. Management Accountants have the full knowledge about the company that would create value. They are in a position to guide a company in its restructuring mission for value creation. So a Management Accountant is expected to successfully transform traditional management system into value based management system.
COMPANIES INTRODUCTION and comparative study GAIL (India) Ltd.-introduction to the company - The Company was incorporated on 16th of August. - The Gas Authority of India Ltd. (GAIL), one of India's leading Public Sector Enterprises, is the largest gas transmission and marketing company in the Country. The Company, possessing a well developed and efficient infrastructure, was established as a wholly owned Company of the Government of India in August, 1984 with 100% equity held by the Goverment of India and, within a short time, it has grown into one of the 'Navratna'enterprises and is ranked among the top ten companies in India. The various activities of the Company range from Gas marketing and distribution through trunk and regional systems, to retailing of Natural Gas to Gas processing for production and marketing of LPG, liquid hydrocarbons and Petrochemicals.The equity pattern in the Company has also changed and the Government today holds about 67% of the equity in the Company
GAIL (India) Limited is a gas utility company in India. The Companys products include natural gas, liquid hydrocarbons, liquid petroleum gas transmission, petrochemicals, city gas distribution and power. The Company serves the retail sector of natural as by supplying green and clean fuel (CNG) and PNG to domestic and commercial sector. The Company has a joint venture with Vododara Mahanagar Sewa Sadan (VMSS). The Companys operating segments include Natural Gas Transmission, natural gas trading, petrochemicals, LPG and other liquid hydrocarbons and other segments. Its supplies of natural gas include fuel t power plants and feedstock for gas fertilizer plants. In September 2011, the Company incorporated a wholly owned subsidiary GAIL Global (USA) Inc.
CALCULATION OF EVA FOR GAIL

