Economic Value Added (EVA) of Sample Companies

Computation of Economic Value Added (EVA) of Sample Companies
Computation of Economic Value Added (EVA) of Sample

Companies
A dissertation submitted in partial fulfillment of the requirements

for the award of MBA degree of Bangalore University.
Submitted By
Ashwani Kumar Kedia
(REGD. NO: 05XQCM6013)
Under The Guidance and Supervision

OF
Dr. N. S. Malavalli, Principle M.P. Birla Institute of Management.
M. P. BIRLA INSTITUTE OF MANAGEMENT

Associate Bharatiya Vidya Bhavan
# 43 Race Course Road, Bangalore-560001
2006-07
M P Birla Institute of Management, Bangalore 1

DECLARATION
I, Ashwani Kumar Kedia, do hereby declare that this project report entitled
“Computation of Economic Value Added (EVA) of Sample Companies” is an
original research work carried out by me, towards the partial fulfillment of requirements
for the M.B.A. degree course of Bangalore University at M.P. Birla Institute of
Management. I also declare that this dissertation has not been submitted to any
University/Institution for the award of any Degree/Diploma.
Place: Bangalore
Date: 15th May 2007 (Ashwani Kumar Kedia)

PRINCIPAL’S CERTIFICATE
This is to certify that this report is the result of Project “Computation of Economic
Value Added (EVA) of Sample Companies” undergone by Mr. Ashwani Kumar Kedia
bearing the register number 05XQCM6013 under the guidance and supervision of Dr. N.
S. Malavalli, M.P. Birla Institute of Management. This has not formed a basis for the
award of any Degree/ Diploma of any University.
Date: Dr Nagesh. Malavalli

Place: Bangalore (Principal)

GUIDE’S CERTIFICATE
This is to certify that this report is the result of Project “Computation of Economic
Value Added (EVA) of Sample Companies” undergone by Mr. Ashwani Kumar Kedia,
bearing the register number 05XQCM6013 is a bonafied work done carried under my
guidance and supervision during the academic year 2005-2007 in the partial fulfillment of
the requirement for the award of MBA degree by Bangalore University. To the best of
my knowledge this report has not formed the basis for the award of any other degree.
Date: Dr. N. S. Malavalli

Place: Bangalore (Principal)

ACKNOWLEDGEMENT
The research work which I had done gave me enormous amount of knowledge and the
understanding of various financial issues related to the firm’s Computation of EVA. This
research project work is made successful by the combining efforts of a no. of officials
and bears the imprint of many people. This project can not be said completed unless and
until, I fulfill my duty of thanking those persons to whom I deeply indebted. I wish to
express my deep gratitude towards them to their whole hearted support and existence.
Firstly I would like to thank Dr. N. S. Malavalli, principal, M P Birla Institute of

Management, Bangalore, who has given his valuable support and guidance in carrying
out this project work.
I am also extremely thankful to Dr. T. V. N. Rao, Professor, M P Birla Institute of

Management, Bangalore, who has guided me to do this project by giving valuable
suggestion and advice.
Further, I am grateful to Professor Santhanam, Professor, M P Birla Institute of

Management, Bangalore, who gave his suggestions to improve the accuracy and the
dependability of the data.
They all guided me during the period and helped me in each and every step to prepare
this report.
DATE: Ashwani Kumar Kedia

-CONTENTS-
Particulars Page No.
1) Chapter – 1
Abstract 08
Introduction 09
Problem Statement 11
Research Objective 11
Background of EVA 12
2) Chapter – 2 REVIEW OF LITERATURE 16
3. Chapter – 3 METHODOLOGY 19
4. Chapter – 4 DATA ANALYSIS 23
5. Chapter – 5 DISCUSSION & CONCLUSION 34
6. Chapter – 6 BIBLIOGRAPHY & REFERENCES 37
7. Chapter – 7 ANNEXURE 46
TABLES
Beta of Sample companies 24
NOPAT Sample companies 25
Capital Employed of Sample Companies 26
WACC of Sample Companies 27
EVA of Sample Companies 29
EVA and Adjusted Market price 31

Chapter-1

ABSTRACT
The value-based management performance measure EVA introduced by Stern Stewart &
Co. is an incarnation of the underlying residual income (RI) concept. The concept is
evaluated and compared with traditional profitability measures within a controlled
simulation framework. It is observed that EVA is very sensitive to its cost of equity
component, but it is unexpectedly insensitive to its cost of debt component under regular
conditions. EVA and its variability are observed to be strongly affected by the firm's
growth policies because of leverage effects. EVA is observed to be much more unstable
than the traditional return on investment and directly related to the return on equity
measure. Methodologically, the paper demonstrates the advantages of using a controlled
simulation approach in financial research.
The EVA is computed of 20 companies of the NIFTY for a period of 5 years beginning
from FY 2001-02 to FY 2005-06. EVA is equal to NOPAT (Net Operating Profit) minus
WACC (Weighted Average Cost of Capital). NOPAT is EBIT after taxes. Cost of equity
is calculated using CAPM Model. Beta is calculated based on monthly high low average
of past three years.
From the study it is observed that there is no strong pattern of wealth created by
companies. EVA of different companies varies year to year based on its overall cost of
capital and cost of equity is more influential factor. It is also found that EVA and market
price has no good relation for the sample companies. And thus we can say that investors
do not consider EVA for the investment decision.

