EVA UNILEVER.pdf

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SAJMMR Volume 2, Issue 8 (August, 2012) ISSN 2249-877XPubl ished by: South Asian Academic Research Journals

SAJMMR:S o u t h A s i a n J o u r n a l o f

M a r k e t i n g & M a n a g e m e n t

R e s e a r c h

ECONOMIC VALUE ADDED PERFORMANCE

A CASE STUDY IN HINDUSTAN UNILEVER LTD.

DR. (MRS.) S. KALAISELVI*

*Assistant Professor & Head,

PG Department of Commerce with Computer Applications,

Vellalar College for Women, Erode-12.

ABSTRACT

Economic Value Added is the financial performance measure that comes closer than

any other to capture the true economic profit of an enterprise. EVA is the

performance measure most directly linked to the creation of shareholder wealth overtime. EVA-based financial management and incentive compensation system, gives

managers superior information and superior motivation to make decisions, that willcreate the greatest shareholder wealth in any publicity owned or private enterprise.

Stern Stewart & Co., is a Global consulting firm, which was established in 1982,developed EVA. Economic Value Added is currently a very popular idea. This has


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SAJMMR Volume 2, Issue 8 (August, 2012) ISSN 2249-877X Earnings Per Share (EPS)

NET INTEREST MARGIN (NIM)

Net Interest Margin is defined as ratio of interest spread and average total assets. Interest

spread is the difference between interest earned and interest expended. The NIM measures the

core earning capacity of the company and is an indicator of the efficiency of the overall portfolio

management.

RETURN ON ASSETS (ROA)

Return on Asset is the ratio of net profit (operating profit minus all provisions) to totalassets. It indicates the ability of the management to convert the assets of the company into net

earnings and also indicate the amount of net income generated per rupee of investment in the

firms assets.

RETURN ON EQUITY (ROE)

Return on Equity is a measure of performance and a Yardstick for shareholders value,

based on book values of networth and Net profit.

EARNINGS PER SHARE (EPS)

Earnings Per Share represents earning available to each common share and is an

important element to judge an appropriate market price of a share. Over the past several years,

the EVA measure has been gaining acceptance all over the world. It has been acknowledged by

institutional firms as a creditable performance measure. It encourages the companies to enterproduct-markets that can boost their sales consequently and to evaluate options to choose the

strategy for maximizing the shareholders value. It is the value of a company to which investors


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SAJMMR Volume 2, Issue 8 (August, 2012) ISSN 2249-877XNET OPERATING PROFIT LESS ADJUSTED TAXES

Net Operating Profit Less Adjusted Taxes represents the total pool of profits available to

provide a cash return to all financial contributors of capital (equity as well as debt) to the

company. NOPLAT is the operating profits of the firm.

INVESTED CAPITAL

Invested Capital represents the total amount of capital invested in the operations of a

company over its life without regard to the source of financing the capital.

RETURN ON INVESTED CAPITAL

The EVA of a company is just a measure of the increment return its investment earns

over the market rate of return. Companies fund their investments from equity, debt or retained

earnings. The returns equity investors expect from a company are, at the very least, equal to whatthey will achieve by investing in the market index although the actual figure depends on the risk

profile of the company. The return institutional and private lenders expect from a company are,again, at the very least, equal to prime lending rate. Even retained earnings, contrary to whatmost managers believe, are not totally free. The company can, after expect some returns from its

retained earnings if it invest them in either the equity or debt markets. The ROIC represents the

total percentage return the company generated on its average invested capital.

ROIC= (NOPLAT/ Average Invested Capital)*100

WEIGHTED AVERAGE COST OF CAPITAL (WACC)

Weighted average cost of capital is an opportunity cost that is equivalent to the rate of

return investor could expect to earn by investing in stock of other companies of comparable risk.


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SAJMMR Volume 2, Issue 8 (August, 2012) ISSN 2249-877X Mindset

MEASUREMENT

Any company that wishes to implement EVA should institutionalize the process of

measuring the metric regularly. This measurement should be carried out after carrying out the

accounting adjustments.

MANAGEMENT SYSTEM

To implement EVA the company should be wiling to align its management system to the

EVA process. The EVA management System is the basis on which the company should takedecisions related to the choice of strategy, capital allocation, divesting business and goal-setting

MOTIVATION

Companies should decide to implement EVA only if they are prepared to implement the

incentive plan that goes with it. This plan ensures that the managers can earn higher bonus bycreating more value for shareholders. EVA- based incentive system, encourages managers to

operate in such a way as to maximize the Eva, not just of the operation they oversee, but of the

company as a whole. Thus, its aim is to make every employee of an organization anentrepreneur, who seeks out just to perform his or her function well.