GAIL NOPT FOR EVA C
NON INT LIABILITIES (LONG AND SHORT TERM DEBTS AND ACCOUNTS PAYABLE AND PROVISIONS
CCR
EVA
GAIL
NOPAT
INT EXP
NOPAT+INT
TOTAL LIABILITIES
C 6,339 7,445 8,626 9,973 11,393
CCR
EVA
2002-03 2003-04 2004-05 2005-06 2006-07
2,601 2,803 3,139 3,561 3,653
94 101 85 139 313
2,695 2,904 3,224 3,700 3,966
8,386 9,578 10,623 11,889 12,730
2,047 2,133 1,997 1,916 1,337
10% 2,062 10% 2159.5 3224 3700 3966
2006-2007 THE EVA IS HIGHEST. 2002-2003 THE EVA IS LEAST.
Comparative study of ICICI BANK for the year 2002-07 ICICI Bank Limited (the Bank) is a banking company. The Bank, together with its subsidiaries, joint ventures and associates, is a diversified financial services group providing a range of banking and financial services, including commercial banking, retail banking, project and corporate finance, working capital finance, insurance, venture capital and private equity, investment banking, broking and treasury products and services. It operates under four segments: retail banking, wholesale banking, treasury and other banking. Retail Banking includes exposures, which satisfy the four criteria of orientation, product, granularity and low value of individual exposures for retail exposures. Wholesale Banking includes all advances to trusts, partnership firms, companies and statutory bodies, which are not included under Retail Banking. Treasury includes the entire investment portfolio of the Bank. Other Banking includes hire purchase and leasing operations and other items.
For over five decades, the ICICI Group has partnered India in its economic growth and development. Promoting inclusive growth has been a priority area for the Group from both a social and business perspective. The ICICI Group strives to make a difference to its customers, to the society and to the nations development directly through its products and services, as well as through development initiatives and community outreach. ICICI Foundation for Inclusive Growth (ICICI Foundation) was founded by the ICICI Group in early 2008 to carry forward and build upon its legacy of promoting inclusive growth. ICICI Foundation works within public systems and specialised grassroots organisations to support developmental work in four identified focus areas. We are committed to investing in long-term efforts to support inclusive growth through effective interventions. Vision ICICIS vision is a world free of poverty in which every individual has the freedom and power to create and sustain a just society in which to live.
Mission THEIR mission is to empower the poor to participate in and benefit from the Indian growth process through integrated action in the fields of primary health, elementary education, financial inclusion and sustainable livelihood. This will be achieved through active collaboration with the government and independent organisations.
icici
NOPT FOR EVA
C
CCR
EVA
NOPAT
INT EXP
NOPAT+INT
TOTAL LIABILITIES
C 24,340 26,380 34,296 47,783 62,892
CCR
2002-03 2003-04 2004-05 2005-06 2006-07
1,225 1,642 2,058 2,728 3,403
1,225 1,642 2,058 2,728 3,403
1,06,811 1,25,228 1,67,659 2,51,388 3,44,658
82,471 98,848 1,33,363 2,03,605 2,81,766
EVA 10% 1,209 10% 10% 10% 10%
-9
1371
2050
2886
Comparative study BHARTI AIRTEL-ABOUT THE COMPANY
Bharti Airtel Limited is a leading integrated telecommunications company with operations in 20 countries across Asia and Africa. Headquartered in New Delhi, India, the company ranks amongst the top 5 mobile service providers globally in terms of subscribers. In India, the company's product offerings include 2G, 3G and 4G services, fixed line, high speed broadband through DSL, IPTV, DTH, enterprise services including national & international long distance services to carriers. In the rest of the geographies, it offers 2G, 3G mobile services. Bharti Airtel had over 246 million customers across its operations at the end of February 2012. This business unit delivers end to end telecom solutions to Indias large corporates. It serves as the single point of contact for all telecommunication needs for corporate customers in India by providing full suite of communication services across data, voice and managed services. It specializes in providing customized solutions to address unique requirements of different industry verticals; Manufacturing and distribution, media, education, telecom, Government and PSUs and retail among others. Backed by the alliances with leading technology companies worldwide and state of the art infrastructure, it offers complete range of telecom solutions. These solutions enable corporates to network their offices within India and across the globe, provide them infrastructure to run business critical applications and provide them means to connect with their customers, vendors and employees. With its entrepreneurial spirit and passion to undertake business projects that are transformational in nature, Bharti has created worldclass businesses in telecom, insurance, retail, and foods. Bharti started its telecom services business by launching mobile services in Delhi (India) in 1995. Since then there has been no looking back and Bharti Airtel, the groups flagship company, has emerged as one of top telecom companies in the world and is amongst the top five wireless operators in the world. Through its global telecom operations Bharti group operates under the Airtel brand in 20 countries across Asia and Africa India, Sri
Lanka, Bangladesh, Seychelles, Burkina Faso, Chad, Congo Brazzaville, Democratic Republic of Congo, Gabon, Ghana, Kenya, Madagascar, Malawi, Niger, Nigeria, Sierra Leone, Tanzania, Uganda, and Zambia. In addition, the group also has mobile operations in Jersey, Guernsey. Over the past few years, the group has diversified into emerging business areas in the fast expanding Indian economy. With a vision to build Indias finest conglomerate by 2020 the group has forayed into the retail sector by opening retail stores in multiple formats small and medium - as well establishing large scale cash & carry stores to serve institutional customers and other retailers. The group offers a complete portfolio of life insurance, general insurance and asset management to customers across India. Bharti also serves customers through its fresh and processed foods business. The group has growing interests in other areas such as telecom software, real estate, training and capacity building, and distribution of telecom/ITproducts. What sets Bharti apart from the rest is its ability to forge strong partnerships. Over the years some of biggest names in international business have partnered Bharti. Currently, Singtel, IBM, Ericsson, Nokia Siemens and Alcatel-Lucent are key partners in telecom. Walmart is Bhartis partner for its cash & carry venture. Axa Group is the partner for the insurance business and Del Monte Pacific for the processed foods division. Bharti strongly believes in giving back to the society and through its philanthropic arm the Bharti Foundation it is reaching out to over 30,000 underprivileged children and youth in India.
CALCULATION OF EVA ON AIRTEL

