AN ANALYSIS OF DETERMINANTS OF SHAREHOLDERS’ VALUE

OF SELECT LISTED COMPANIES IN INDIA

RASHTRASHANT TUKADOJI MAHARAJ NAGPUR UNIVERSITY

NAGPUR

Doctoral thesis submitted

For the fulfillment of the award of Degree of Doctor of Philosophy

By

Researcher:
John Yesudas Valluri,
M.B.A., M.D.I.T.,

Guide:
Dr. AMIT.R.PANDE,
M. Com., M. Phil., Ph.D., Associate Professor,
Department of Commerce,
Sharadchandra Arts and Commerce College, Butibori, NAGPUR – 441122.

2015

AN ANALYSIS OF DETERMINANTS OF SHAREHOLDERS’ VALUE

OF SELECT LISTED COMPANIES IN INDIA

1
 RASHTRASHANT TUKADOJI MAHARAJ NAGPUR UNIVERSITY
NAGPUR

Doctoral thesis submitted

For the fulfillment of the award of Degree of Doctor of Philosophy

By

Researcher:
John Yesudas Valluri,
M.B.A., M.D.I.T.,

Guide:
Dr. AMIT.R.PANDE,
M. Com., M. Phil., Ph.D., Associate Professor,
Department of Commerce,
Sharadchandra Arts and Commerce College, Butibori, NAGPUR – 441122.

2015

CERTIFICATION BY THE GUIDE

This is to certify that John Yesudas Valluri, S/O Late Yesudas Valluri, has completed the
thesis on “AN ANALYSIS OF DETERMINANTS OF SHAREHOLDERS’

VALUE OF SELECT LISTED COMPANIES IN INDIA” for the fulfillment of

the award of the Degree of Doctor of Philosophy.

2
The work has been a bona fide work carried on by him on his own. It is completely
satisfactory. He has not submitted the same for obtaining any other degree under
Rashtrashant Tukadoji Maharaj Nagpur University.

(Dr. AMIT.R.PANDE),
M. Com., M. Phil., Ph. D.,
Associate Professor,
Department of Commerce,
Sharadchandra Arts and Commerce College,
Butibori, NAGPUR – 441122.

DECLARATION BY THE STUDENT

I, John Yesudas Valluri, S/O Late Yesudas Valluri, hereby declare that the thesis tiled “ AN

ANALYSIS OF DETERMINANTS OF SHAREHOLDERS’ VALUE OF

SELECT LISTED COMPANIES IN INDIA” submitted by me is an original work
done for the fulfillment of the award of the Degree of Doctor of Philosophy under
Rashtrashant Tukadoji Maharaj Nagpur University. It has not been submitted to obtain any
other degree under Rashtrashant Tukadoji Maharaj Nagpur University or to any other
University.

Researcher:

John Yesudas Valluri,

M.B.A., M.D.I.T.,

3
 ACKNOWLEDGEMENTS
At the outset, I thank the Almighty and one and all who have directly or indirectly
contributed towards the successful completion of my research work.

My profuse and immense thanks are boundlessly owing to my mentor and guide, Dr.
AMIT.R.PANDE, M. Com., M. Phil., Ph. D., Associate Professor, Department of
Commerce, Sharadchandra Arts and Commerce College, Butibori, Nagpur for his generous
and humane approach through which he was able to not only guide but also inspire me at
various points of time towards the successful completion of my research work. My thanks are
limitlessly owing to Dr. Baban Taywade, Principal, DNC College, Nagpur for his most
valuable encouragement, guidance and more particularly moral support extended throughout
the period of study. My boundless thanks are due to Dr. Bharat Meghe, Dean, Faculty of
Commerce, RTM Nagpur University, for being a father figure and an endless source of
motivation, encouragement and guidance throughout the period of the study.

My heartfelt and profound gratitude pricelessly remain towards Dr. Vinayak Deshpande,
Head, Department of Business Management, RTM Nagpur University, for his invaluable
guidance, admonition and encouragement throughout the period of research. My gratitude
remains towards Dr. Anant Deshmukh, Head, Department of Commerce, RTM Nagpur
University, for his unflinching and unconditional support extended throughout the period of
study. I would also like to thank my mentor Dr.G.V.R.K.Acharyulu, Associate Professor –
Operations & Supply Chain, School of Management Studies, University of Hyderabad for his
sound support and guidance.