INTRODUCTION
With increasing pressure on firms to deliver shareholder value, there has been a renewed
emphasis on devising measures of corporate financial performance and incentive
compensation plans that encourage managers to increase shareholder wealth. One
professedly recent innovation in the field of internal and external performance
measurement is a trade-marked variant of residual income known as economic value-
added (EVA).
Economic Value Added (EVA) is a value-based framework that provides a unique insight
into value creation and unites the finance theory with the competitive strategy
framework. Economic Value Added (EVA) is a relatively new concept in the area of
financial management. It is the financial performance measure that comes closest than
any other to capture the true economic profit of a firm. EVA is the performance measure
most directly linked to the creation of shareholder wealth over time. It is a value-based
framework that provides a unique insight into value creation and unites the finance theory
with the competitive strategy framework. The financial concept underlying EVA was
originally propagated by Adam Smith, who proclaimed that the social mission of an
individual enterprise is to maximize the value of shareholders. Further contributions were
made by Merton Miller and Stern Stewart.
Stern Stewart developed EVA to help managers incorporate two basic principles of
finance into their decision making: One, the primary objective of maximizing the wealth
of its shareholders; and two, accepting that the value of a company depends on the extent
to which investors expect future profits to exceed or fall short of the cost of capital.
EVA is the net operating profit minus an appropriate charge for the opportunity cost of
all capital invested in an enterprise. Hence, EVA is an estimate of true economic profit,
or the amount by which earnings exceed or fall short of the required minimum rate of
return those shareholders and lenders could get by investing in other securities of
comparable risk. Jenson (1986) argues that managers do not like to disburse free cash to
investors even when no positive present value project is available.
Capital charge is the most important characteristic of EVA. Under conventional
accounting, most companies seem profitable while, in fact, they may not be. By taking all

capital costs into account, including the cost of equity, EVA shows the amount of wealth
in rupee a business has created or destroyed in each reporting period. In other words,
EVA is the profit as defined by the shareholders.
A sustained increase in EVA will bring an increase in the market value of a company.
EVA has the advantage of being conceptually simple and easy to explain, since it starts
with familiar operating profits and deducts a charge for the capital invested in the
company. By assessing a charge for using capital, EVA makes managers care about
managing assets as well as income and helps them properly assess the trade-offs between
the two.
Above all, EVA helps in overcoming the ambiguity of financial goals. Most companies
use a plethora of measures to express their financial goals and objectives. Strategic plans
often are based on growth in revenue or market share. Companies usually evaluate
individual products or lines of business on the basis of gross margins. Business units may
be evaluated in terms of return on assets.
Finance departments usually analyze capital investments in terms of the net present
value, but weigh prospective acquisitions against the likely contribution to the earnings
growth. The result of the inconsistent standards, goals and terminology usually results in
cohesive planning, operating strategy and decision making. EVA eliminates this
perplexity by using a single financial measure that links decision making with a common
focus.

PROBLEM STATEMENT
Investors who have a variety of options will evaluate the performance of various
companies based on the returns they provide, before making investments. In this context,
it is relevant to see whether companies are earning returns on their costs, and thereby,
creating wealth for their shareholders.
NEED AND IMPORTANCE OF THE STUDY:

Investors who have a variety of options will evaluate the performance of companies
based on the returns they provide, before making investments. Companied need to
improve their financial performance to meet the expectations of investors. So, creation of
wealth is an important task for companies. Non-creation of EVA leads to investor
dissatisfaction. This will affect the equity mobilization activities of companies, which
have a great impact on the economy.
In this context, it is relevant to see whether companies are earning returns on their costs,
and thereby, creating wealth for their shareholders.
THE OBJECTIVE THE STUDY:
To measure the economic value added of selected companies

THE BACKGROUND OF EVA
EVA is not a new discovery. An accounting performance measure called residual income
is defined to be operating profit subtracted with capital charge. EVA is thus one variation
of residual income with adjustments to how one calculates income and capital. According
to Wallace (1997, p.1) one of the earliest to mention the residual income concept was
Alfred Marshall in 1890. Marshall defined economic profit as total net gains less the
interest on invested capital at the current rate. According to Dodd & Chen (1996, p.27)
the idea of residual income appeared first in accounting theory literature early in this
century by e.g. Church in 1917 and by Scovell in 1924 and appeared in management
accounting literature in the 1960s. Also Finnish academics and financial press discussed
the concept as early as in the 1970s. It was defined as a good way to complement ROI-
control (Virtanen 1975, p.111). Knowing this background many academics have been
wondering about the big publicity and praise that has surrounded EVA in the recent
years. The EVA-concept is often called Economic Profit (EP) in order to avoid problems
caused by the trademarking. On the other hand the name "EVA" is so popular and well
known that often all residual income concepts are often called EVA although they do not
include even the main elements defined by Stern Stewart & Co. For example, hardly any
of those Finnish companies that have adopted EVA calculate rate of return based on the
beginning capital as Stewart has defined it, because average capital is in practice a better
estimate of the capital employed. So they do not actually use EVA but other residual
income measure. This insignificance detail is ignored later on in order to avoid more
serious misconceptions. It is justified to say that the EVA concept Finnish companies are
using corresponds virtually the EVA defined by Stern Stewart & Co.
In the 1970s or earlier residual income did not got wide publicity and it did not end up to
be the prime performance measure in great deal of companies. However EVA, practically
the same concept with a different name, has done it in the recent years. Furthermore the
spreading of EVA and other residual income measures does not look to be on a
weakening trend. On the contrary the number of companies adopting EVA is increasing
rapidly. We can only guess why residual income did never gain a popularity of this scale.
One of the possible reasons is that Economic value added (EVA) was marketed with a

concept of Market value added (MVA) and it did offer a theoretically sound link to
market valuations. In the times when investors demand focus on Shareholder value issues
this was a good bite EVA measures whether the operating profit is enough compared to
the total costs of capital employed. Stewart defined EVA (1990, p.137) as Net operating
profit after taxes (NOPAT) subtracted with a capital charge.
At operational level this new approach leads often to increased shareholder value through
increased capital turnover (Wallace 1997, p.16). In many companies everything has been
done in cutting costs but the capital efficiency has been ignored. EVA has been helpful
because it forces to pay attention to capital employed and especially to excess working
capital. Allocating the capital costs to their originators i.e. individual functions of
organization can further reinforce this impact.
One of EVA's most powerful features is its suitability to management bonus systems.
This have been empirically proofed to be good way to increase shareholder value
(Wallace 1997). The good feasibility for this purpose is due to the nature of EVA as
excess return to shareholders. When EVA is maximized also shareholder value is
maximized. The idea of EVA bonuses is that if management can be paid some bonuses,
the shareholders have always earned higher return on their capital than they can expect.
This kind of bonus system is usually beneficial both to management and the shareholders,
because the performance level is likely to rise after introducing EVA bonus system. EVA
bonus paid is far from a cost to shareholders, because it is often a share in the
discretionary value created. With well designed bonus plan, the higher the bonuses that
are paid, the better it is for the shareholders. In order to be successful, EVA based bonus
systems should be long-term, based mainly on changes of EVA and offer considerable
bonuses for considerable shareholder value improvements.