airtel NOPT FOR EVA
TOTAL LIABILITI ES
C
CCR
EVA
NOPAT
INT EXP
NOPAT+I NT
C 4,824 4,825 4,533 7,345 11,44 4
CCR
EVA
200203 200304 200405 200506 200607
6,244 7,743 9,426 7,716
393 434 283 296 1,19 9
6,637 8,177 9,709 8,012
4,825 5,451 9,527 12,141
1 626 4,994 4,796
10% 6,155 7694. 10% 5 9255. 10% 7 8012
5,730
6,929
16,754
5,310
6929
2004-2005 EVA WAS THE MOST 2002-2003 EVA WAS THE LEAST
Comparative study of Maruti Suzuki Maruti Suzuki India Limited engages in the manufacture, purchase, and sale of motor vehicles, components, and spare parts in India and internationally. It offers passenger cars, light duty utility vehicles. The company also involves in the facilitation of preowned car sales, fleet management, and car financing business.
Maruti Suzuki India Limited is a subsidiary of Suzuki Motor Corporation, Japan. Maruti Suzuki has been the leader of the Indian car market for over two and a half decades. The company has two manufacturing facilities located at Gurgaon and Manesar, south of New Delhi, India. Both the facilities have a combined capability to produce over a 1.5 million vehicles annually. The company plans to expand its manufacturing capacity to 1.75 million by 2013.
The Company offers 15 brands and over 150 variants ranging from people's car Maruti 800 to the latest Life Utility Vehicle, Ertiga. The portfolio includes Maruti 800, Alto, Alto K10, A-star, Estilo, WagonR, Ritz, Swift, Swift DZire, SX4, Omni, Eeco, Kizashi, Grand Vitara, Gypsy and Ertiga. In an environment friendly initiative, in August 2010 Maruti Suzuki introduced factory fitted CNG option on 5 models across vehicle segments. These include Eeco, Alto, Estilo, Wagon R and Sx4. With this Maruti Suzuki became the first company in India to introduce factory fitted CNG
vehicles.
In terms of number of cars produced and sold, the Company is the largest subsidiary of Suzuki Motor Corporation. Cumulatively, the Company has produced over 10 million vehicles since the roll out of its first vehicle on 14th December,1983.
Maruti Suzuki is the only Indian Company to have crossed the 10 million sales mark since its inception. In 2011-12, the company sold over 1.13 million vehiclesincluding1,27,379unitsofexports.
The Company employs over 9000 people as Maruti Suzuki's sales and service network is the largest among car manufacturers in India. The Company has been rated first in customer satisfaction in the JD Power survey for 12 consecutive years.
Maruti Suzuki's revenue over the years:
(Rs. in Million) Year 2006-07 2007-08 2008-09 Net Sales 1,45,922 1,78,603 2,03,583 Year 2009-10 2010-11 2011-12 Net Sales 3,01,198 3,58,490 3,47,059
The company is listed on Bombay Stock Exchange and National Stock Exchange.
National Road Safety Mission is the flagship Road Safety initiative introduced by the Company in December 2008. Under this
initiative, the Company took a commitment of training over 500,000 people in safe driving practices in a span of 3 years. The Company has successfully met this achievement. Amongst the five lakh people trained one lakh are from the underprivileged sections of society. The main objective was to make them employable in driving profession.
The journey began 28 years ago with the principle of "Give" - a principle that has been bedrock of Maruti Suzuki's approach to sustainability. Get and Grow have been the natural outcomes over the years. Maruti Suzuki has now gone beyond its business and contributed to the society at large, as envisioned by its founders. Maruti Suzuki has strived towards offering high quality, latest technology and value for money products to its customers. CALCULATION OF EVA OF MARUTI SUZUKI
MAR UTI
NOPT FOR EVA
NOPA T 200203 200304 200405 200506 200607
INT EX P
NOPA T+INT
TOTA L LIABI LITIE S
C NON INT LIABILITIES (LONG AND SHORT TERM DEBTS AND ACCOUNTS PAYABLE AND PROVISIONS
CCR
EVA
OBSERVATIONS
C 3,09 8 3,59 2 4,37 9 5,45 3 6,85 4
CCR
EVA
BOOK VALUE
MARKE T PRICE
EVA/ BV
EVA/ MP
146
56
202
3,554
456
10%
-108 226. 8
150
250
-0.72 #DIV /0! #DIV /0! #DIV /0! #DIV /0!
-0.43 #DIV /0! #DIV /0! #DIV /0! #DIV /0!
542
44
586
3,903
311
10%
853
36
889
4,686
307
889
1,189
20
1,209
5,524
71
1209
1,562
37
1,599
7,484
630
1599
EVA IN THE YEAR 2007-08 IS THE MOST.

