MBA PROJECT ON ECONOMIC VALUE

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A STUDY ON ECONOMIC VALUE ADDED

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MAHINDRA & MAHINDRA

1.INTRODUCTION OF ECONOMIC VALUE ADDED:

For an investor and potential investor, performance and profitability measurement is one of the
significant yardsticks to evaluate / check their rationality behind the investment or potential
investment of funds. There are different ways to measure the profitability of a concern but no perfect
method or technique is available so far. For e.g.: Returns on investment (ROI) computation is based
on profit and due to lack of uniform concept of profit, it is also debatable. Various techniques are to
be found to eliminate the limitation of Return on investment (ROI) and to some extent Economic
Value Added (EVA) satisfies this requirement. Simply, EVA is the return a firm earns in excess of
minimum required return by the investors. EVA measures corporations true economic profit and help
to understand which business units best utilized their assets to generate returns and maximize
shareholder value. The following aspects of Economic Value have inspired me to take of this Project:

EVA is better technique of measure of performance.

EVA is better discloser of genuine addition or draining the net worth of shareholders.
 Unlike other taking techniques it can be used in decision- making process.

Financial analysis is the process of understanding the financial strength and weakness of a firm by
establishing the relationship between the term of the balance sheet and the profit and loss account.
Financial Analysis is therefore the starting point of making plans, before using any sophisticated
forecasting and planning procedures. In a public Enterprise like Mahindra & Mahindra, different
interested groups eg: legislators, consumers, Employees, suppliers, the local community and the
investors and expectations from the enterprise according to criteria, norms and values suiting to their
interest. M & M being a public enterprise operated under blaze of publicity and compounded to it
there are so many success criteria and the expectation of the most interest groups mentioned above.
This study makes a humble attempt to evaluate the company on financial performance criteria. While
financial performance analysis comprise resolving the statements by creating them into simple
statements by a process of re-arranging regrouping and calculation of ratios. Evaluating is the mental
process of understanding the terms of such statement and forming opinions of inferences about the
financial health, profitability, efficiency and such other aspects of undertaking.
DEFINITION:

To interpret means to put the meaning of a statement into simple terms for the benefit of a person
F.Wood.

OBJECTIVES OF THE STUDY:

This empirical study has been taken up with the following objectives.
To compare and contrast EVA with other measures of performance.
To measure the financial performance of Mahindra & Mahindra using EVA.
To suggest and recommend, if any, ways of improving EVA.

SCOPE OF THE STUDY:

This scope is limited to the operations of M & M. The information obtained from the primary and
secondary sources were limited to M & M. The key performance indicators were taken from annual
reports and other internal reports of M & M. The information regarding Annual reports, profit & loss
Account, Balance Sheet was of last six years. Comparison Analysis was done with information
available in annual reports.

LIMITATIONS OF THE STUDY:

 The study is based on accounting information. So all the limitations of accounting apply to this study.

The study has only made a humble attempt at evaluating financial performance and does not and
cannot claim as the perfect study.
The data used for calculation is historical data and may have some adjustments made.
Time constraint

RESEARCH METHODOLOGY:

This is a case study. Personal discussions were held with many executives for the collection of data.
Secondary data has been collected from books, magazines, journals, newspapers and Internet.
Financial data is collected from annual reports, records.
RESEARCH DESIGN:

Maximizing shareholders value is of vital importance to an organization like M & M. so as to stand

high in the present competitive and disinvestments scenario. Though ROI, popularly known as profit
generation is an adequate measure of corporate performance, it does not provide the real picture.
Economic Value Added is gaining popularity as the true measure of economic profit.
The design of the study is as follows:

Determining the overall cost of capital.

Comparing with the operating profit.
Assessing the rupee value of wealth created.
Determining EVA as a percentage of capital employed.
Comparative Analysis with other measures of performance

PRIMARY DATA:

Profit & loss accounts, Balance Sheets, cash and funds flow statements and various schedules
attached to the preparation of the above statements, operating results were used for analyzing the
data. The period covered under the study is six financial years, which is from 2007-08 to 2010-12.
The project was undertaken for a period from feb2012 to apr2012.

SECONDARY DATA:
 The work is undertaken under many executives in the Financial Department of M & M. For
collecting some specific information, went to
Companys library and students science library at M & M.
Also information was collected by visiting ICWA chapter, Hyderabad.
2. REVIEW OF LITERATURE
PAPER TITLE: The Economic Value Added (EVA): An Analysis of Market
Reaction.
AUTHOR NAMES: Bartolom Dey Tortella & Sandro Brusco (2001)
FINDINGS:
Using different event case study methodologies and test statistics we test the market reaction to the
introduction of the Economic Value Added (EVA1) management technique. Additionally we also
analyze the effects over the main company variables, looking at the evolution before and after EVA
adoption of three sets of company variables: profitability, investment and cash flow variables. We
first observe that the EVA introduction does not generate significant abnormal returns, either
positive or negative. In other words, the market does not appear to react to EVA adoption. Next,
our analysis shows that firms adopt EVA after a long period of bad performance, and performance
indicators improve only in the long run after EVA adoption. With respect to the investment
variables, we observe that EVA adoption provides incentives for the managers to increase firm
investment activity, and this appears to be linked to higher levels of debt. Finally, we can observe that
the EVA adoption affects positively and significantly cash flow measures. We test if this positive
relation between EVA adoption and cash flow measures can be due to the fact that such measures
affect directly part of managerial compensation, but we do not obtain definitive robust results.

PAPER TITLE: Economic Value Measurement: Investment Recovery and

Value Added IRVA
AUTHOR NAMES: Ignacio Velez-Pareja (2001)
FINDINGS:
In Velez-Pareja, (1999b and 1999c), some difficulties of EVA as an approach for the measurement of
economic added value were considered. In those papers, the use of real economic value added based
on the real free cash flow was suggested. This means the real cash flow calculated from the
immediately previous period. In Velez-Pareja (1999a and 2000), a methodology was presented to
determine and to construct the free cash flow of a firm. The present article studies based on the
previous works, an indicator of value added derived from the real free cash flow.

PAPER TITLE: Economic value addition by Indian Banks: A study

AUTHOR NAMES: INDIAN BANKS (2001)
FINDINGS: This research paper studies Indian banks profile to demonstrate a direct correlation
between the investment in stakeholder relationships and corporate performance. Many Indian
banking seems to have destroyed shareholders wealth over a period of time and only a few have
positively contributed to their wealth. With the help of EVA (Economic Value Added) and MVA
(Market Value Added) which tell what the institution is doing with investors hard earned money, the
paper examines an appropriate way of evaluating banks performance and also finds out which Indian
banks have been able to create (or destroy) shareholders wealth since 1996-1997 to 2000-2001.

The overriding message of this paper is that banks must always strive to maximize shareholders
value without which their stocks can never be fancied by the market. This analysis helps us to dig
below the surface numbers to tell us more about the underlying business and whether there is a prima
facie case for using EVA as one of the range of performance measurement tools.