With implementation it is important to understand the EVA-concept thoroughly and tailor

the concept to the unique situation of each company or business unit. EVA is at its best as
an overall measure and organizational approach with strong link to payroll of managers
and other employees. That kind utilization can not succeed without deep understanding
and commitment achieved with proper training.
EVA = NOPAT – CAPITAL COST
EVA = NOPAT – COST OF CAPITAL x CAPITAL EMPLOYED
Terminology
Shareholder value = Shareholder value is being used as a overall term covering various
aspects in thinking that promotes the interests of shareholders. Normally the term also
means a company’s value to its shareholders i.e. market capitalization.
Shareholder value approach = Shareholder value approach refers to the focus of

organization and management on acting within the interests of shareholders. Hence it
means focus on maximizing the wealth of shareholders (creating shareholder value).
Value based measures = Value based measures are new performance measures that
originate from the shareholder value approach. They seek to measure the periodic
performance in terms of shareholder value created (or destroyed).
Cost of Equity: Cost of equity is the minimum rate of return, which has to be made from
an equity-financed project, in order to maintain the present wealth of the shareholders
unaffected. It can be computed based on Capital Asset Pricing Model (CAPM).
According to CAPM,
Cost of Equity Ke = Risk-free Rate + (Beta x Market Premium).

Risk-free Rate: Risk-free rate is the rate of return from securities, which are free from
any type of risk. Generally, government-backed securities are considered as risk-free
securities. So, the yield on the 364-day Government of India Treasury Bill is considered
as risk-free rate [Thampy et al. (2001), Sen et al. (2003)]. Theses show 9.7583%,
7.1016% and 5.9251% for years 2000-01, 2001-02 and 2002-03 respectively.
Beta: Beta is the measure of the volatility of a stock in relation to the market. It is the
index of systematic risk. Beta for the each stock was calculated based on the daily stock
price with the Bombay Stock Exchange’s sensex returns as the proxy for the market
returns. Beta was calculated by using the data from the period April 1, 2002 to March 31,
2003.
Market Premium: Market premium is the excess return offered by the market over the
risk-free rate. It is considered as 7%, since some of the leading firms like Infosys used the
same rate while calculating EVA for their firm.

Chapter-2

LITERATURE REVIEW:
Stern Stewart (1990, p.215 - 218) has first studied this relationship with market data of
618 U.S. companies. Stewart presents the results in his book "The quest for value".
Stewart has studied the relationship between EVA and market value of the company and
he has produced a list of companies’ EVA annually since 1982, its coverage is limited to
the largest 1,000 companies. He states that EVA and MVA correspond each other in
reality quite well among US companies (the data was from late 1980’s). Only the
relationship between negative EVA and negative MVA does not hold very well.
According to Stewart, this is because the potential of liquidation, recovery,
recapitalization, or takeover sets a floor on a company’s market value (Stewart p.217).
For example with companies which have a lot of fixed assets this is quite easy to
understand. Market value will always reflect the value of assets even though the company
has very low or negative rate of return (and so theoretically it should sell a lot below
book value). That is because the company can always be liquidated; the owners have an
option to liquidate the assets if the return looks week also in the future. On the other hand
markets do not believe that the weak returns can go on forever. Markets are expecting a
chance, an improvement, in the long run. If EVA is positive, the relationship is more
direct. Then the market valuation happens on the basis of return and growth potential and
not on the basis of liquidation or recovery value. Stewart finds also that MVA and EVA
correspond each other best when we talk about changes in EVA and MVA and not the
absolute levels. Changes in EVA and MVA are not affected so much by accounting
distortions and inflation than the absolute values.
Grant (1996) shows that EVA significantly impacts the market value added of a firm and
that this wealth effect stems from the company’s positive residual return on capital. He
calculates regression statistics between the MVA-to-capital and EVA-to-capital ratios
from the data of 983 firms.

Peterson (1996) show that value-added measures are slightly but not significantly more
correlated with stock returns than traditional performance measures.
Lehn and Makhija (1996) study EVA and MVA as performance measures and signals for
strategic change. Their data consists of 241 U.S. companies and cover years 1987, 1988,
1992 and 1993. The researchers first find out that both measures correlate positively with
stock returns and that the correlation is slightly better than with traditional performance
measures like return on assets (ROA), return on equity (ROE) and return on sales (ROS).
Additionally they study how companies’ performance, as measured in terms of EVA and
MVA, affect on the CEO firings. Finally they examine the relationship between
EVA/MVA and corporate focus. Lehn and Makhija find an inverse relation between
EVA/MVA and abnormal CEO turnover. They also find that firms with greater focus on
their business activities have significantly higher MVA than their less focused
counterparts. Lehn and Makhija conclude that their results suggest EVA and MVA to be
effective performance measures that contain information about the quality of strategic
decisions and serve as signals of strategic change.

Chapter-3

METHODOLOGY
STUDY TYPE:
The study type is analytical, quantitative and historical.
Analytical as facts and existing information is used for the analysis.
Quantitative as EVA is calculated and the variables are expressed in measurable terms.
Historical as the historical information is used for analysis and interpretation.
SAMPLE TECHNIQUE:
The Sampling method used here is Non-Probability Sampling. Companies listed in the
stock exchange are considered for the sample because market prices and other
information are available. Since NIFTY is a good proxy for the whole market, so
companies will be selected from the NIFTY Index.
SAMPLE SIZE:
Sample includes 20 companies in the NIFTY (for which relevant data was available), for
a period of 5 years starting from FY 2001-02 to FY 2005-06. The following are the
sample 20 companies:
1. Associated Cement Companies Ltd.