I would be failing in my duty if I do no thank my wife Bhagyalakshmi for her sacrificial

support throughout the period of study. Last, but not the least, I wish to thank my friends,
well wishers, family members and my mother who were a constant source of inspiration and
encouragement throughout the period of the study.

John Yesudas Valluri ,

M.B.A., M.D.I.T.

4
 Chapter CONTENTS Page
No No.

ABSTRACT 11

I INTRODUCTION TO THE STUDY 12

II REVIEW OF LITERATURE 24

III CONCEPTUAL FRAMEWORK OF THE STUDY 37

IV PROFILE OF THE INDUSTRIES REPRESENTED IN THE 60

SAMPLE OF LISTED COMPANIES.

V DATA ANALYSIS AND INTERPRETATION 95

VI CONCLUSIONS AND SUGGESTIONS 171

REFERENCES 176

APPENDICES 181

I) List of Companies included in the Sample

II) Summarized Average Annual Figures of the Sample Companies.

GLOSSARY 187

ABBREVIATIONS 189

Table LIST OF TABLES Page

No. No.

1 Sample of 120 companies(categorized into major Industry Types) 62

2 Average MV & MVA of Auto Industry(2005-06 to 13-14) 109

3 Average MV & MVA of Cement Industry(2005-06 to 13-14) 110

5
4 Average MV & MVA of Energy Industry(2005-06 to 13-14) 112

5 Average MV & MVA of Infrastructure Industry(2005-06 to 13-14) 114

6 Average MV & MVA of Indl. Manufacturing Industry(2005-06 to 13-14) 116

7 Average MV & MVA of IT/ITES Industry(2005-06 to 13-14) 118

8 Average MV & MVA of Pharmaceutical Industry(2005-06 to 13-14) 120

9 Average MV & MVA of Banking & Services Industry(2005-06 to 13-14) 122

10 Average MV & MVA of Consumer Goods Industry(2005-06 to 13-14) 124

11 Average MV & MVA of Textiles Industry(2005-06 to 13-14) 125

12 Average EBDIT & EAT of Auto Industry(2005-06 to 13-14) 127

13 Average EBDIT & EAT of Cement Industry(2005-06 to 13-14) 129

14 Average EBDIT & EAT of Energy Industry(2005-06 to 13-14) 131

15 Average EBDIT & EAT of Infrastructure Industry(2005-06 to 13-14) 132

16 Average EBDIT & EAT of Indl. Manufacturing Industry(2005-06 to 13-14) 134

17 Average EBDIT & EAT of IT/ITES Industry(2005-06 to 13-14) 136

18 Average EBDIT & EAT of Pharmaceutical Industry(2005-06 to 13-14) 137

19 Average EBDIT & EAT of Banking & Services Industry(2005-06 to 13-14) 139

Table LIST OF TABLES Page

No. No.

20 Average EBDIT & EAT of Consumer Goods Industry(2005-06 to 13-14) 141

21 Average EBDIT & EAT of Textiles Industry(2005-06 to 13-14) 143

22 Average CFO & FCF of Auto Industry(2005-06 to 13-14) 145

23 Average CFO & FCF of Cement Industry(2005-06 to 13-14) 147

24 Average CFO & FCF of Energy Industry(2005-06 to 13-14) 149

25 Average CFO & FCF of Infrastructure Industry(2005-06 to 13-14) 151

26 Average CFO & FCF of Indl. Manufacturing Industry(2005-06 to 13-14) 153

27 Average CFO & FCF of IT/ITES Industry(2005-06 to 13-14) 155

28 Average CFO & FCF of Pharmaceutical Industry(2005-06 to 13-14) 157

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29 Average CFO & FCF of Banking & Services Industry(2005-06 to 13-14) 160

30 Average CFO & FCF of Consumer Goods Industry(2005-06 to 13-14) 162

31 Average CFO & FCF of Textiles Industry(2005-06 to 13-14) 164

Chart LIST OF CHARTS Page

No. No.

