Value Based Performance Measures

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Value Based PerformanceMeasures

Date: 10/07/2010

Place: Bglore



Introduction

Wealth v/s Profit

EVA, MVA v/s ROI, ROE

Performance based v/s Traditional based

valuation



Wisdom

³Until a business returns a profit that is

greater than its cost of capital, it operates atloss. Never mind that it pays taxes as it had

genuine profit. The enterprise still returns

less to economy than it devours in

resources«. Until then it does not createwealth, it destroys it. Peter. F. Drucker



Purpose

To decode the decades old argument

between 2 schools of thoughts Wealth v/sProfit

To study the relationship that exists b/w

wealth, value and other performance based

measures

To see whether EVA, MVA, ROCE and EPS

have relationship with share price



Methodology

Study population: 30 domestic IT, Power and

Pharmaceuticals Sampling frame: Scripts listed on BSE

Sampling technique: Random

Data gathering:

Type- Secondary, HistoricalSource- Capital market, Capital line, Annualreports



Conti«

Hypothesis:

1 H1: There is no significant relationship b/w EVA,MVA and share price

H2: There is significant relationship b/w EVA, MVA

and share price

2 H1: There is no significant relationship b/w EPS,ROCE, RONW

H2: There is significant relationship b/w EPS, ROCE,

RONW



Background of EVA

Stern Stewart & Co, a consulting firm in New

York introduced this concept in 1989 Also called Economic profit

It says value of a company depends on theextent to which investors expect future profits

to exceed or fall short of cost of capital It recognizes cost of capital and hence the

risk of firms operations.



Flipside of traditional measures

EPS- Simply can be raised by investing more

capital in business- Usually the capital is a mix of debt and

equity and EPS will rise if the return is just

b/w cost of debt and zero



Conti«

RONW- Risk component not included hence no

comparison- Does not tell the owners if firm is

creating wealth or destroying it

- Increase in leverage also increases

the return



MVA

Shows the difference b/w market value of

company and capital contributed by investors In other words sum of all claims held against

the company plus the market value



Analysis

COMPANIES EVA & MVA EPS, ROCE & RONW BETTER MEASURE

INFOSYS REJECTED REJECTED EVA

HCL TECH REJECTED REJECTED ROCE

SOFTW ARE

PATNI ACCEPTED REJECTED EPS

WIPRO LTD REJECTED REJECTED EVA

POLARIS SOFTW ARE REJECTED REJECTED MVA



Conti«


NTPC ACCEPTED REJECTED EPS

POWER GRID CORP REJECTED REJECTED EVA

POW

ER NEYVELI LIGNITE REJECTED REJECTED EVA

TATA POWER CORP REJECTED REJECTED EVA

GVK POWER INFRA REJECTED REJECTED MVA



Conti«


SUN PHARMA REJECTED REJECTED MVA

CIPLA REJECTED REJECTED EPS

PHARMA RANBAXY REJECTED REJECTED EPS

DR.REDDYS LAB REJECTED REJECTED EPS

CADILA HEALTH CARE REJECTED REJECTED EPS



Interpretations

Null hypothesis is rejected in 27 companies

and not rejected in 3 companies in case of relationship with EVA, MVA and share prices

In case of relationship b/w EPS,ROCE &

RONW null hypothesis rejected in all cases

Sector wise EPS strong influencing factor in

software, EVA in power sector and EPS in

pharma.



Key learning's

Invest in companies whose EVA is increasing

Watch out for other aspects like mergers andacquisitions

Investing in market becoming less risky as

beta of individual stocks decreasing yearly

Cost of capital becoming less costly



Conclusion

EVA is greatly influenced by equity and debt

component in the total capital Cost of debt has little effect on EVA

EVA behaves in linear fashion with respect to

equity

EVA is better than other measures but

effective when used as supplementary



Currently

Working in Mumbai for Nirmal Bang Pvt Ltd

as management trainee (operations) Presently assigned at Bangalore Branch for

1 week to overlook the Depositorydepartment.

Thank you

Documents

Value Based Performance Measures