PAPER TITLE: Economic Value-Added: A Review of the Theoretical and

Empirical Literature
AUTHOR NAMES: Andrew C. Worthington & Tracey West (2001)
FINDINGS: With increasing pressure on firms to deliver shareholder value, there has been
arenewed 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). This paper attempts

to provide a synoptic survey of EVAs conceptual underpinnings and the comparatively few

empirical analyses of value-added performance measures. Special attention is given to the

GAAP- related accounting adjustments involved in EVA-type calculations.

PAPER TITLE: The Validity of the Economic Value Added Approach: an

Empirical Application
AUTHOR NAMES: Dimitris kyriazis, & christos anastassis (2007)
FINDINGS:
This study investigates the relative explanatory power of the Economic Value Added (EVA) model
with respect to stock returns and firms' market value, compared to established accounting variables
(e.g. net income, operating income), in the context of a small European developing market, namely
the Athens Stock Exchange, in its first market-wide application of the EVA measure. Relative
information content tests reveal that net and operating income appear to be more value relevant than
EVA. Additionally, incremental information tests suggest that EVA unique components add only
marginally to the information content of accounting profit. Moreover, EVA does not appear to have a
stronger correlation with firms' Market Value Added than the other variables, suggesting that for
our Greek dataset EVA, even though useful as a performance evaluation tool, need not necessarily
be more correlated with shareholder's value than established accounting variables.

PAPER TITLE: Whats Wrong with the Economic Value Added?

AUTHOR NAMES: Sergei Vasilievich Cheremushkin (2008)
FINDINGS:
The paper reveals some substantial defects crept in the conventional method of calculating EVA's
essential component - Capital Charge. Presently the Capital Charge is derived as combination of
market capital structure based WACC and accounting based Invested Capital, which is likewise
joining apples with oranges. This cross-breeding deflects EVA from the Residual Income and the
concept of Economic Profit, formulated by Alfred Marshall. The paper proves that the correct way to
calculate Capital Charge is to use accounting WACC embracing relevant adjustments made to the
Invested Capital. Properly calculated EVA adequately reflects firm's performance compared with
initial opportunity costs existed when the capital was contributed. However shareholders' dollar
amount opportunity costs at the moment of performance evaluation depend on the market value of
capital and market WACC. The paper also establishes the Residual Market Profit that is based on
Market Profit and Market Capital Charge defined as market WACC multiplied Market Value of the
Firm. The Residual Market Profit effectively accounts for time value effects and manifests either the
firm justifies market expectations about her performance or fails to satisfy them.

PAPER TITLE: Economic Value Added: The Invisible Hand at Work

AUTHOR NAMES: Michael Durant
FINDINGS:
Adam Smith, one of the fathers of classical economic thought, observed that firms and

resource suppliers, seeking to further their own self-interest and operating within the framework

of a highly competitive market system, will promote the interest of the public, as though guided

by an invisible hand. (Smith, 1776) The market mechanism of supply and demand

communicates the wants of consumers to businesses and through businesses to resource

suppliers. Competition forces business and resource suppliers to make appropriate responses.

The impact of an increase in consumer demand for some product will raise that goods price. The

resulting economic profits signal other producers that society wants more of the product.

Competition simultaneously brings an expansion of output and a lower price.Profits cause

resources to move from lower valued to higher valued uses. Prices and sales are

dictated by the consumer. In the quest for higher profits, businesses will take resources out of

areas with lower than normal returns and put them into areas in which there is an expectation of

high profits. Profits allocate resources. The primary objective of any business is to create wealth

for its owners. If nothing else the organization must provide a growth dividend to those who

have invested expecting a value reward for their investment. As companies generate value and

grow, society also benefits. The quest for value directs scarce resources to their most promising

uses and most productive users. The more effectively resources are employed and managed, the

more active economic growth and the rate of improvement in our standard of living as a society.

Although there are exceptions to the rule relating to the value of economic wealth, most of the

time there is a distinct harmony between creating increased share value of an organization and

enhancing the quality of life of people in society. In most companies today the search for value is

being challenged by a seriously out of date financial management system. Often, the wrong

financial focus, cash strategies, operating goals, and valuation processes are emphasized.

Managers are often rewarded for the wrong achievements and in many cases they are not

rewarded for the efforts that lead to real value. Balance sheets are often just the result of

accounting rules rather than the focus of value enhancement. These problems beg for approaches

to financial focus that are completely different from current approaches. New approaches must

start nothing less than a revolution in thinking in the process of economic evaluation. One of the

focuses that have proved to be incorrect in the valuation of economic worth is earnings per share
(EPS). Earnings per share has long been the hallmark of executives that appear in meetings of

the shareholders, as the measure of their accomplishments.

This, along with return on equity has long been thought of as the way to attract Wall Street

investment. There is nothing that points to EPS as anything more than a ratio that accounting has

developed for management reporting. Many executives believe that the stock market wants

earnings and that the future of the organizations stock depends on the current EPS, despite the

fact that not one shred of convincing evidence to substantiate this claim has ever been produced.

To satisfy Wall Streets desire for reported profits, executives feel compelled to create earnings

through creative accounting. Accounting tactics that could be employed to save taxes and

increase value are avoided in favor of tactics that increase profit.

Capital acquisitions are often not undertaken because they do not meet a hypothetical profit

return. R&D and market expanding investments get only lip service. Often increased earnings

growth is sustained by overzealous monetary support of businesses that are long past their value

peak. We must ask then, what truly determines increased value in stock prices. Over and over

again the evidence points to the cash flow of the organization, adjusted for time and risk, that

investors can expect to get back over the life of the business. Economic Value Added (EVA) is a

measurement tool that provides a clear picture of whether a business is creating or destroying

shareholder wealth. EVA measures the firms ability to earn more than the true cost of capital.

EVA combines the concept of residual income with the idea that all capital has a cost, which

means that it is a measure of the profit that remains after earning a required rate of return on

capital. If a firms earnings exceed the true cost of capital it is creating wealth for its

shareholders.

3. INDUSTRY & COMPANY PROFILE

 COMPANY PROFILE

Few groups can identify as closely with India's destiny and industrial progress as the Mahindra
Group. In fact, Mahindra is like a microcosm of India. Both were born around the same time, had the
same aspirations and both experienced the inevitable troughs and crests in the journey towards their
goals. And both continue to march on the path to progress and global recognition. The birth of
Mahindra & Mahindra began when K.C. Mahindra visited the United States of America as Chairman
of the India Supply Mission. He met Barney Roos, inventor of the rugged 'general purpose vehicle' or
Jeep and had a flash of inspiration: wouldn't a vehicle that had proved its invincibility on the
battlefields of World War II be ideal for India's rugged terrain and its kutcharural roads?