1 Sample of 120 companies(categorized into major Industry Types) 62

2 Average MV & MVA of Auto Industry(2005-06 to 13-14) 109

3 Average MV & MVA of Cement Industry(2005-06 to 13-14) 111

4 Average MV & MVA of Energy Industry(2005-06 to 13-14) 112

5 Average MV & MVA of Infrastructure Industry(2005-06 to 13-14) 114

6 Average MV & MVA of Indl. Manufacturing Industry(2005-06 to 13-14) 116

7 Average MV & MVA of IT/ITES Industry(2005-06 to 13-14) 118

8 Average MV & MVA of Pharmaceutical Industry(2005-06 to 13-14) 120

9 Average MV & MVA of Banking & Services Industry(2005-06 to 13-14) 122

10 Average MV & MVA of Consumer Goods Industry(2005-06 to 13-14) 124

11 Average MV & MVA of Textiles Industry(2005-06 to 13-14) 126

12 Average EBDIT & EAT of Auto Industry(2005-06 to 13-14) 127

13 Average EBDIT & EAT of Cement Industry(2005-06 to 13-14) 129

14 Average EBDIT & EAT of Energy Industry(2005-06 to 13-14) 131

7
15 Average EBDIT & EAT of Infrastructure Industry(2005-06 to 13-14) 133

16 Average EBDIT & EAT of Indl. Manufacturing Industry(2005-06 to 13-14) 134

17 Average EBDIT & EAT of IT/ITES Industry(2005-06 to 13-14) 136

18 Average EBDIT & EAT of Pharmaceutical Industry(2005-06 to 13-14) 138

19 Average EBDIT & EAT of Banking & Services Industry(2005-06 to 13-14) 139

Chart LIST OF CHARTS Page

No. No.

20 Average EBDIT & EAT of Consumer Goods Industry(2005-06 to 13-14) 141

21 Average EBDIT & EAT of Textiles Industry(2005-06 to 13-14) 143

22 Average CFO & FCF of Auto Industry(2005-06 to 13-14) 146

23 Average CFO & FCF of Cement Industry(2005-06 to 13-14) 148

24 Average CFO & FCF of Energy Industry(2005-06 to 13-14) 150

25 Average CFO & FCF of Infrastructure Industry(2005-06 to 13-14) 152

26 Average CFO & FCF of Indl. Manufacturing Industry(2005-06 to 13-14) 153

27 Average CFO & FCF of IT/ITES Industry(2005-06 to 13-14) 156

28 Average CFO & FCF of Pharmaceutical Industry(2005-06 to 13-14) 158

29 Average CFO & FCF of Banking & Services Industry(2005-06 to 13-14) 160

30 Average CFO & FCF of Consumer Goods Industry(2005-06 to 13-14) 162

31 Average CFO & FCF of Textiles Industry(2005-06 to 13-14) 164

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 ABSTRACT

In this research, one of the prominent Shareholder Value Metric, Market Value Added(MVA)
is used to measure shareholder value. MVA is defined as the excess of M over B. M is the
aggregate Market Value of a Company’s Equity. B represents the aggregate Book Value of a
Company’s Equity. The primary Objective of this research is to objectively and empirically
identify the profit variants which maximize shareholders value on a long term.

A fairly representative sample of 120 large and leading listed companies has been chosen
from the companies listed under the NSE and BSE. Regression Analysis was primarily
conducted(apart from other supporting statistical analysis) in order to observe the causal
influence of profit variants, viz., the average figures of Profits Before Depreciation, Interest
and Taxes(PBDIT), Profits After Taxes(PAT), Free Cash Flows(FCFs), Cash From
Operations(CFOs), Return on Investment(ROI), Return on Net Worth(RONW) on
Shareholders Value. The data pertaining to the above has been collected for a period of nine
years (FY 2005-06 to FY 2013-14). Regression Results clearly reveal that Profits After Taxes
(PAT), Cash From Operations (CFO) contribute significantly towards the determination of
MVA. Regression results including Average Dividends as an additional Independent Variable
apart from the above 6 profit variants as Independent Variables amazingly reveal that
consistent dividends also along with the above six variants of profits contribute to
shareholder value.

A good number of relevant conclusions were made. A few key recommendations that
emerged out of this research were: Managers and Investors need to watch out if MVA is
consistently increasing in a company. Along with this, CFOs, PATs, FCFs and Dividends are
to be observed if they are consistently increasing on a long-term basis. These coupled with a
good track record of the past of a company are the best buys for any investor.