2. Bajaj Auto
3. Bharat Heavy Electricals Ltd.
4. Bharat Petroleum Corporation Ltd.
5. Cipla Ltd.
6. Dabur
7. Dr. Reddy’s Laboratories Ltd.
8. Hero Honda Motors
9. Hindustan Lever Ltd.
10. ITC Ltd.
11. Infosys Technologies Ltd.
12. Larsen & Tourbo Ltd.

13. Maruti Udyog

14. Oil & Natural Gas Corporation
15. Ranbaxy Laboratories Ltd.
16. Reliance Industries
17. Satyam Computers
18. Tata Consultancy Services
19. Tata Motors
20. Wipro Ltd.
DATA COLLECTION:
Data type:
Secondary data
Data Content:
Historical share prices of the sample companies.
Index values of S&P CNX 500.
Financial Information of the sample companies.
Data Source:
Historical share prices of the sample companies and the index points for the period has
been taken from the database of Capital Market Publishers (India) Ltd., Capitaline 2000
as well as from nseindia.com. Financial statements of the sample companies have also
been taken from the same source.

METHOD ADOPTED TO CALCULATE ECONOMIC VALUE ADDED (EVA):

EVA = NOPAT-WACC*CAPITAL EMPLOYED
NOPAT is net operating profit after taxes.
WACC is weighted average cost of capital (equity and debt). WACC used in the
calculations is at book value of equity and debt. It is calculated as follows:
WACC = Ke *W1+ Kd (1-T)*W2
W1 is weight of EQUITY
W2 is weight of DEBT
Kd is the effective cost of Debt, which is calculated by dividing the totat

interest by the total debt.
Ke is calculated using the Capital Asset Pricing Model developed by Modigliani and
Miller.
Ke=Rf+Beta (Rm-Rf)
Rf is the risk free rate, i.e., the rate of interest for 1-year government
securities. These rates are obtained from the website of Reserve Bank
of India.
Rm is the return for the market. It is calculated by using the formula given below for the
index values.
Rm=Average of return on market for all the 10 years
Return = Closing index value-opening index value * 100/Opening index value
Beta values for all the sample companies for all the 5 years are calculated by finding the
slope between log normal of share prices of all the companies and log normal of the
index values. Log normal of the values is considered to remove abnormalities if any and
convert them into normal distribution.
Invested Capital is the total long term funds and includes equity shares and the total debt
as at the end of the year.

Chapter-4

DATA ANALYSIS AND INTERPRETATION

TABLE-1
The following table shows the calculated beta of sample companies for
the period of 2002 to 2006:
BETA OS SAMPLE COMPANIES:
2006 2005 2004 2003 2002

Infosys 0.3546 0.152979 -0.04411 0.00557 -0.01655
Wipro 0.292279 0.297731 0.349974 0.188693 0.174759
TCS 0.3510 0.3674 0.1664 0.1298 0.1115

Satyam 0.406208 0.401593 0.193428 0.195075 0.176145
Maruti
Udyog 0.4456 0.3870 0.3349 0.2281 0.1156
Tata
Motors 0.509645 0.557892 0.511727 0.362388 0.30271
Bajaj Auto 0.420812 0.438884 0.352684 0.185454 -0.12573
Hero
Honda 0.435857 0.164088 0.140313 0.136568 0.169832
HLL 0.471316 0.525848 0.579891 0.841632 0.926359
ITC 0.646798 0.618266 0.576269 0.580617 0.520053
Dabur 0.481458 0.552343 0.607186 0.382696 0.349168
L&T 0.320191 0.633972 0.572677 0.45041 0.378928
ACC 0.531201 0.606884 0.43202 0.358689 0.288628
BHEL 0.436836 0.487245 0.499585 0.277344 0.191105
RIL 0.497087 0.634151 0.321646 0.392903 0.271334
ONGC 0.34848 0.299664 0.346486 0.352947 0.406132
BPCL 0.38585 0.269347 0.188172 0.161034 0.130788
Ranbaxy 0.428494 0.140275 0.145339 0.169551 0.396663
Cipla 0.510034 0.520426 0.375294 0.178704 0.158716
Dr. Reddys 0.346703 0.134656 -0.05817 0.065163 0.079722

TABLE-2
The following table shows the NOPAT of selected companies during the
period of 2002-2006:
NET OPERATING PROFIT AFTER TAX (NOPAT):
2006 2005 2004 2003 2002

Infosys 2271.5 1753.5 1110.623 875.4655 718.0875
Wipro 1883.161 1501.619 912.639 722.8195 717.444
TCS 2658.404 1790.096 5.9865 1.2155 N. A.
Satyam 1044.036 660.387 478.1985 342.6085 272.1355
Maruti
Udyog 1471.4 1286.53 868.335 426.985 349.83
Tata Motors 2297.351 1830.682 1363.7 844.3955 442.6435
Bajaj Auto 1239.616 935.641 754.2925 628.628 559.0455
Hero Honda 1070.846 915.992 745.8815 617.292 485.485
HLL 1231.545 1298.192 1562.236 1550.848 1387.328
ITC 2604.189 2459.723 1754.812 1563.088 1335.932
Dabur 201.033 151.585 106.8145 105.17 95.4915
L&T 1163.498 1046.017 632.424 688.0575 733.0245
ACC 636.839 573.804 400.7315 302.783 314.5675
BHEL 2008.279 1317.295 827.3135 677.6315 603.8565
RIL 10817.63 10028.82 7150.358 6025.065 5920.876
ONGC 18786.83 16569.22 10616.09 10986.42 7070.934
BPCL 1485.491 2872.072 3196.193 2719.34 1880.996
Ranbaxy 259.644 705.46 725.53 609.843 292.838
Cipla 564.263 406.924 291.3235 224.471 217.4835
Dr. Reddys 301.966 107.611 246.2655 320.3915 345.15

TABLE-3
The following table shows the Total Capital Employed of selected
companies during the period of 2002-2006:
TOTAL CAPITAL EMPLOYED (EQUITY FUND + DEBT FUND):
2006 2005 2004 2003 2002