MINDSET

The effective implementation of EVA necessitates a change in the culture and Mindset of

the company. Indeed, EVA is an ideal tool to bring about a transformation in a companysculture. Its singular focus leaves no room for ambiguity. It is not difficult for employees to know

just which action by them will create EVA and which will destroy it.


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SAJMMR Volume 2, Issue 8 (August, 2012) ISSN 2249-877X It leads to an EVA-driven cultural transformation.

EVA FRAMEWORK

EVA = (Return On Invested Capital Weighted Average Cost of Capital) x InvestedCapital

Return On Invested Capital = (NOPLAT/ Average Invested Capital) x 100

NOPLAT = Net Operating Profit Less Adjusted Tax

Invested Capital = Total amount of capital invested in the operations of a bank Weighted Average Cost of Capital (WACC) = K eW e + KdWdWhere,

Ke = Cost of Equity = 10

D i v

gP

Expected Dividend YieldDIV1 =Dividend Per Share

Po= Market Price Per Share

g = b * ROE

1

0

D i v

P


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SAJMMR Volume 2, Issue 8 (August, 2012) ISSN 2249-877X Kd =

Market Value of Debt

Kd = Cost of Debt INT = Interest Expenses

Market Value of Debt

Wd =Total Value of Debt & Equity

Wd = Debt RatioRESULTS AND DISCUSSION (TABLE 1.1 THROUGH 1.5)

Hindustan Unilever Limiteds Economic Value Added performance had been eloquentlyshown in the table 1.5.The Return On Investment capital varied between 30.51% and

64.32% during the study period. (Table 1.3)

Weighted Average cost of capital increased from 15.15% during 2006-07 to 19.26%during 2010-11. EVA was Rs.162150.37 crores during 2006-07 and there was a slightincrease to Rs.170122.48 crores during 2007-08. EVA registered during 2010-11 was

Rs.114147.48. Economic Value Added performance of Hindustan Unilever Limited

shows a positive position towards an effective management. It implies that the EconomicValue Added should be increased in future periods.It is suggested that the WeightedAverage Cost of Capital has to be reduced and Return on Investment Capital should be

increased This will further result in aspect in the EVA performance of the company


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SAJMMR Volume 2, Issue 8 (August, 2012) ISSN 2249-877XTABLE 1.1

NET OPERATING PROFIT LESS ADJUSTED TAX (NOPLAT)

(RS. IN CRORES)

S.

NoPARTICULARS

2006-

2007

2007-

2008

2008-

2009

2009-

2010

2010-

2011

1 Total Income 12813.81 14112.71 20630.88 16950.71 20154.22

2 Operating Expenses 10438.33 11604.13 17355.33 13971.42 17025.42

3 Earnings Before Interest

expended and Tax (EBIT)

(1)-(2)

2375.48 2508.58 3275.55 2979.29 3128.80

4 Provision for Tax 331.74 426.36 587.56 657.20 588.99


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SAJMMR Volume 2, Issue 8 (August, 2012) ISSN 2249-877X

South Asian Academic Research Journals

http://www.saarj.com- 9 -

TABLE 1.2

INVESTED CAPITAL

(RS. IN CRORES)

S.

NoParticulars 2006-2007 2007-2008 2008-2009 2009-2010 2010-2011

1 Operating Current Assets:

A] Cash & Bank Balances

B] Inventories

C]Sundry Debtors

D] Loans & Advances

416.94

1547.71

440.37

764.63

3169.65

200.86

1953.59

443.37

679.58

3277.40

1777.35

2580.53

536.89

757.86

5652.63

1892.21

2179.93

678.44

617.18

5367.76

1787.26

2811.26

943.20

663.22

6204.94

2 Other Liabilities 2732.72 1527.77 2483.46 2583.52 2633.92

3 Operating working capital [1-2]

436.93 1149.63 3169.17 2784.24 3571.02

4 Fixed Assets 2462.69 2669.08 2881.73 3581.96 3759.62

5 Other Operating Assets:

A] Advances 764.63 679.58 757.86 617.18 663.22


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S.