Key words: Shareholders Value MVA PAT CFO Dividends

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 CHAPTER – I

INTRODUCTION TO THE STUDY

10
SHAREHOLDERS VALUE

The factors that drive shareholder value have been of perennial interest to all the stakeholders
in a business, more so, the shareholders who are active participants in the affairs and results
of a business. The composition of the body of shareholders too has also evolved in the recent
past and is continuing to evolve in the light of the changing business environment which has
become very competitive and intolerant of any firm which does not consistently generate
adequate value to its shareholders. While we find that a good proportion of the shares of a
company are owned by its promoters, a chunk of the shares are also owned by the public in
the Indian context. Shares owned by the public comprise institutional investors and individual
investors. These investors hail from both domestic and off shore markets. Therefore it is well
known that all listed companies do not serve the interest of only the promoters per se. They
also serve the interest of the non-promoter shareholders. These shareholders are very
conscious of the performance of a business and may easily shift their investment to other
business if they find that their investment in a particular business is not generating adequate
returns. Therefore, any business that rests on its laurels without being on its feet to constantly
maintain the goodwill of the customers, shareholders is bound to face low values of its
shares, face high volatility in the share price or be a target of a takeover/merger and in the
worst case may face dissolution. Shareholders have become very discerning and adept at
owning or disowning shares in any firm given its performance, under-performance or poor
performance. History is replete with many companies which have faced such circumstances
and were ultimately either taken over or wound up.

The following developments further highlight the importance of shareholder value

maximization.
Creating value for shareholders is now widely accepted as the dominant corporate objective.
The interest in value creation has been stimulated by several developments.

 Institutional investors, traditionally were passive investors, have begun exerting

influence on corporate managements to create value for shareholders.

11
  Many leading companies like General Electric, Coca Cola, Siemens, Hindustan
Unilever,
Reliance Industries and Infosys Technologies which have accorded value creation a
central place in their corporate planning serve as a role model for others.
 Business press is emphasizing shareholder value creation in performance rating
exercises.
 Greater attention is now being paid to link top management compensation to
shareholder returns.

Difference between wealth and value creation: Though there is a subtle difference
between shareholders wealth and shareholders’ value, it is worthwhile to note this difference.
Wealth creation refers to changes in the wealth of shareholders on a periodic (annual) basis.
Applicable to exchange-listed firms, changes in shareholder wealth are inferred mostly from
changes in stock prices, dividends paid, and equity rise during the period. Since stock prices
reflect investor expectations about future cash flows, creating wealth for shareholders
requires that the firm undertake investment decisions that have a positive net present value
(NPV). Although used interchangeably, there is a subtle difference between value creation
and wealth creation. The value perspective is based on measuring value directly from
accounting-based information with some adjustments, while the wealth perspective relies
mainly on stock market information. For a publicly traded firm these two concepts are
identical when (i) management provides all pertinent information to capital markets, and (ii)
the markets believe and have confidence in management.

Determinants of shareholders value: The factors that drive shareholder value has been a
quintessential question which has remained answered to some fair degree, but has remained
unanswered completely. While finance theories and literature abound on the contribution of
the profits, cash flows to the value obtained by the shareholders such as the Marakon
approach, Alcar Approach, McKinsey approach, Stern Stewart approach, BCG approach and
the like. There remain certain gray areas like the degree of influence which profits, dividends,
cash flows, and the like have on the shareholder value. Of late, in the finance literature there
has been good amount of literature and empirical writings which relate shareholder value to
the present value of the future cash flows of the business. Modern understanding of
Shareholder Value assumes and tries to empirically validate that the share price in the share

12
market when observed on a long-term is a reflector of the inherent capacity of the firm to
generate cash flows long into the future (Michael J. Mouboussin, 2011). It assumes that the
present share price factors in the inherent capacity of the firm to generate cash flows in the
future given its past record, present status and the prospective projections regarding its future
earning potential. Right from the time Modigliani and Miller, finance history is a witness to
theories which have been advocated linking shareholders value to its causal factors like the
dividends, profits and taxes. Of course, it cannot be gainsaid that there is some positive
correlation between the shareholder value of a business that is increasing and profits which
are consistently and simultaneously increasing. However, there is a mute question related to
the degree of consistent influence that the profits of a company have on the shareholders
value. Even if profits are found to move in tandem with the shareholder value, there are
many nuances which remain completely unanswered like the degree of positive correlation
between profits and shareholder value. The degree of causal influence of profits on
shareholders’ value is also not well established. Moreover, influence of the various variants of
profits on the shareholder value is not established. Profits are made and measured as PBDIT
(Profits before Depreciation, Interest and Taxes.), PAT (Profits after Taxes). Cash Profits are
indicated through Cash from Operations (CFO) and Free Cash Flows (FCFs). Internationally,
Free Cash Flows and Cash from Operations have been commonly agreed as leading liquid
indicators of profits a business firm makes in terms of cash profits. Key profitability ratios in
relation to Sales are Gross Profit Ratio and Net Profit Ratio. Key Profitability Ratios in
relation to the Investment made by a Business are Return on Capital Employed or Return on
Investment (ROI), Return on Net Worth (RONW). But which of these has a serious causal
relationship with shareholders value is a question which is not completely answered. This
research intends to study this gap in understanding the determinants of long-term
shareholders value in terms of the variants of profits and profitability as mentioned above.