Infosys 6966 5225 3249.58 2857.49 2080.31
Wipro 6680.96 5343.51 3860.29 3536.41 2624.06
TCS 6115.5 3680.55 488.26 36.84 N. A.
Satyam 4418.18 3316.59 2661.7 2217.67 1975.16
Maruti
Udyog 6242.6 4803.6 3986.7 3554 3363.3
Tata Motors 9510.61 7111.36 5350.26 4009.66 4976.3
Bajaj Auto 7144.34 5807.06 4946.09 4236.56 3486.07
Hero Honda 2195.11 1695.14 1313.51 995.31 802.2
HLL 2288.13 3742.27 3891.2 3777.27 3230.89
ITC 9181.21 8140.97 6530.91 5650.16 4698.52
Dabur 601.39 514.81 410.6 630.86 699.36
L&T 8463.17 6769.76 5416.54 7917.45 8115.54
ACC 3334.88 3277.39 2947.8 2670.71 2709.72
BHEL 7859.62 6563.87 5835.97 5337.89 5135.41
RIL 74370.83 59910.76 56034.32 50318.2 46926.1
ONGC 71869.71 60774.37 55624.41 42071.69 33233.02
BPCL 19187.3 13203.78 11261.21 10937.45 10543.17
Ranbaxy 4450.99 3360.47 2741.15 2177.58 2067.65
Cipla 2452.18 1744.83 1474.63 1164.86 924.03
Dr. Reddys 5185.79 2222.2 2007.76 1768.39 1428.87

TABLE-4
The following table shows the WACC of selected companies during the
WEIGHT AVERAGE COST OF CAPITAL:
2006 2005 2004 2003 2002

Infosys 23.95 13.74978 2.468405 6.425512 6.22
Wipro 20.65 12.46592 37.49863 3.965674 3.706979
TCS 23.32 12.99626 2.120275 4.76447 N. A.
Satyam 25.67 13.98304 24.131 3.911132 4.034106
Maruti
Udyog 25.32 13.37678 34.76259 3.970437 5.081238
Tata Motors 21.34 12.70353 39.12789 6.648945 6.981656
Bajaj Auto 21.28 11.595 30.85732 3.237675 6.376151
Hero Honda 25.64 8.782083 16.84032 4.156126 3.322146
HLL 28.65 11.81722 35.4589 -4.42524 -5.89429
ITC 37.09 15.26988 58.47004 -0.65914 0.316923
Dabur 23.85 9.323024 45.61707 3.605058 4.122739
L&T 14.43 10.12468 30.27125 2.312099 3.594039
ACC 22.12 11.19154 24.60122 4.117138 4.575137
BHEL 25.92 15.14266 48.00732 3.178827 4.239266
RIL 21.55 14.15315 24.10534 2.769184 3.959447
ONGC 18.82 10.02115 28.81652 1.700393 1.004354
BPCL 14.03 8.108671 15.29107 4.952546 5.49838
Ranbaxy 15.37 7.757425 16.15997 4.617624 2.914775
Cipla 25.24 8.070181 35.57109 4.026319 4.02599
Dr. Reddys 10.24 8.627416 1.305751 5.756608 5.673527

INTERPRATION
TABLE-1
It can be seen that beta for most of the companies has increased from year to
year from Table-1. Earlier, in 2002 it was in range between “0.10 to 0.20” except
some cases. But slowly it has increased to about 0.50 by the end of 2006. Thus
we can say that riskiness of the stock is increased during the period of 2002 to
2006.
TABLE-2
NOPAT is increased consistently increased and improved from year to year of
almost companies. There is some variations in case of pharmacy companies. In
2006, NOPAT of Ranbaxy has dropped, while in case of Dr. Reddy’s NOPAT has
decreased continuously but in year 2006 it has improved a lot.
TABLE-3
Total capital employed of almost companies is increased consistently from
2002 to 2006. While, HLL has reduced its capital fund in year 2005 and
2006. L&T has also reduced its capital fund during 2003 and 2004 but it has
again increased the capital fund in 2005 and 2006.
TABLE-4
From the table it is concluded that weightage average cost of capital
(WACC) of the all companies during 2002 and 2003 is very low. WACC is
around 2-6 during these years. But in 2004 WACC is increased drastically
because of increasing beta and market return as well as. In case of Infosys
and Dr. Reddy’s, WACC is very low because of negative beta. And in case
of TCS, WACC is also very low because it depended more on debt fund

TABLE-5
The following table shows the EVA of selected companies during the
EVA OF SAMPLE COMPANIES (in rs. crore)
2006 2005 2004 2003 2002

Infosys 602.8215 1035.074 1030.41 691.8571 588.6936
Wipro 503.6009 835.5013 -534.917 582.577 620.1707
TCS 1232.47 1311.762 -4.36595 -0.53973 N. A.
Satyam -89.9553 196.6269 -164.096 255.8725 192.46
Maruti
Udyog -109.532 643.9632 -517.545 285.8757 178.9327
Tata
Motors 267.3399 927.2883 -729.744 577.7954 95.21535
Bajaj Auto -280.662 262.3122 -771.938 491.462 336.7684
Hero
Honda 508.11 767.1234 524.6822 575.9257 458.8347
HLL 576.0827 855.9597 182.4592 1718.001 1577.765
ITC -801.572 1216.607 -2063.81 1600.33 1321.041
Dabur 57.59015 103.5891 -80.4892 82.42713 66.65871
L&T -57.9097 360.6007 -1007.23 504.9982 441.3488
ACC -100.672 207.0137 -324.463 192.8262 190.5941
BHEL -28.9498 323.3506 -1974.38 507.9492 386.1528
RIL -5210.28 1549.555 -6356.91 4631.661 4062.862
ONGC 5262.658 10478.93 -5412.93 10271.03 6737.157
BPCL -1206.64 1801.421 1474.233 2177.658 1301.292
Ranbaxy -424.617 444.7741 282.5611 509.2905 232.5707
Cipla -54.6487 266.1131 -233.219 177.57 180.2821
Dr. Reddys -228.956 -84.1074 220.0491 218.5922 264.0827