Swift action followed thought. The Mahindra brothers joined hands with a distinguished gentleman
called Ghulam Mohammad. And, on October 2nd, 1945, Mahindra & Mohammad was set up as a
franchise for assembling jeeps from Willys, USA. Two years later, India became an independent
nation and Mahindra & Mohammad changed its name to Mahindra & Mahindra. Ghulam
Mohammad migrated to Pakistan post-partition and became the first Finance Minister of Pakistan.
Since then, Mahindra & Mahindra has grown steadily in size and stature and evolved into a Group
that occupies a premier position in almost all key sectors of the economy. The Group's history is
studded with milestones. Each one is taking the Group forward. In fact, today, its total turnover is
about 4* billion dollars. These days, Mahindra is a group in a hurry, engaged in an ambitious,
sustained and prolonged penetration into the global arena. Its spirit can be encapsulated in the words
of the poet Robert Frost, a favourite of India's first Prime Minister, Pandit Jawaharlal Nehru:
"The woods are lovely, dark and deep,
But I have promises to keep,
And miles to go before I sleep,
And miles to go before I sleep."

For Mahindra and Mahindra, this translates into many more milestones to be set up before it rests. If
ever.

The US $6.3 billion Mahindra Group is among the top 10 industrial houses in India. Mahindra is the
market leader in multi-utility vehicles in India. It made a milestone entry into the passenger car
segment with the Logan. Mahindra & Mahindra is the only Indian company among the top tractor
brands in the world.
Set up in 1945 to make general-purpose utility vehicles for the Indian market, the flagship company
Mahindra & Mahindra Ltd. has expanded its operations beyond automobiles and tractors and has
made spirited thrusts into new areas of business. The Group has a leading presence in key sectors of
the Indian economy, including the financial services, trade, retail and logistics, automotive
components, after-market, information technology and infrastructure development. Mahindra has
recently made an entry in the two-wheeler segment which will see the company emerge as a full-
range player with a presence in almost every segment of the automobile industry. The Group employs
over 70,000 people and has several state-of-the-art facilities in India and overseas.

With the launch of edgy, new generation vehicles like the Mahindra Bolero, Mahindra Scorpio &
Mahindra Xylo, the group has created brands that are already going global. The groups global
strategy today focuses on a mix of mergers & acquisitions and joint ventures to strengthen its core
product areas and enter new niche markets, both domestic and international. These include a joint
venture with French auto major, Renault, to manufacture and market Logan, the worlds most
affordable C-segment car, in India, and a joint venture with International Truck, USA.

The Mahindra group has always been committed to corporate social responsibility. On the occasion
of its 60th anniversary, the group announced a range of CSR activities supported by a commitment of
1% of Profit after Tax for its CSR initiatives.

In 2002, the group embarked on a transformation process which was christened the Blue Chip
initiative. The essence of the Blue Chip is captured in the five business mantras that it propagates,
namely, leadership, innovation, globalization, a sharp focus on financial returns and, most
importantly, customer centricity. Leadership for the group is the aim to be number one or number two
in all their businesses. Above all, the group is committed towards creating a genuinely customer
centric organization, with the aim of not just satisfying customers but delighting them.
Forbes has ranked the Mahindra Group in its Top 200 list of the Worlds Most Reputable Companies
and in the Top 10 list of Most Reputable Indian companies.

ORGANISATION DESCRIPTION

AUTOMOTIVE SECTOR OVERVIEW

The Mahindra Groups Automotive Sector is in the business of manufacturing and marketin
Sector can trace its antecedents back to 1954. The iconic jeep that led American G.I.s to victo

Mahindra & Mahindra Limited, the flagship company of the Group, was set up as a franchise
In 2002, it launched the indigenously engineered world-class sports utility vehicle-Scorpio, which bridges the g
portfolio that includes mass transport as well as new generation vehicles like Scorpio, Bolero and the recently lau

Mahindra & Mahindras foray into the three wheeler segment with Alpha and Champion has also made it a leader

Mahindra Renault (MRPL) announced the launch of Logan, Indias first wide body car, sporting a host of class-de

Mahindra Navistar Automotives Ltd. (MNAL), a joint venture between Mahindra & Mahindra Limited and Intern

Mahindra Navistar Engines Pvt. Ltd. (MNEPL), a second joint venture agreement with Mahindra & Mahindra, L

The Automotive Division has vehicles manufacturing plants at Kandivli (Mumbai), Igatpuri, Nashik in the Stat
Chakan- Pune
All the divisions of the Company plants are ISO/ TS 16949:2002 certified except Chakan -Pune.

The Division has embarked upon Business Process Re-engineering since 1994 and PCE - Process Centric Enterp

The spread of the product is uniformly distributed in North, South, East and West regions of India.
Nearly 70% of the Company's products are sold in semi-urban and rural markets. With models like,
the Xylo, Scorpio and Bolero, the Company is catering to the niches in urban market. The
distribution is managed through a network of more than 150 Dealers spread across the Country,
which is supported by Companys 19 Area Offices. Apart from this, the vehicles are serviced through
30 Authorised Service Centres and 60 Stockists for meeting the need of genuine spare parts. The
marketing strategy of the Division revolves around rationalizing models, delivering value for money,
increasing safety features, incorporating fuel efficient engine, improving the quality of after sales
service and maintaining low price product image. For high end market, the strategy adopted is to
offer products with more comfort level with option of accessories to meet special needs of
individuals.
Currently the Export focus is on African, South American, South Asian, Russian and Middle East
Markets, where the need and use of vehicles is akin to India. The Company has set itself target to
export 15% of the output within next three years.

The Division has a separate R&D Centre at Nashik .Cross Functional and Concurrent Engineering
Teams are working on Integrated Design & Manufacturing (IDAM) to design a product to suit
specific requirements of the customers through quick product development.

The current role of R & D is to design products that meet all the customer needs as well as the legal
requirements in terms of various norms for CMVR, Safety & Emission. Thus, emphasis is given on
designing a product that has a level of quality built into it (through specifications) & which is easy to
manufacture. R & D also lends its support during the entire life cycle of a product by associating
closely with Service department.

R&D has a Design Centre with a state of the art CAD Centre having 60 workstations with specialised
analysis software like Adams, Nastran & Hypermesh. Styling software: Alias, PDM software,
Metaphase, Solid Modelling software, SDRC, Ideas, Catia, etc. that are being used for designing &
analysing various aggregates going into the vehicle. All designs are validated in Testing Centre
having laboratories for Engine Testing, Metrology, Metallurgy, Polymer, Oil & Fuel, Acoustic
Testing, Vehicle Testing and Fatigue Testing.