There are also macro economic, political and social events which sometimes bolster the
leading indicators driving shareholder value. This causes positive sentiments to dominate the
share market. For example, about a little more than a year ago, Indian government has
observed a change in guard in the political leadership. It has driven the hopes of the public
by and large to have high expectations of the corporate sector in the near and far future. We
observe that both the institutional investors on a dominant scale and individual investors are
keen on enjoying the party. There is increasing demand for the shares in general despite

13
momentary setbacks. These sentiments have caused a rally in the share indices more so after s
san expectation that the newly elected government will deliver on its promises. The
companies’ earnings are thus expected to increase and this prompts investors to buy and
cause a bull run to exist in the stock market. Of course, it is beyond the scope of this study to
dwell profoundly on the issues mentioned above. However, this is only to highlight the
length and breadth of the topic being researched. To illustrate, the third world countries are no
doubt on a scanner by the developed countries. One of the important reasons is that
companies like Google, Pfizer, etc., are sitting on a cash pile of billions of dollars expecting
and waiting to see the developments in the third world countries like Brazil, India, China,
Russia, South Africa and the like so as to assess the best companies to invest in and also firms
to exit. Thus, one of the important factors that prompt the Foreign Institutional Investors to
make investment in Indian companies is the macro-economic environment that is prevailing
in the Indian Economy and is most likely to prevail in the near and far future. This study
seeks to fill this gap albeit at its own level to identify the keen pointers of shareholder value
and the key industries delivering long-term value to the shareholders.

NEED FOR THE STUDY

An extensive literature review has revealed that there are no contemporary studies in India
which carefully have chosen the large, leading listed companies in India and studied the
impact of different variants of profits as to their being determinants of shareholders value.
While there is a general belief and empirically held conviction that companies consistent
earnings by and large bolsters shareholder value, the mute question that remained unanswered
was which variant of the profits was actually having a high degree of bearing on the
shareholder value. This is what precisely this research focuses on. Consultants, investment
managers, middle class investors, foreign institutional investors, lay investors too often
struggle with the decision as to what to look for and what figures’ consistency from the
financial statements need to be focused so as to assess the degree of its bearing on
shareholder value on a long term. While in general, the figure of sales/revenues,
profits/earnings do give a reasonable clue, too often, these figure beguile gullible investors
who may not necessarily be in a strong position to identify the companies delivering adequate
value and those which do not.

14
Ordinary investors often also struggle to identify which industry to look for while buying
shares. Particularly, the middle class category of investors who would like to make real
earnings out of their investments, find it very difficult to understand the dynamics of the
share market. They also would gain in wisdom if only they knew which industries are
promising better long term returns vis-à-vis other industries. The investors would also want
to know what to check or how they should choose an industry over the other or one company
over the other. This empirical research makes an effort to ease this gap. Of course, it is
assumed that an investor is aware of the basics of financial statements and is reasonably
intelligent to know their interpretations.

It is also in vogue the world over that shareholder value maximization is being gradually
embraced as the viable corporate objective on a long term by large and leading companies.
However, due to the existence of a dichotomy between the shareholders and the management,
and more so in the Indian context, the prevalence of family owned organizations vs. public
owned organizations, makes it imperative that this study is required in the Indian context. In
India, we notice that while in paper, it appears that the management and owner ship are
separated, still a majority of the decisions are made by the supremo or the Number one
person who is invariably the key owner- shareholders of the company. While there is nothing
wrong in it, sometimes the decisions may become so lopsided that it reflects the vision,
experience and expectations of a single individual or a single family which is the key owner
in the company. Sometimes, this may detrimentally affect the other minority shareholders.
In order that the shareholders wealth is maximized on an equal and on a long-term basis, the
decisions need to be always looked at from its impact on the long-term shareholder value. It
is this gap this research seeks to narrow down.