INTERPRATION:
It can be understood from Table 5 that there is no consistent pattern of economic
value created by the selected companies. Sometimes, it is negative and some
time it is positive.
In year 2002, Economic Value added of all the companies is positive. in the next
year 2003, EVA of the most companies is increased in comparison of previous
year except Wipro, ONGC, Cipla and Dr. Reddys. EVA of these four companies
is decreased compare to previous year. While, EVA of TCS is negative.
In year 2004, EVA of the companies is the combination of positive and negative.
In the year, only Infosys, Hero Honda, HLL, BPCL, Ranbaxy and Dr. Reddy’s
added economic value while all other companies did not create any wealth to
their shareholders because of high market return.
Again in 2005, all selected companies created wealth except Dr. Reddy’s
In year 2006, economic value added is again combination of positive and

negative like in year 2004. The companies, those created value to shareholders
are Infosys, Wipro, TCS, Tata Motors, Hero Honda, HLL, Dabur and ONGC.
Except these companies no other companies added any economic value.
Infosys, Hero Honda and HLL are the companies among all sample companies,
those created wealth to its shareholders consistently during five years from 2002-
2006.

TABLE-6: EVA and Market Price of the sample companies 2002-2006
2002 2003 2004 2005 2006

Adjusted
INFOSYS Market Price 5770.10 6678.15 10362.50 11142.50 14617.50
EVA 588.69 691.86 1030.41 1035.07 602.82
Adjusted
WIPRO Market Price 2732.75 2674.15 3769.50 3397.80 5347.75
EVA 620.17 582.58 -534.92 835.50 503.60
Adjusted
TCS Market Price N. A. N. A. N. A. 1413.00 1848.63
EVA N. A. -0.54 -4.37 1311.76 1232.47
Adjusted
SATYAM Market Price 695.63 876.25 1042.25 1014.75 2033.50
EVA 192.46 255.87 -164.10 196.63 -89.96
TATA Adjusted
MOTORS Market Price 164.85 433.75 494.95 447.95 878.53
EVA 95.22 577.80 -729.74 927.29 267.34
BAJAJ Adjusted
AUTO Market Price 512.50 1086.15 1080.55 1071.00 2722.05
EVA 336.77 491.46 -771.94 262.31 -280.66
HERO Adjusted
HONDA Market Price 273.83 424.50 532.45 561.50 879.45
EVA 458.83 575.93 524.68 767.12 508.11
Adjusted
HLL Market Price 1767.50 1943.50 1480.50 1404.00 2587.00
EVA 1577.77 1718.00 182.46 855.96 576.08
Adjusted
ITC Market Price 445.65 632.10 863.00 883.45 1868.00
EVA 1321.04 1600.33 -2063.81 1216.61 -801.57
Adjusted
DABUR Market Price 444.60 812.10 891.00 1250.40 1178.75
EVA 66.66 82.43 -80.49 103.59 57.59

Continued…..
Adjusted
L&T Market Price 203.50 499.00 955.58 1057.51 N. A.
EVA 441.35 505.00 -1007.23 360.60 -57.91
Adjusted
ACC Market Price 1610.75 2376.00 3118.75 3655.00 7114.00
EVA 190.59 192.83 -324.46 207.01 -100.67
Adjusted
BHEL Market Price 165.83 471.43 656.75 812.08 2137.53
EVA 386.15 507.95 -1974.38 323.35 -28.95
Adjusted
RIL Market Price 294.30 508.90 510.01 569.95 633.00
EVA 4062.86 4631.66 -6356.91 1549.55 -5210.28
Adjusted
ONGC Market Price 241.12 473.64 558.69 609.37 822.06
EVA 6737.16 10271.03 -5412.93 10478.93 5262.66
Adjusted
BPCL Market Price 212.95 413.45 432.13 387.50 414.05
EVA 1301.29 2177.66 1474.23 1801.42 -1206.64
Adjusted
RANBAXY Market Price 284.54 546.28 595.70 523.63 424.10
EVA 232.57 509.29 282.56 444.77 -424.62
Adjusted
CIPLA Market Price 689.20 967.60 1193.30 1091.00 2427.90
EVA 180.28 177.57 -233.22 266.11 -54.65
DR. Adjusted
REDDY'S Market Price 2117.75 3331.08 2065.13 1853.83 3459.00
EVA 264.08 218.59 220.05 -84.11 -228.96

INTERPRATION:
From the table it can be understood that there is no such relationship
between price and EVA. Because increase or decrease in EVA, there is no
relative effect on market price of shares of companies. Market price does not
vary with the variation of economic value added of the companies.
Especially in 2004 and 2006 when companies did not created any wealth to
its shareholders, market price of the companies was not influenced
negatively.
Market price of Infosys has increased consistently in stead of negative EVA
in 2006. Price of Wipro and Satyam is also increased consistently in stead of
negative EVA in 2004 and 2006.

Chapter-5

DISCUSSIONS:
Economic Value Added is a residual income variable. It is defined as Net

operating profit after taxes subtracted with the cost of capital tied in operations.
EVA seems to have importance for companies as a performance measurement
and controlling tool. First of all it is fairly simple measure but still measures well
the ultimate aim of any given company, the increase or decrease in shareholders’
wealth. Maximizing traditional performance measures like ROI is not theoretically
in line with maximizing the wealth of shareholders. Therefore EVA is superior to
conventional performance measures. The premise behind EVA – that businesses
must cover their capital costs – is neither new nor peculiar. Putting it into practice
can still be eye-opening. EVA shows financial performance with a new pair of
glasses or offers new approach especially for the companies where equity is
viewed as free source of funds and performance is measured by some earnings
figure. At best EVA helps with creating a mind-set throughout the organization
that encourages managers and employees to think and behave like owners.
Substantial shareholder value increases and true success stories arise always
from outstanding strategy, quick response, great ideas and good predicting of
future. EVA helps in quantitative assessing of different strategies but that is all.
Wealth does not arise from EVA alone. EVA only measures changes of wealth. It
is also as short-term as all other periodic performance measures. Therefore all
companies should rely also on other performance measures. Especially
important this is e.g. for new growth phase companies. However we have to bear
in mind that the success or failure of any given company is measured ultimately
as created shareholder value. Therefore EVA is important measure also for those
companies that use primarily other tools is assessing the achievement of their
strategic goals.