MAIN PRODUCTS AND SERVICES

Product / Segmen Top key Key service

Key product requirements
Service t customer requirements
Commander UV Individual, Rugged, Fuel Economy, Space, Fast response
Institutional, Low Maintenance, Low Initial and on-time
Savari UV
Fleet Owner Cost delivery after
Bolero MUV Rugged, Fuel Economy, Space, service
Bolero Camper MUV
Low Maintenance, Comfort
Bolero Invader MUV
Luxurious Space, Fuel Economy,
Xylo MUV Rugged, Low Maintenance, Low
Initial Cost
Scorpio SUV
Stylish, Macho, Luxury,
Scorpio Getaway UV
Performance Rugged, Space,
Scorpio Automatic SUV
DI 3200 LCV Tonnage, Rugged, Fuel Economy,
Load king Low Maintenance and Initial Cost
Camper
Rugged, Fuel Economy, Space,
MaXX Maxi Truck Pik-up
Low Maintenance, Low Initial
Maxx Pik-Up
Cost
Bolero Pik-Up
Champion 3 Fuel Economy, Space, Low
Champion Alfa Wheeler Maintenance, Low Initial Cost
Table:3.1

ZAHEERABAD PLANT
 Mahindra & Mahindra Ltd, Auto Sector, Zaheerabad Plant -
Manufacturing Operations is a part of Order Management
Process in Auto Sector.

Products Manufactured:
Multi-Utility Vehicle MaXX, Marshal,
Marshal Royale.
Light Commercial Vehicle Load king and its variants,
Tourister and its variants.
3 wheelers Champion, its variants and Alfa.
Spares for above models.

Table: 3.2
Zaheerabad is a semi-arid province located in Andhra Pradesh, situated about 136
kms away from Hyderabad. Zaheerabad, associated with a rich cultural heritage and a glorious
lincage, is also known for its water shortages. Water is a scarce commodity, water harvesting is
therefore practiced very seriously and all plantations are on drip irrigation. Water is often pumped up
through bore wells and open wells. Being a dry region, in summers the temperature climbs up to
450C. The Mahindra Plant in Zaheerabad is spread across a vast expance of 343.36 acres with a built
up area of about 16.79 acres. Its employee strength is 641 and a vehicle assembly capacity of 218
vehicles per day. The total area could be categorized in four segment:
A) Plant Area:
B) Tech. Colony Total area 157 acres.
C) Executive colony & Mahindra Academy.
D) Truck park area 144 acres.
The Products manufactured at this location ranges from UV (maxx) to 3 wheelers (Champion Alfa)
Levs and Busses the manufacturing facilities present at the plant include body shop AED Line, paint
shop and Assembly lines.
AREA:
Total area of Mahindra & Mahindra Ltd., Zaheerabad Plant is @ 343 acres & built up area is 16.6
acres.
 CORE VALUES
Mahindra Core values are influenced by Mahindra past, tempered by its present and are designed to
shape our future, the are an amalgam of what we have been, what we are and what want to be. These
values are the compass that will guide our actions both personal and corporate they are.

GOOD CORPORATE CITIZENSHIP:

As in the past we will continue to seek long term success that is in alignment with our companys
needs. We will do this without compromising on ethical business standards.
PROFESSIONALISM:
We have always sought the best people and given them the Freedom and the opportunity to grow, we
will continue and well personal risk taking but will Demand performance.
CUSTOMER FIRST:
We exist and prosper only because of our customers, we will respond to their changing needs and
exceptions speedily, courteously and effectively.
QUALITY FOCUS:
Quality is the key to deriving value for money to our customers, we will make quality a driving value
in our work in our products and in our interactions. With others we will do it First time right.
DIGNITY OF THE INDIVIDUAL:
We value individual dignity, uphold the right to express disagreement and respect the time and efforts
of others through our actions, we nurture fairness, trust and transparency.
PLANT LOCATIONS:
The companys manufacturing facilities are located at Kandavali, Nasik, igtapuri Nagar, Zaheerabad,
Jaipur, Rudrapur, Haridwar, Pune and Mohali.

4. CONCEPTUAL FRAMEWORK
ABOUT EVA:
The goal of all financial decisions is to maximize shareholders value. No only share holders but also
the value of stakeholders like employees, Customers and creditors has also to be maximized. The
maximization of Shareholders value will in turn lead to the increase in stakeholders value.

Shareholders wealth is measured by returns they receive on their Investment. Returns are in
two parts:

First in the form of dividends and the second in the form of capital appreciation reflected in market
value of shares. But the market value of shares is influenced by the management of a firm. The
market value which is reflected in share price are influenced by the extend to which management is
able to meet the expectations of share holders. Various measures like Earning per share (EPS), Return
on equity(ROE) and Return on capital employed(ROCE or ROI) have been used to evaluate the
Performance of the business. The problem with these measures is that they lack proper benchmark
and have failed to capture the shareholder value creation / destruction as a result of management
actions. With the drawbacks associated with the above measures and to develop a technique, which
measures the real shareholders wealth, EVA comes closer than any of the above in capturing true
economic profit. EVA has gained increased acceptance during the last decade.

EVOLUTION OF EVA:
Joel stern, managing partner of M/s. stern Stewart and company pioneered the concept of Economic
Value Added (EVA) as a measure of performance in early interest. E.g., U.S. postal employees have
entered into a new arrangement whereby they would received bonus for improvements in EVA. The
concept of EVA, as eighties. They claimed that EVA as a tool of financial management was neither a
U.S. phenomenon not it is limited to for-profit organization. It helps to strengthen management
incentives in a way that it does not dilute shareholders a means of performance, has picked up in
India in recent years. Some companies like Mahindra satyam, Infosys, HLL etc. have already made
EVA a part of their annual reports.
It is of no doubt that other corporate will soon follow the suit especially public sector enterprises in
this present disinvestments scenario.

DEFINITION OF EVA:
EVA is net operating profit minus an appropriate charge for the opportunity cost of all capital
invested in an enterprise. As such, to make clear, EVA is an estimate of true Economic profit, or the
amount, which earnings exceed or fall short of the required minimum rate of return that shareholders
and lenders could get by investing in other securities of comparable risk.
------ Bennet Steart.

MATHEMATICAL FORMULATION OF EVA:

As for the formal definition of EVA, it is calculated using the formula.
EVA=NOPAT-(WACC*CE)
Whereas,
NOPAT=Net operating profit after tax before exceptional items.

WACC=Weighted average cost of capital

CE= Capital Employed

 All the above terms are explained in detail in the later pages. EVA thus calculated above are a rupee
figure and not a percentage i.e., EVA measures the absolute rupee value of wealth created.

NATURE & CONCEPT OF EVA:

Various studies has provided that accounting earnings fail to measure reliably the changing the value
of the firm mainly because of
Alternative accounting methods followed.
Non-considerations of risk, dividend policy and time value of money.
Non-reporting of economic substance of transactions and
Non-consideration of cash flows cost of capital and forecast horizon- the drivers of stock
prices.
In this context, EVA serves as the best measure of identifying the wealth created to share holders by
the corporate. It recognizes the cost of capital and hence, risk ness of firms operations.

The capital charge is the most distinctive and important aspect of EVA. Under conventional
accounting most companies appear profitable may infact but are not. As Peter Drucker put the matter
in a Harvard business review article until a business returns a profit that is greater than its cost of
capital, it operates at a loss never mind that it pays taxes as if it had genuine profit. The enterprise
still returns less to the economy than it devours in resourcesuntil then it does not create wealth, it
destroys it.