World over, there is an ongoing struggle as to how the interests of shareholders and managers
have to be dovetailed or aligned. This study is therefore needed to help bridge this gap by
objectively identifying which aspect of profits, the managers need to give maximum priority
to be increased collectively, viz., for instance, is it the Free Cash Flows, Cash From
Operations, PBDIT, PAT, ROI or the RONW, which the managers must effectively maximize
in the long term. This study helps narrow down and pin point this aspect.

OBJECTIVES OF THE STUDY

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 1) To examine the impact of Profit before Depreciation, Interest and Taxes (PBDIT) on
the Market Value Added (MVA) of the selected listed companies.

2) To study the impact of Profit after Taxes (PAT) on the Market Value Added (MVA) of
the selected listed companies.

3) To study the impact of Free Cash Flows (FCFs) on the Market Value Added (MVA) of
the selected listed companies.

4) To study the impact of Cash from Operations (CFOs) on the Market Value Added
(MVA) of the selected listed companies.

5) To study the impact of Return on Investment (ROI) on the Market Value Added
(MVA) of the selected listed companies.

6) To study the impact of Return on Net worth (RONW) on the Market Value Added
(MVA) of the selected listed companies.

7) To study the impact of Dividends on the Market Price of shares of companies.

8) To study if there is an association between the industry category of a company and its
size.

SCOPE OF THE STUDY

The study is confined to the impact of different variants of profits on the shareholders value
of listed companies in India. Since the idea of shareholder value is most realistically
applicable only to listed companies, the study is confined to listed companies in India. Given
the fact that the shareholders’ say in management in India is gradually percolating from
promoter-family managers to non-promoter managers, it is quite pertinent to note that this
study focuses and is also relevant to the shareholders who do not have a direct or a substantial
stake in the formation and management of the company. These shareholders have only parted
with their hard earned money which is entrusted to the hands of the managers. In as much as
the transition from pre-dominantly family owned shareholders to public owned shareholders
is taking place in India, still, a good chunk of the managers in the Indian context comprise the
representatives of the family group or the promoters body who are invariably the manger-
shareholders in the company.
16
The study covers the period from the FY 2005-06 to FY 2013-14. The study focuses on
important indicators of profit most prominently the PBDIT, PAT, ROI, RONW, CFO and
FCFs and the degree of each of these being a keen determinant of shareholder value. Of
course, from the point of view of the shareholders, Dividends is also considered as one of the
factors which need to be researched as to its degree of impact on delivering shareholder
value. This is also facilitated through this research.

The study focuses on those companies having turnover of at least Rs.3000 core or more
during the FY 2013-14. Moreover, the shareholder metric chosen to indicate shareholder
value is the MVA (Market Value Added).

LIMITATIONS OF THE STUDY:

1) The study is confined to the period from 2005-06 to 2013-14. Therefore the study is a
kind of a post-mortem study of the determinants of shareholders value during a major
part of the past decade.

2) The study is focused on the determinants of long term shareholders value from the
point of view of primarily profits being a determinant of shareholder value. While it
is generally already known that consistent profits increase shareholder value, the
study tries to identify which variant of profits most closely determines shareholders
value on a long term basis through empirical analysis.

3) The bulk of the data collected is of secondary nature. The data about the profits of
the company is taken from the published financial statements of the companies. The
data about the share prices is taken from the share prices as noted from the historical
data of the national stock exchange in India. Hence any inherent limitation of these
secondary sources of data carries forward to the analysis and conclusions made.

4) The study uses some of the well established statistical tools to link consistent profit
figures and profit indicators to shareholders value. The study also bases shareholder
value as measured by Market Value Added (MVA). While the above statistical tools
and Market Value Added are well established theories, however, the inherent
limitations of these tools/theories affect the data analysis, interpretations and
conclusions.

17
 5) Due to time period of the research and other data availability constraints, the impact
of other aspects like company’s product portfolio, industry factors and macro-
economic factors on the shareholders value has not been studied.

METHODOLOGY OF THE STUDY:

The Study undertakes an analysis of the key determinants of shareholders value of selected
listed companies in India. A sample of 120 companies is taken primarily from the listed
companies comprising the ET 500 stock index in India. i.e., the companies listed under BSE
and NSE. Of course a few other listed companies in NSE satisfying the conditions below
have also been included. This sample is used to conduct Regression Analysis on the
Shareholders Value of the companies in India.