Conclusion
The above discussion explains the importance of using EVA as a tool for
measuring financial performance. The study reveals that there is no strong
pattern of EVA of selected companies during the period. The wealth created by
most companies in year 2004 and 2006 is negative because of higher cost of
capital than that of other years.
The central idea of EVA is subtracting the cost of capital from the firm's profits to
measure, as the term indicates, the economic additional value produced by the
firm to its owners over the weighted cost of the capital employed. This raised the
question of the effect of the debt and equity cost components on the behavior of
EVA. It was observed that the cost of debt has little effect on the EVA's. On the
other hand, as is expected, EVA behaves in a linear fashion with respect to the
cost of equity. It was also observed that even EVA is much more unstable than
the other performance measure.
It is also observed that there is no strong relation between EVA and market
prices of the companies. Thus, it can be understood that investor do not give so
importance to EVA for its investment decision. Extensive study is required to
establish the influence of other factors like non-fund based income, spread,
deployment of funds, market price, etc. It is also expected that the usage of EVA
as a financial performance tool will also be more in India.

Chapter-6

BIBLIOGRAPHY:
TEXT BOOKS:
Financial Management, Theory and Practice

Prasanna Chandra (Sixth Edition)
Research Methodology
Donald Cooper and Pamela Schindler (Eighth Edition)
WEBSITES:
www.nseindia.com
www.rbi.org.in
www.capitaline.com
www.investopedia.com

REFERENCES:
1. ARTICLES OF ICFAI (The Institute of Chartered Financial Analysts of India):
“Computation of EVA in Indian Banks”, by Roji George, the ICFAI

Journal of Bank Management, Vol IV, No. 2 , May 2005, Pg No. 30-44.
2. A Review and Synthesis of the Economic Value-Added Literature, Andrew

Worthington, Tracey West
3. Database ofCapital Market Publishers (India) Ltd., Capitaline 2000

Chapter-6

ANNEXURE
COMPUTATION OF EVA OF SAMPLE COMPANIES DURING
PERIOD OF 2002 TO 2006:
2006
COMPANY EBIT NOPAT WACC EVA
Infosys 3245 2271.5 1668.68 602.82
Wipro 2690.23 1883.161 1379.56 503.60
TCS 3797.72 2658.404 1425.93 1232.47
Satyam 1491.48 1044.036 1133.99 -89.96
Maruti
Udyog 2102 1471.4 1580.93 -109.53
Tata Motors 3281.93 2297.351 2030.01 267.34
Bajaj Auto 1770.88 1239.616 1520.28 -280.66
Hero Honda 1529.78 1070.846 562.74 508.11
HLL 1759.35 1231.545 655.46 576.08
ITC 3720.27 2604.189 3405.76 -801.57
Dabur 287.19 201.033 143.44 57.59
L&T 1662.14 1163.498 1221.41 -57.91
ACC 909.77 636.839 737.51 -100.67
BHEL 2868.97 2008.279 2037.23 -28.95
RIL 15453.75 10817.625 16027.91 -5210.28
ONGC 26838.33 18786.831 13524.17 5262.66
BPCL 2122.13 1485.491 2692.13 -1206.64
Ranbaxy 370.92 259.644 684.26 -424.62
Cipla 806.09 564.263 618.91 -54.65
Dr. Reddys 431.38 301.966 530.92 -228.96

2005
Infosys 2505 1753.5 718.43 1035.07
Wipro 2,145.17 1501.619 666.12 835.50
TCS 2,557.28 1790.096 478.33 1311.76
Satyam 943.41 660.387 463.76 196.63
Maruti
Udyog 1,837.90 1286.53 642.57 643.96
Tata Motors 2,615.26 1830.682 903.39 927.29
Bajaj Auto 1,336.63 935.641 673.33 262.31
Hero Honda 1,308.56 915.992 148.87 767.12
HLL 1,854.56 1298.192 442.23 855.96
ITC 3,513.89 2459.723 1243.12 1216.61
Dabur 216.55 151.585 48.00 103.59
L&T 1,494.31 1046.017 685.42 360.60
ACC 819.72 573.804 366.79 207.01
BHEL 1,881.85 1317.295 993.94 323.35
RIL 14,326.88 10028.816 8479.26 1549.55
ONGC 23,670.31 16569.217 6090.29 10478.93
BPCL 4,102.96 2872.072 1070.65 1801.42
Ranbaxy 1,007.80 705.46 260.69 444.77
Cipla 581.32 406.924 140.81 266.11
Dr. Reddys 153.73 107.611 191.72 -84.11
2004
Infosys 1708.65 1110.6225 80.21 1030.41
Wipro 1,404.06 912.639 1447.56 -534.92
TCS 9.21 5.9865 10.35 -4.37
Satyam 735.69 478.1985 642.29 -164.10
Maruti
Udyog 1,335.90 868.335 1385.88 -517.54
Tata Motors 2,098.00 1363.7 2093.44 -729.74
Bajaj Auto 1,160.45 754.2925 1526.23 -771.94
Hero Honda 1,147.51 745.8815 221.20 524.68
HLL 2,403.44 1562.236 1379.78 182.46
ITC 2,699.71 1754.8115 3818.63 -2063.81
Dabur 164.33 106.8145 187.30 -80.49
L&T 972.96 632.424 1639.65 -1007.23
ACC 616.51 400.7315 725.19 -324.46
BHEL 1,272.79 827.3135 2801.69 -1974.38
RIL 11,000.55 7150.3575 13507.26 -6356.91
ONGC 16,332.45 10616.0925 16029.02 -5412.93
BPCL 4,917.22 3196.193 1721.96 1474.23
Ranbaxy 1,116.20 725.53 442.97 282.56
Cipla 448.19 291.3235 524.54 -233.22
Dr. Reddys 378.87 246.2655 26.22 220.05