EVA corrects this error by explicitly recognizing that when managers employ capital they must pay
for it, just if it was a wage.

Taking all capital costs into account, including the cost of equity, EVA Shows that rupee amount of
wealth a business has created or destroyed in reporting period. In other words, EVA is the profit the
way shareholders define it. If the shareholders expect, say, a 10% return on their investments, they
make money only to that extent that their share of after-tax operating profits exceeds 10% of equity
capital. Everything before that is just building upto minimum acceptable compensation for investing
in a risky enterprise.By

EVA has been developed to help managers to incorporate two basic principles of finance into their
decision-making they are: First, is that the primary financial objective of any company should be to
maximize the wealth of its shareholders. Second, is 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.
By definition, a sustained increase in EVA will bring an increase in the market value of a firm. This
approach has proved effective in virtually all types of organizations, from emerging growth
companies to turnarounds .It is the continuous improvement in EVA that brings continuous increase
in shareholders wealth.
A financial measure that line managers understand that EVA has the advantage of conceptually
simple and easy to explain to non-financial managers, since it starts with familiar operating profits
and simply deducts a charge for the capital invested in the company. EVA makes managers care
about managing assets as well as income and helps them to properly assess the trade offs between the
two.

ENDING THE CONFUSION OF MULTIPLE GOALS:

Most companies use a numbering array of measures to express financial goals and objectives.
Strategic plans are often based on growth in revenues or market share. Companies may evaluate
individual products or lines of business on the basis of gross margin or cash flow.

Business units may be evaluated in terms of return on assets or against a budgeted profit level.
Finance departments usually analyze capital investments in terms of net present value, but weigh
prospective acquisitions against the likely contribution to earning growth. And bonuses for line
managers and business unit heads typically are negotiated annually and are based on a profit plan.

The result of the inconsistent standards, goals and terminology usually is in cohesive planning,
operating strategy and decision-making. EVA eliminates this confusion by using a single financial
measure that links all the Decision making with a common focus.

EVA is the only financial management System that provides a common language for employees
across all operating and staff functions and allows all management decisions to be modeled,
monitored and communicated and compensated in a single and consistent way-always in form of
value added to share holder investment.

The concept of EVA can be typically illustrated with the following pictures/diagram.

EVA based financial management and incentives compensation system gives managers superior
information and superior motivation to make decisions that will create the greatest shareholder
wealth in any publicly owned or private enterprise.

METHODOLOGY-CONCEPTUAL ISSUES IN CALCULATIONS OF EVA:

The following methodology has been used in computation of EVA.

1. Period of study: The period of study is a six years period from 2007-08 (31.03.2008)

To 2011-12 (31.03.12).

2. Ke i.e., weighted average cost of capital: calculated using the formula

[Ke (Equity capital+ free reserves) + (Kd x long term debt) ]

X 100
Capital Employed

3. Kd Cost of debt

4. Ke Cost of equity

5. Capital Employed

6. Economic Value Added: NOPAT (WACC*CE)

7. EVA in%: EVA

X 100
Capital Employed

CONCEPTUAL ISSUES:
EVA calculation mainly involves calculating three figures viz., NOPAT, capital employed (CE) and
weighted average cost of capital (WACC) incidentally accounting principles gives a lot of
flexibilities to corporate in accounting for certain matters like valuations of inventory, R & D
expenses, depreciation etc. A companys accounting for these matters may not be based on sound
economic principles and for this reason the companys accounting profits may not be its true
economic profits. So, for this EVA calls for certain adjustments.
The first issue in calculations of EVA is measurement of NOPAT, NOPAT is measured from income
statement by adding interest payments and subtracting and adding non-operating income and
expenses respectively to the Net profit figures and after making certain adjustments, which turns
accounting profits into economic profits.

The second element in EVA calculation is the cost of capital, which is the weighted
Average of cost of debt and cost of equity.

Weighted average cost of capital is the weighted average of the cost of debt, cost of
equity and the cost of preference capital, if any with weights equivalent to the proportion
of each in total capital. As such weighted average cost of capital computation involves the calculation
of the following:

DEBT CAPITAL:
Debt capital includes any type of long-term funds obtained by borrowing. There are various types of
long-term debt. It can be secured or unsecured senior or subordinated, raise by the sale of bonds or
through a negotiated long-term loan. Many large Manufacturing firms have more than one type of
debt. The cost of debt capital is found to be relatively cheaper than any other form of capital. The
cheapness of debt capital is attributable primarily to the fact that interest is tax Deductible.

COST OF DEBT (KD):

The calculation of cost of debt is relatively easy. The cost of funds raised through debt in the form of
debentures or loan from financial institutions can be determined through the corporate balance sheet.
To apply the formulation of explicit cost of debt, we need data regarding.

-The net cash proceeds/ inflows

-The net cash outflows in terms of amount of periodic interest payment and
-Repayment of principal in installments or in lump sum on maturity.
Therefore, cost of debt is the interest paid by the company on its long-term Borrowings.

EQUITY CAPITAL:
Equity capital consists of the long-term funds provided by the firms owners. Unlike borrowed funds
that must be repaid at a specified date, equity capital is expected to remain in the firm for an infinite
period of time.

The basic types of equity capital are Authorized equity / share capital represents the
maximum amount, which a company can raise from the ordinary shareholders and can be changed in
the prescribed manner.

The portion of authorized capital offered by the company to the investors is issued capital.
Subscribed share capital is that part of issued capital, which has been subscribed by the investors.
The actual amount paid by the shareholders is the paid-up
capital.

COST OF EQUITY CAPITAL (KE):

The cost of equity capital is by far, conceptually speaking, the most difficult and
Controversial cost to measure. Conceptually, the cost of equity capital, Ke, may be defined as the
minimum rate of return that a firm must earn on equity financed portion of an investment project in
order to leave unchanged the market price of shares. In the present context, capital asset pricing
approach / technique is used to estimate the cost of equity.

CAPM formally describes the risk return trade off for securities with reference to cost of capital
perspective, the CAPM describes the relationship between the required rate of return, and the cost of
equity capital, and the non-diversifiable or relevant risk, of the firm as reflected in its index of non-
diversifiable risk, that is beta.

Symbolically
Ke = Rf + (Rm Rf)

Where
Ke = Cost of equity
Rf = Risk free rate of return represents the rate at which shareholders
can

expect the return by investing in risk less securities.

Rm = Market premium rate is the rate of return of the market index. It is the
rate of return expected by shareholders from a well-diversified

portfolio.
= Measure of the risk of equity measures the percentage change in
Securities return for one percent change in market returns.

The next element required for calculating EVA is the capital employed capital
 employed consists of adjusted equity shareholders fund, all interest bearing obligation
and preference capital (if any).

The capital employed can be calculated through the assets side of the balance sheet or the liability
side. Form the assets side, capital employed, is the current assets less the non-interesting bearing
current liabilities i.e., networking capital plus the net fixed assets. It is the sum of interest bearing
debt and net working less any non-operating assets.