The Sample was chosen based on the following criterion:

i) The companies’ shares should be continuously traded between 2005-06 and 2013-14.

ii) The minimum turnover of each of the companies should be Rs.3000 crores during the
FY 2013-14.

iii) About 40 companies comprise those whose average annual turnover ranged between
Rs. 1000 to Rs. 4000 cores (during the years 2005-06 to 2013-14). About 40
companies comprise those whose average annual turnover ranged between Rs.4001
crores and Rs.10000 crores (during the years 2005-06 to 2013-14). About another 40
companies were those which had a turnover of more than Rs.10000 cores (during the
years 2005-06 to 2013-14).

iv) A fair degree of representative sample comprising leading industries among the large
listed companies was made.

The method of sampling could be termed as stratified random sampling as about 40

companies each were chosen from three different strata of companies based on the average
annual turnover between 2005-06 and 2013-14 which is explained above. The Dependent
Variable was considered as the Shareholders Value as measured by MVA (Market Value
Added), i.e., the difference between M and B. M implies the total average market
capitalization of the Company during the year and B implying the Book Value of all

18
outstanding shares of the Company. The Difference between M and B is taken as an indicator
of shareholders value.

(James H. McTaggart, Peter W. Kontes, and Michael C. Mankind(1994), Marakon &

Associates, 1978, Stewart, 1991, p.153)

Data related to the Market Value Added (MVA) of 120 companies share prices was collected
for the years 2005-06 to 2013-14. Data was also collected related to the profits (PBDIT, PAT,
ROI, RONW, FCF, CFO,) in respect of the above companies. The Regression Equation is
drawn taking into consideration the Market Value of each company(as the difference between
M and B), M implying the total average Market Capitalization of the company during the
year and B implying the average book value of all outstanding shares of the company. The
difference between M and B is taken as an indicator of shareholders value (James M.
McTaggart, et al.,, 1994, Stewart, 1991, p.153). This is done to assess the degree of causal
influence of profits on the shareholders value. The independent variables intended to be
taken are PBDIT (Profits Before Depreciation, Interest and Taxes), PAT (Profits after Taxes),
ROI (Return on Investment), RONW (Return on Net Worth), FCFs (Free Cash Flows) and
CFO (Cash From Operations).

The impact of dividends issues on the market value of the companies is analyzed through the
regression analysis incorporating dividends as one of the independent variables and also
calculating the correlation between the dividends and the MVA. Valid inferences and
conclusions are drawn from the above studies.

HYPOTHESES

H1: MVA of a Company is positively related to its PBDIT. (Alternate Hypothesis – 1)

H01: MVA is not related to PBDIT. (Null Hypothesis – 1)

H2: MVA of a Company is positively related to its PAT. (Alternate Hypothesis – 2)

H02: MVA is not related to PAT. (Null Hypothesis – 2)

19
H3: MVA of a Company is positively related to its Free Cash Flows (FCFs). (Alternate
Hypothesis – 3)

H03: MVA is not related to Free Cash Flows (FCFs). (Null Hypothesis – 3)

H4: MVA of a Company is positively related to its Cash from Operations (CFOs). (Alternate
Hypothesis – 4)

H04: MVA is not related to Cash from Operations (CFOs). (Null Hypothesis – 4)

H5: MVA of a Company is positively related to its Return on Investment (ROI). (Alternate
Hypothesis – 5)

H05: MVA is not related to Return on Investment (ROI). (Null Hypothesis – 6)

H6: MVA of a Company is positively related to its Return on Net worth (RONW). (Alternate
Hypothesis – 6)

H06: MVA is not related to Return on Net Worth (RONW). (Null Hypothesis – 6)

H7: MVA of a Company is positively related to its Dividends. (Alternate Hypothesis-7)

H07: MVA is not related to its Dividends. (Null Hypothesis – 7)

H8: There is a significant association between the category of industry of a company and its
size/turnover. (Alternate Hypothesis – 8)

H08: There is no significant association between the category of industry of a company and its
size/turnover. (Null Hypothesis – 8)