2003
Infosys 1346.87 875.4655 183.61 691.86
Wipro 1,112.03 722.8195 140.24 582.58
TCS 1.87 1.2155 1.76 -0.54
Satyam 527.09 342.6085 86.74 255.87
Maruti
Udyog 656.9 426.985 141.11 285.88
Tata Motors 1,299.07 844.3955 266.60 577.80
Bajaj Auto 967.12 628.628 137.17 491.46
Hero Honda 949.68 617.292 41.37 575.93
HLL 2,385.92 1550.848 -167.15 1718.00
ITC 2,404.75 1563.0875 -37.24 1600.33
Dabur 161.8 105.17 22.74 82.43
L&T 1,058.55 688.0575 183.06 505.00
ACC 465.82 302.783 109.96 192.83
BHEL 1,042.51 677.6315 169.68 507.95
RIL 9,269.33 6025.0645 1393.40 4631.66
ONGC 16,902.18 10986.417 715.38 10271.03
BPCL 4,183.60 2719.34 541.68 2177.66
Ranbaxy 938.22 609.843 100.55 509.29
Cipla 345.34 224.471 46.90 177.57
Dr. Reddys 492.91 320.3915 101.80 218.59
2002
Infosys 1,104.75 718.0875 129.39 588.69
Wipro 1,103.76 717.444 97.27 620.17
TCS #VALUE! #VALUE!
Satyam 418.67 272.1355 79.68 192.46
Maruti
Udyog 538.2 349.83 170.90 178.93
Tata Motors 680.99 442.6435 347.43 95.22
Bajaj Auto 860.07 559.0455 222.28 336.77
Hero Honda 746.9 485.485 26.65 458.83
HLL 2,134.35 1387.3275 -190.44 1577.77
ITC 2,055.28 1335.932 14.89 1321.04
Dabur 146.91 95.4915 28.83 66.66
L&T 1,127.73 733.0245 291.68 441.35
ACC 483.95 314.5675 123.97 190.59
BHEL 929.01 603.8565 217.70 386.15
RIL 9,109.04 5920.876 1858.01 4062.86
ONGC 10,878.36 7070.934 333.78 6737.16
BPCL 2,893.84 1880.996 579.70 1301.29
Ranbaxy 450.52 292.838 60.27 232.57
Cipla 334.59 217.4835 37.20 180.28
Dr. Reddys 531 345.15 81.07 264.08


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Computation of Economic Value Added (EVA) of Sample Companies

Computation of Economic Value Added (EVA) of Sample

A dissertation submitted in partial fulfillment of the requirements

Ashwani Kumar Kedia

(REGD. NO: 05XQCM6013)

Under The Guidance and Supervision

Dr. N. S. Malavalli, Principle M.P. Birla Institute of Management.

M. P. BIRLA INSTITUTE OF MANAGEMENT

M P Birla Institute of Management, Bangalore 1

M P Birla Institute of Management, Bangalore 2

Date: Dr Nagesh. Malavalli

M P Birla Institute of Management, Bangalore 3

Date: Dr. N. S. Malavalli

M P Birla Institute of Management, Bangalore 4

Firstly I would like to thank Dr. N. S. Malavalli, principal, M P Birla Institute of

I am also extremely thankful to Dr. T. V. N. Rao, Professor, M P Birla Institute of

Further, I am grateful to Professor Santhanam, Professor, M P Birla Institute of

DATE: Ashwani Kumar Kedia

M P Birla Institute of Management, Bangalore 5

2) Chapter – 2 REVIEW OF LITERATURE 16

4. Chapter – 4 DATA ANALYSIS 23

5. Chapter – 5 DISCUSSION & CONCLUSION 34

6. Chapter – 6 BIBLIOGRAPHY & REFERENCES 37

M P Birla Institute of Management, Bangalore 6

M P Birla Institute of Management, Bangalore 7

M P Birla Institute of Management, Bangalore 8

M P Birla Institute of Management, Bangalore 9

M P Birla Institute of Management, Bangalore 10

NEED AND IMPORTANCE OF THE STUDY:

THE OBJECTIVE THE STUDY:

To measure the economic value added of selected companies

M P Birla Institute of Management, Bangalore 11

THE BACKGROUND OF EVA

M P Birla Institute of Management, Bangalore 12

M P Birla Institute of Management, Bangalore 13

With implementation it is important to understand the EVA-concept thoroughly and tailor

EVA = NOPAT – CAPITAL COST

EVA = NOPAT – COST OF CAPITAL x CAPITAL EMPLOYED

Shareholder value approach = Shareholder value approach refers to the focus of

M P Birla Institute of Management, Bangalore 14

M P Birla Institute of Management, Bangalore 15

M P Birla Institute of Management, Bangalore 16

M P Birla Institute of Management, Bangalore 17

M P Birla Institute of Management, Bangalore 18

M P Birla Institute of Management, Bangalore 19

1. Associated Cement Companies Ltd.

M P Birla Institute of Management, Bangalore 20

13. Maruti Udyog

M P Birla Institute of Management, Bangalore 21

METHOD ADOPTED TO CALCULATE ECONOMIC VALUE ADDED (EVA):

Kd is the effective cost of Debt, which is calculated by dividing the totat

M P Birla Institute of Management, Bangalore 22

M P Birla Institute of Management, Bangalore 23

DATA ANALYSIS AND INTERPRETATION

2006 2005 2004 2003 2002

TCS 0.3510 0.3674 0.1664 0.1298 0.1115

M P Birla Institute of Management, Bangalore 24

2006 2005 2004 2003 2002

M P Birla Institute of Management, Bangalore 25

2006 2005 2004 2003 2002

M P Birla Institute of Management, Bangalore 26

2006 2005 2004 2003 2002

M P Birla Institute of Management, Bangalore 27