ADVANTAGES OF EVA:

EVA, as a measure of corporate performance has the following advantages over other
traditional performance measures.

The biggest advantage of EVA is that if forces management to expressly recognize its cost of
equity and to take that cost into account in all its decisions.
EVA can be used to hold management accountable for all economic outlays.
Increasing EVA over a time offers a clear financial mission for management.
EVA adoption becomes a common language for making decisions.
EVA makes managers care about managing assets as well as income and helps them properly
assess the trade offs between two.
EVA provides meaningful target to pursue for both internally and externally oriented
decision.
EVA as a compensation system offers an advantage that it links the
management compensation to the shareholders value in a much-refined manner.
EVA serves as a most powerful tool as such it can be used to measure
performance, allocate capital, restructure balance sheets and price a companys acquisitions.

LIMITATIONS / DRAWBACKS OF EVA:

One important drawback of EVA is that it ignores inflation. So it is biased against new assets.
Whenever a new investment is made, capital charge is on the full cost initially, so EVA figure is low.
But as the depreciation is written off, the capital charge decreases and hence EVA goes up. This
problem existed with other traditional performance measures.
 Second problem is that since EVA measured in rupee terms, it is biased in favour of large, low return
business large business that have returns only slightly above the cost of capital can have higher EVA
than smaller businesses that earn returns much higher than the costs. This makes EVA a poor metric
for companying business.
Thirdly, in short term, EVA can be improved by reducing assets faster than the earnings and if this is
pursued for long it can lead to problems in long run when a new improvements to asset based are
made. This new investment can make a high negative effect on EVA because the asset base would
have been reduced to a large extent and improvements will involve huge investments.

WAYS TO IMPROVE EVA:

There are basically two parts to EVA, efficiency and growth. EVA is the difference between the
percent rate of return and the percent cost of capital or what we call he (return spread that is measure
of efficiency) times the capital (that is measurement of size). To increase EVA a company can
improve its efficiently reduce its cost of capital, or increase its capital. It is an issue of both quality
and quantity. EVA, as a measure points out that growth without efficiently is bad, and also that
efficiently without growth is not good.
The following strategies can be recommended for improving EVA:

Generating more operating profits without investing anymore capital in the business.
Reducing the capital employed without affecting the earnings i.e., discarding the
unproductive assets.
Investing in those projects that earn a return greater than cost of capital.
By reducing the cost of capital, which means employing more debt, as debt is cheaper than
equity or preference capital.

5. DATA ANALYSIS & INTERPRETATION

The data collected from the books were subjected to statistical Analysis. Before the analysis the data
is collected from various sources. Pre analytical process was incorporated by personal and
mechanical means to ensure the data collected is in order and ready for statistical analysis. This
procedure results in reduction of inaccuracy and fallacious elements in the data.

Calculation of Capital Employed:

Capital Employed = Current AssetsCurrent liabilities + Net fixed assets.
(or)
= Net working capital + Net fixed assets.

TABLE NO: 5.1

2007-2008
S.NO PARTICULARS AMOUNT (in Crores)
.

1. CURRENT ASSETS 2749.05

2. CURRENT LIABILITIES 2051.64

3. INTEREST ACCURED AND DUE 18.40

4. NET WORKING CAPITAL(1-2) 697.41

5. NET FIXED ASSETS 1555

6. CAPITAL EMPLOYED(4+5) 2252.41

TABLE NO: 5.2

 2008-2009
S.NO PARTICULARS AMOUNT (in
.

Crores)
1. CURRENT ASSETS 3748.17

2. CURRENT LIABILITIES 2665.65

3. INTEREST ACCURED AND DUE 67.45

4. NET WORKING CAPITAL 1082.52

5. NET FIXED ASSETS 1871

6. CAPITAL EMPLOYED(4+5) 2953.52

TABLE NO: 5.3

2009-2010
 S.NO PARTICULARS AMOUNT (in
.

Crores)
1. CURRENT ASSETS 3655.37

2. CURRENT LIABILITIES 3251.01

3. INTEREST ACCURED AND DUE 24.24

4. NET WORKING CAPITAL 404.36

5. NET FIXED ASSETS 2361

6. CAPITAL EMPLOYED(4+5) 2765.36

TABLE NO:5.4
2010-2011
 S.NO. PARTICULARS AMOUNT (in

Crores)
1. CURRENT ASSETS 5062.93

2. CURRENT LIABILITIES 4797.76

3. INTEREST ACCURED AND DUE 45.26

4. NET WORKING CAPITAL 265.17

5. NET FIXED ASSETS 3214

6. CAPITAL EMPLOYED(4+5) 3479.17

TABLE NO: 5.5

2011-2012
 S.NO PARTICULARS AMOUNT (in
.

Crores)
1. CURRENT ASSETS 6042.39

2. CURRENT LIABILITIES 5196.54

3. INTEREST ACCURED AND DUE 27.81

4. NET WORKING CAPITAL 845.85

5. NET FIXED ASSETS 3703

6. CAPITAL EMPLOYED(4+5) 4548.85

CALCULATION OF NET OPERATING PROFIT AFTER TAXES:

Net Operating Profit After Taxes = Operating profit Interest (1-T) Taxes.

TABLE NO: 5.6

2007-2008
S.NO PARTICULARS AMOUNT (in Crores)
.
 1. RATE OF TAX 34.22

2. OPERATING PROFIT 1099

3. INTEREST x (1-T) 18.40(1-.34) 12.11

4. (2-3) 1086.89

5. TAXES PAID 285

6. NET OPERATING PROFIT AFTER 801.89

TAXES (4-5)

TABLE NO: 5.7

2008-2009
S.NO PARTICULARS AMOUNT (in Crores)
.
 1. RATE OF TAX 33.32

2. OPERATING PROFIT 1438

3. INTEREST x (1-T) 67.45(.67) 45.19

4. (2-3) 1392.80

5. TAXES PAID 366

6. NET OPERATING PROFIT AFTER 1026.81

TAXES (4-5)

TABLE NO: 5.8

2009-2010
S.NO PARTICULARS AMOUNT (in Crores)
.
 1. RATE OF TAX 38.48

2. OPERATING PROFIT 1407

3. INTEREST x (1-T) 24.24(.62)

4. (2-3) 1392.09

5. TAXES PAID 279

6. NET OPERATING PROFIT AFTER 1136.56

TAXES (4-5)

TABLE NO: 5.9

2010-2011
S.NO PARTICULARS AMOUNT (in Crores)
.
 1. RATE OF TAX 33.33

2. OPERATING PROFIT 1037

3. INTEREST x (1-T) 45.26(.66)

4. (2-3) 1005.68

5. TAXES PAID 58.51

6. NET OPERATING PROFIT AFTER 947.64

TAXES (4-5)

TABLE NO: 5.10

2011-2012
S.NO PARTICULARS AMOUNT (in Crores)
.
 1. RATE OF TAX 33.33

2. OPERATING PROFIT 2846.75

3. INTEREST x (1-T) 27.81(.67)

4. (2-3) 2828.12

5. TAXES PAID 749

6. NET OPERATING PROFIT AFTER 2097.75

TAXES (4-5)

CALCULATION OF COST OF DEBT:

Cost of debt = (On term loans and debentures/ Total debt)

TABLE NO: 5.11

2007-2008
S.NO PARTICULARS AMOUNT (in Crores)
.
 1. TOTAL DEBT 883.38

2. INTEREST PAID 18.40

3. COST OF DEBT(Kd) 2.08%

4. Kd x DEBT 18.37

TABLE NO: 5.12

2008-2009
S.NO PARTICULARS AMOUNT (in Crores)
.