EVA IN THE YEAR 2002-2003 IS THE MOST.
JINDAL STEEL AND POWER

Jindal Steel and Power Limited (JSPL) is one of India's major steel producers with a significant presence in sectors like Mining, Power Generation and Infrastructure. With an annual turnover of over US$ 3.5 billion, JSPL is a part of the US$ 15 billion diversified O. P. Jindal Group and is consistently tapping new opportunities by increasing production capacity, diversifying investments, and leveraging its core capabilities to venture into new businesses. The company has committed investments exceeding US$ 30 billion in the future and has several business initiatives running simultaneously across continents. Mr. Naveen Jindal, the youngest son of the legendary Shri. O. P. Jindal spearheads JSPL and its group companies. The company produces economical and efficient steel and power through backward and forward integration. From the widest flat products to a whole range of long products, JSPL today sports a product portfolio that caters to varied needs in the steel market. The company also has the distinction of producing the world's longest 121 metre rails and large size parallel flange beams for the first time in India.
JSPL operates the largest coal - based sponge iron plant in the world and has an installed capacity of 3 MTPA of steel at Raigarh in Chhattisgarh. With a 0.6 MTPA wire rod mill and a one million tone capacity bar mill at Patratu, Jharkhand, a medium and light structural mill at Raigarh, Chhattisgarh and a plate mill to produce upto 5.00 metre wide plates at Angul, Odisha. The company aims for a fast-paced growth so as to contribute substantially to India's long term prosperity. An enterprising spirit and the ability to discern future trends have been the driving force behind the company's remarkable growth story. The company has scaled new heights with the combined force of innovation, adaptation of new technologies and the collective skills of its 15,000 strong, committed workforce.
JINDA L
NOPT FOR EVA
C
CCR
EVA
GAIL
NOPAT
INT EXP
NOPAT+INT
TOTAL LIABILITIE S
C 584 857 1,32 0 1,84 5 2,49 7
CCR
EVA
200203 200304 200405 200506 200607
1,236 1,536
243 267
1,479 1,803
1,469 1,882
885 1,025
10% 1,421 1717. 10% 3
1,479
331
1,810
2,815
1,495
10%
1678 2362. 5 2396. 3
2,064
483
2,547
4,590
2,745
10%
2,110
536
2,646
6,004
3,507
10%
CONCLUSION:
EVA companies typically find benefits come from three main areas: better asset efficiency; improved business and financial literacy at all levels, and more owner like behavior by managers. The EVA approach to management has been endorsed by many influential investors and independent experts. Eva has already become the primary focus in many companies around the world across a wide range of industry sectors. However the practitioners differ with one another in regard to the methodology of calculation of adjustments required for conversion of accounting profit to NOPAT, market rate, beta and risk free rate. The technique of computing EVA requires making several adjustments in arriving at the NOPAT. The developers of the concept have identified 164 potential adjustments to obtain a real reflection of companys performance. Omitting even a few may lead to some serious errors. A large number of adjustments tend to complicate the concept and put off the management. Thus, it has been suggested that companies identify four five critical adjustments that are simple to implement. There are also no standard ways or statutory guidelines such as the FASB or the accounting standards for making the adjustments.
Consequently, different companies can adopt ways of adjusting the NOPAT. This could impair seriously the comparability of EVA figures of different companies. Though a useful measure, until proper standards are evolved, EVA will remain at best an internal measure of shareholder value.
Bibliography www.moneycontrol.com www.nseindia.com www.livemint.com www.scribd.com www.google.in www.icici.com www.gailindia.com