NoParticulars 2006-2007 2007-2008 2008-2009 2009-2010 2010-2011

B] Investments 2413.93

3178.56

1440.81

2120.39

3320.62

4078.48

3264.08

3881.26

2188.48

2851.70

6 Other Operating liabilities:

A] Capital

B] Reserves

C] Debts

220.68

2502.81

56.94

2780.43

217.75

1221.49

72.60

1511.84

217.99

1843.52

88.53

2150.04

218.17

2365.35

421.94

3005.46

215.95

2493.40

56.00

2765.35

7 Other operating assets of netof operating liabilities [5-6]

398.13 608.55 1928.44 875.80 86.35

8 Operating Invested Capital

[3+4+7]

3297.75 5027.26 7979.34 7242.00 7416.99

9 Non-operating assets & Otherassets

0.00 0.00 0.00 0.00 0.00


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S.

NoParticulars 2006-2007 2007-2008 2008-2009 2009-2010 2010-2011

10 Total Invested Capital [8+9] 3297.75 5027.26 7979.34 7242.00 7416.99

Source: Annual Reports of Hindustan Unilever Limited.

TABLE 1.3

RETURN ON INVESTED CAPITAL (ROIC)

(RS. IN CRORES)

S.

No

Particulars 2006-2007 2007-2008 2008-2009 2009-2010 2010-2011

1Net Operating Profit Less Adjusted

Tax (NOPLAT)2043.74 2082.22 2687.99 2322.09 2539.81

2Average Invested Capital

(Current year + Previous year /2)3177.32 4162.51 6503.30 7610.67 7329.50

3 ROIC [1/2 * 100] 64.32% 50.02% 41.33% 30.51% 34.65%



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TABLE 1.4

WEIGHTED AVERAGE COST OF CAPITAL (WACC)

(RS. IN CRORES)

S. No Particulars 2006-2007 2007-2008 2008-2009 2009-2010 2010-2011

1 Value of Equity 220.68 217.75 217.99 218.17 215.95

2 Value of Debt 56.94 72.60 88.53 421.94 56.00

3 Total Value [1+2] 277.62 290.35 306.52 640.11 271.95

4 Equity Ratio [1/3] 0.80 0.75 0.71 0.34 0.79

5 Debt Ratio [2/3] 0.20 0.25 0.29 0.66 0.21

6 Dividend Payout Ratio (%) 78.40% 79.39% 80.22% 80.79% 81.45%

7 Retention Ratio [1-6] (%) 21.60% 20.61% 19.78% 19.21% 18.55%

8 Return on Equity (ROE) (%) 84.36 100.32 138.66 124.08 126.43

9 Growth Rate (g) [7*8] (%) 18.22 20.68 27.43 23.84 23.45

10 Dividend Per Share 7.57 7.89 8.14 9.00 9.00

11 Growth in dividend [10*9]+10 145.49 171.06 231.42 223.56 220.05

12 Current Market Price Per Share (po) 218.00 223.00 241.00 242.00 267.45

13 Dividend Yield [11/12] 0.67 0.77 0.96 0.92 0.822

14 Cost of Equity (ke) [13+9] (%) 18.89 21.45 28.39 24.76 24.27

15 Interest Expenses 10.73 25.50 25.32 26.98 24.89

16 Cost of debt (kd) [15/2] (%) 0.19 0.35 0.29 0.06 0.44

17 Equity Ratio (Shareholders fund/Total 15.11 16.09 20.16 8.42 19.17


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Assets) [14*4] (%)

18 Debt Ratio [16*5] (%) 0.04 0.09 0.08 0.04 0.09

19 WACC [17+18] 15.15 16.18 20.24 8.46 19.26


TABLE 1.5

ECONOMIC VALUE ADDED PERFORMANCE ANALYSIS

(RS. IN CRORES)

S.

NoParticulars 2006-2007 2007-2008 2008-2009 2009-2010 2010-2011

1 Return on Invested Capital(ROIC) (%)

64.32% 50.02% 41.33% 30.51% 34.65%

2Weighted Average Cost ofCapital (WACC) (%)

15.15% 16.18% 20.24% 8.46% 19.26%

3 ROIC-WACC [1-2] (%) 49.17% 33.84% 21.09% 22.05% 15.39%

4 Invested Capital 3297.75 5027.26 7979.34 7242.00 7416.99

5 EVA [3*4] 162150.37 170122.48 168284.28 159686.10 114147.48


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