1. TOTAL DEBT 1636

2. INTEREST PAID 67.45

3. COST OF DEBT(Kd) 4.0%

4. Kd x DEBT

TABLE NO: 5.13

2009-2010
 S.NO PARTICULARS AMOUNT (in Crores)
.

1. TOTAL DEBT 2587.06

2. INTEREST PAID 24.24

3. COST OF DEBT(Kd) 0.94%

4. Kd x DEBT 24.24

TABLE NO: 5.14

2010-2011
S.NO PARTICULARS AMOUNT (in Crores)
.

1. TOTAL DEBT 4052.76

2. INTEREST PAID 45.26

3. COST OF DEBT(Kd) 1.12%

4. Kd x DEBT 44.58

TABLE NO: 5.15

 2011-2012
S.NO PARTICULARS AMOUNT (in
.

Crores)
1. TOTAL DEBT 2880.15

2. INTEREST PAID 27.81

3. COST OF DEBT(Kd) 0.96%

4. Kd x DEBT 27.81

Calculation of Cost of Equity:

Earning Per Share

Cost of Equity (Ke) = ----------------------------------- x 100
Net Annual Value Per Share

TABLE NO: 5.16

2007-2008
S.NO PARTICULARS
.
 %VALUE AMOUNT (in

Crores)
1. EQUITY CAPITAL 233

2. EARNING PER SHARE 19.04

3. NET ANNUAL VALUE 313.55

4. COST OF EQUITY(Ke) 6.07

5. Ke x EQUITY CAPITAL 14.14

TABLE NO: 5.17

2008-2009
S.NO. PARTICULARS
 %VALUE AMOUNT (in

Crores)
1. EQUITY CAPITAL 238

2. EARNING PER SHARE 45.15

3. NET ANNUAL VALUE 390.10

4. COST OF EQUITY(Ke) 11.57

5. Ke x EQUITY CAPITAL 27.54

TABLE NO: 5.18

2009-2010
S.NO. PARTICULARS
 %VALUE AMOUNT (in

Crores)
1. EQUITY CAPITAL 239

2. EARNING PER SHARE 46.24

3. NET ANNUAL VALUE 347.83

4. COST OF EQUITY(Ke) 13.29

5. Ke x EQUITY CAPITAL 31.76

TABLE NO: 5.19

2010-2011
 S.NO PARTICULARS
.

%VALUE AMOUNT (in

Crores)
1. EQUITY CAPITAL 273

2. EARNING PER SHARE 15.92

3. NET ANNUAL VALUE 191.6

4. COST OF EQUITY(Ke) 8.31

5. Ke x EQUITY CAPITAL 22.69

TABLE NO: 5.20

2011-2012
 S.NO PARTICULARS
.

%VALUE AMOUNT (in

Crores)
1. EQUITY CAPITAL 283

2. EARNING PER SHARE 37.97

3. NET ANNUAL VALUE 545.2

4. COST OF EQUITY(Ke) 6.96

5. Ke x EQUITY CAPITAL 19.73

Calculation of Weighted Average Cost of Capital:

Weighted Average Cost of Capital =

[ Ke(Equity capital + free reserves ) + (Kd x long term debt)]

-------------------------------------------------------------------------------- x 100
Capital Employed
TABLE NO: 5.21
2007-2008
S.NO. PARTICULARS

%VALUE AMOUNT (in

Crores)
1. Kd x COST OF DEBT 18.36

2. Ke x COST OF EQUITY 177.45

3. TOTAL COST(1+2) 195.31

4. CAPITAL EMPLOYED 2252.41

5. WACC 8.67
TABLE NO: 5.22
2008-2009
S.NO. PARTICULARS

%VALUE AMOUNT (in

Crores)
1. Kd x COST OF DEBT 65.44

2. Ke x COST OF EQUITY 426.36

3. TOTAL COST(1+2) 491.8

4. CAPITAL EMPLOYED 2953.52

5. WACC 16.65
TABLE NO: 5.23
2009-2010
S.NO PARTICULARS
.

%VALUE AMOUNT (in

Crores)
1. Kd x COST OF DEBT 24.24

2. Ke x COST OF EQUITY 70.23

3. TOTAL COST(1+2) 94.47

4. CAPITAL EMPLOYED 2765.36

5. WACC 3.42

TABLE NO: 5.24

2010-2011
S.NO PARTICULARS
.

%VALUE AMOUNT (in

Crores)
1. Kd x COST OF DEBT 44.58

2. Ke x COST OF EQUITY 421.81

3. TOTAL COST(1+2) 466.39

4. CAPITAL EMPLOYED 3479.17

5. WACC 13.48
TABLE NO: 5.25
2011-2012
S.NO PARTICULARS
.

%VALUE AMOUNT (in

Crores)
1. Kd x COST OF DEBT 149.77

2. Ke x COST OF EQUITY 19.73

3. TOTAL COST(1+2) 169.5

4. CAPITAL EMPLOYED 4548.85

5. WACC 12.47

Calculation of Economic Value Added:

Economic Value Added = Net operating profit after taxes (weighted average cost of capital *
capital employed)

TABLE NO: 5.26

2007-2008

S.NO PARTICULARS
. %VALUE AMOUNT (in

Crores)
1. NOPAT 801.89

2. WACC 8.67

3. CAPITAL EMPLOYED (CE) 2252.41

4. WACC x CE 195.28

5. ECONOMIC VALUE ADDED9(1-4) 606.6

TABLE NO: 5.27
2008-2009

S.NO. PARTICULARS
%VALUE AMOUNT (in

Crores)
1. NOPAT 1026.81

2. WACC 16.65

3. CAPITAL EMPLOYED (CE) 2953.56

4. WACC x CE 472.56

5. ECONOMIC VALUE ADDED9(1-4) 554.25

TABLE NO: 5.28
2009-2010
S.NO PARTICULARS
.

%VALUE AMOUNT (in

Crores)
1. NOPAT 1113.09

2. WACC 3.4

3. CAPITAL 2785.36
EMPLOYED (CE)
4. WACC x CE 94.02

5. ECONOMIC VALUE 1019.06

ADDED9(1-4)
TABLE NO: 5.29
2010-2011
S.NO. PARTICULARS

%VALUE AMOUNT (in

Crores)
1. NOPAT 947.64

2. WACC 13.48

3. CAPITAL EMPLOYED (CE) 3479.17

4. WACC x CE 468.99

5. ECONOMIC VALUE ADDED9(1-4) 478.65

TABLE NO: 5.30

2011-2012
 S.NO PARTICULARS
.