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Impact of eva and comparative study of gail,icici,jindal,airtel,maruti suzuki

2 IMPACT OF EVA ON MARKET PRICE

What is Economic Value Added (EVA)?

3 IMPACT OF EVA ON MARKET PRICE

EVA Basic Premise

EVA also useful for small companies

Companys Income Statement Companys Balance Sheet

4 IMPACT OF EVA ON MARKET PRICE

EVA Calculation Steps

Step 3: Determine Capital Cost Rate (CCR)

5 IMPACT OF EVA ON MARKET PRICE

Step 4: Calculate Companys EVA EVA = NOPAT - C * CCR

6 IMPACT OF EVA ON MARKET PRICE

7 IMPACT OF EVA ON MARKET PRICE

8 IMPACT OF EVA ON MARKET PRICE

9 IMPACT OF EVA ON MARKET PRICE

10 IMPACT OF EVA ON MARKET PRICE

11 IMPACT OF EVA ON MARKET PRICE

12 IMPACT OF EVA ON MARKET PRICE

13 IMPACT OF EVA ON MARKET PRICE

Academic researchers have argued for the following additional benefits:

14 IMPACT OF EVA ON MARKET PRICE

Also, the following two limitations of EVA:

15 IMPACT OF EVA ON MARKET PRICE

EVA BASED PERFORMANCE MEASUREMENT: A CASE STUDY OF DABUR INDIA LIMITED

16 IMPACT OF EVA ON MARKET PRICE

17 IMPACT OF EVA ON MARKET PRICE

18 IMPACT OF EVA ON MARKET PRICE

Database and Methodology

19 IMPACT OF EVA ON MARKET PRICE

EVA BASED PERFORMANCE MEASUREMENT

20 IMPACT OF EVA ON MARKET PRICE

Working Capital Assets

Cost of Goods Sold

Selling & Distribution Expe nses Current

Current Assets Liabilities

21 IMPACT OF EVA ON MARKET PRICE

Weighted Average Cost of Capital

Expe nses with out Inter est

Interest Interest Rate Selling & Distribut ion expense s

Curr ent As set s

Current Liabilities Adjustment for Systematic Rate

22 IMPACT OF EVA ON MARKET PRICE

23 IMPACT OF EVA ON MARKET PRICE

Manufacturing 22.76 Expenses

7.61 1.39 1.92

7.80 85.17 0.37 7.25 7.43 77.92

7.30 75.51 0.62 11.07 6.68 64.44

6.49 95.53 0.95 10.42 5.54 85.11

7.75 0.85 6.91

1.5 Tax After Tax 50.5 Profit

24 IMPACT OF EVA ON MARKET PRICE

Cost of Other Debts: K0 = I (1-T) Where : K0 = Cost of other debts,

25 IMPACT OF EVA ON MARKET PRICE

26 IMPACT OF EVA ON MARKET PRICE

27 IMPACT OF EVA ON MARKET PRICE

28 IMPACT OF EVA ON MARKET PRICE

29 IMPACT OF EVA ON MARKET PRICE

246.8 6 7792. 34 2018. 53 422.0 5 246.8 6 9635. 68

30 IMPACT OF EVA ON MARKET PRICE

31 IMPACT OF EVA ON MARKET PRICE

32 IMPACT OF EVA ON MARKET PRICE