%VALUE AMOUNT (in

Crores)
1. NOPAT 2097.75

2. WACC 12.47

3. CAPITAL EMPLOYED 4548.85

(CE)
4. WACC x CE 567.24

5. ECONOMIC VALUE 1530.51

ADDED9(1-4)

Economic Value Added In Percentage:

Economic Value Added

------------------------------ X 100
Capital Employed
TABLE NO: 5.31
2007-2008
S.NO PARTICULARS AMOUNT(in crores) %VALUE

01. ECONOMICVALUE ADDED 606.6

02. CAPITAL EMPLOYED 2252.41
03. EVA IN PERCENTAGE 26.93

TABLE NO: 5.32

2008-2009
S.NO PARTICULARS AMOUNT(in crores) %VALUE
01. ECONOMIC VALUE ADDED 554.25
02. CAPITAL EMPLOYED 2953.52
03. EVA IN PERCENTAGE 18.76

TABLE NO: 5.33

2009-2010
S.N PARTICULARS AMOUNT(in crores) %VALUE
O
01. ECONOMIC VALUE ADDED 1019.06
02. CAPITAL EMPLOYED 2765.36
03. EVA IN PERCENTAGE 36.85
TABLE NO: 5.34
2010-2011
S.NO PARTICULARS AMOUNT(in crores) %VALUE
01. ECONOMIC VALUE ADDED 478.65
02. CAPITAL EMPLOYED 3479.17
03. EVA IN PERCENTAGE 13.75
TABLE NO: 5.35
2011-2012
S.N PARTICULARS AMOUNT(in crores) %VALUE
O
01. ECONOMIC VALUE ADDED 1530.51
02. CAPITAL EMPLOYED 4548.85
03. EVA IN PERCENTAGE 33.64

Calculation of Return on Investment:

Operating Profit
Return on Investment = ---------------------------------- x 100
Capital Employed

TABLE NO: 5.36

2007-2008
S.NO PARTICULARS AMOUNT(in crores) %VALUE
01. OPERATING PROFIT 1099
02. CAPITAL EMPLOYED 2252.41
03. RETURN ON INVESTMENT 48.79

TABLE: 5.37
2008-2009
S.N PARTICULARS AMOUNT(in crores) %VALUE
O
01. OPERATING PROFIT 1438
02. CAPITAL EMPLOYED 2953.52
03. RETURN ON INVESTMENT 48.68

TABLE NO: 5.38

2009-2010
 S.N PARTICULARS AMOUNT(in crores) %VALUE
O
01. OPERATING PROFIT 1407
02. CAPITAL EMPLOYED 2765.36
03. RETURN ON INVESTMENT 50.87

TABLE NO: 5.39

2010-2011
S.N PARTICULARS AMOUNT(in crores) %VALUE
O
01. OPERATING PROFIT 1036
02. CAPITAL EMPLOYED 3479.17
03. RETURN ON INVESTMENT 29.77

TABLE NO: 5.40

2011-2012
S.N PARTICULARS AMOUNT(in crores) %VALUE
O
01. OPERATING PROFIT 2846.75
02. CAPITAL EMPLOYED 4548.85
03. RETURN ON INVESTMENT 62.58

COMPARATIVE STATEMENT OF EVA IN % AND ROI

TABLE NO: 5.41

S.NO PARTICULARS 2007-08 2008-09 2009-10 2010-11 2011-12
1. EVA 606.61 554.25 1019.07 478.65 1530.51
2. EVA In % 26.93 18.76 36.85 13.75 33.64
3. ROI 48.79 48.68 50.87 29.77 62.96

The following table & graph shows the amount of capital employed by Mahindra & Mahindra.

TABLE NO: 5.42

 YEAR 2007-08 2008-09 2009-10 2010-11 2011-12
Amount of Capital 2252 2954 2765 3479 4549
Employed

INTERPRETATION:

From the above analysis amout of capital employed is more in 2011-2012.

TABLE NO: 5.43

S.NO PARTICULARS 2007-08 2008-09 2009-10 2010-11 2011-12

1 EVA 606.61 554.25 1019.07 478.65 1530.51

INTERPRETATION:
In the above analysis the economic value added is high in 2009-10 & 2011-12, there is a greater
increase in EVA in 2011-12.

TABLE NO: 5.44

 YERA 2007-08 2008-09 2009-10 2010-11 2011-12
EVA (%) 26.93 18.76 36.85 13.75 33.64
ROI 48.79 48.68 50.87 29.77 62.96

INTERPRETATION:
In the above analysis in 2011-12 ROI is high compared to other years , & EVA is also improved
compared to 2010-11

6. CONCLUSIONS
SUGGESTIONS

On the basis of the study undertaken by me in Mahindra & Mahindra, I would like to make the
following suggestions regarding the improvements of financial performance of Mahindra &
Mahindra.

Mahindra & Mahindra should me made competent enough to increase its net operating profit
after taxes for the same amount of capital employed.

Steps must be taken by Mahindra & Mahindra discard its non-performing assets that is it
should reduce its overall capital employed.

Investment should be made in those projects, which earn more than its cost of capital
employed on that particular project.

CONCLUSION
 From the analysis of the data, which is collected from various sources, the following is brefily
summarized as far as the financial performance of Mahindra & Mahindra.

The capital employed by Mahindra & Mahindra LTD showed increased year after year 2007-
08.

Traditional mreasure of performance viz., return on investment showed a favorable picture of

Mahindra &Mahindra from 2007-08 and 2009-10

Return on investment declined in the year 2009-10 financial year.

Economic value added as a measure of performance in contrast to return on investment

showed that the performance of Mahindra & Mahindra in financial area is favorable.

Where return on investment declined 2009-10 in by half of the earlier year, EVA showed an
increase from the year 2011-12 which shows that the performance of Mahindra & Mahindra is bright.

The reason for the low EVA may be attributed to the reason that the net operating profit after
taxes did the proportionate increase with that capital employed.

BIBLIOGRAPHY
BOOKS:

Financial management : third edition, MY Khan & P.K.Jain.

Principles of Managerial Finance : Lawrence J. Gitman
Economic Value Added: what is and how does it help in international management- Atul kumar,
1999- The Management Account, July 1999 Pg. 487-491.
Economic Value Added and ROI - A comparative analysis-Prof
EVA as a tool of shareholders value creation-Dr. Pracin Saxena, Dr.P.D.Saini, 2001-

JOURNALS:

H.C.sardar,Deepak.J.Thakkar, 2001-India journal of Accounting, Vol XXXII-Dec 2001.

 Indian Journal of Accounting- Vol XXXII Dec 2001.
Winning with EVA, Kondvagunta, chaith, 2000, Business today Feb 22, 82-109pg.

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