20
SCOPE FOR FURTHER RESEARCH:

The Regression Equation has shown that the different key variants of profits, viz., PBDIT
(Profits Before Depreciation, Interest and Taxes), PAT (Profits after Taxes), ROI (Return on
Investment), RONW (Return on Net Worth), FCFs (Free Cash Flows), CFO (Cash From
Operations), collectively have a 0.56 positive correlation (Multiple R) with the shareholder
value as measured by MVA. The value of R square of 0.308 also indicates that the above
variants of profits can predict the value of MVA to the extent of about 30.8%. There are a
host of other factors which determine the shareholder value like the industry factors,
economic factors which may be further researched as to their degree of being determinants of
shareholder value. The regression incorporating Dividends as the 7th Independent Variable in
addition to the previous 6 independent variables clearly shows that Dividends have a p value
of 0.058 which is absolutely close to 0.05 and so one can safely say that in addition to PAT
and CFO which have been found as significant determinants of shareholders value, Dividends
can also be considered as one of the significant determinants of shareholders value as
measured by MVA. The R square value is enhanced to 0.33 and the Multiple R value is also
enhanced to 0.57 which explains that consistent Dividends in addition to the other profit
variants do contribute to shareholder value.

However, there are a host of other factors which have an impact on long-term shareholder
value. These include the company factors, industry factors, social factors, demographic
factors, political factors, economic factors, fads of customers, regional disparities; the list
goes on and on. It may even include the perception of corruption in a particular firm or an
industry or the perception of under performance in a particular area in a particular firm,
industry and the country. These issues may be researched taking one key factor after the
other as to its impact on the long-term shareholder value.

21
 CHAPTER – II

REVIEW OF LITERATURE

Shareholder Value Analysis has been a very well studied, debated and yet a kind of
controversial issue in the area of finance since many decades. As is properly known,
shareholders value primarily depends on the market price of shares in the capital market.
However, the value that each shareholder perceives differs from each other. The bottom line
is that the share price in the market is the most dominant and is most practical indicator of the
underlying performance of a company. In fact, the present value of the future cash inflows
likely to be generated by the business in future is inherently incorporated in the share price of
the company (Michael J. Mouboussin, 2011). Companies which were successful in the long-
term were found to be those which have delivered long-term shareholder value (Alfred
22
Rappaport, 2006). Assuming the company is transparent and candid in its disclosures,
obviously a company which is enjoying better performance enjoys a better share price in the
share market and vice versa. The performance of the company may be leading or lagging due
to reasons external or internal to the business.

However, the view of the share price of a company on a long-term basis is one of the best
indicators (Kel Jensen, 2013) of the amount and the consistency with which value is
generated to the shareholders of the company is well embraced by investment experts and
corporate the world over. This view is being endorsed by many leading investment experts
from time to time. This view is shared by leading investment gurus like Warren Buffet,
Templeton and many others. In the following pages, the views expressed by various writers
of relevant literature vouch the opinion and in fact, a conviction that share price behavior on a
long-term basis is the most commonly agreed indicator of the performance of a company.
Too often company manager, and even the well intentioned promoter shareholder, falls into
the trap of making short-term profits at the cost of losing on a long-term. However, history is
replete with examples of how companies which have focused on maintaining the share value
on a long-term have fetched better value to the shareholders when compared to companies
which did not focus on the same.

The following paragraphs contain the view of point of existing literature on key financial
determinants of shareholders value directly or indirectly. Literature also leads us to make
valid conclusions that dividends when paid consistently and based on a policy of regular and
constant increase contribute to shareholder value. Thus one can make valid inference that
dividends when paid consistently with increasing intensity do contribute to share holder value
along with profits. One of the important observations that may be may be made in this
context is that the dividends are influenced by the liquidity of the business. In other words,
the more the liquidity of the business, the greater is the consistency and the ability with which
a company is able to pay dividends and vice-versa.

It can also be deduced that profits and more so the Cash From Operations and Free Cash
Flows which are generated by a business speak better about the value delivered to the
shareholders rather than the other profit figures. The above parameters have to do with the
literal cash that is made available after meeting all its commitments, maintenance charges,
appropriations and capital expenditures required during the period of the study. An objective
investor would therefore observe the behavior of the Free Cash Flows, Cash From Operations
23
apart from the behavior of the profits and dividends of the business. Therefore, along with
the Free Cash Flows which in the final analysis seem to be a somewhat distant indicator of
shareholder value, Cash From Operations which is an important item in the Cash Flow
Statement of a business. This is a more proximate indicator of shareholder value delivery on
a long-term as can be empirically verified from this research. Ultimately, what drives or
propels a business towards greater levels and heights is the ability of a business to generate
consistent cash flow from operations which is a keen pointer of the profitability of a business
on a long-term. However, the term has to be also considered along with the Net Profits or
also called popularly as the Profits After Taxes (PAT) as this also speaks practically about a
company’s real profitability. The reason is that Net Profit is calculated after deducting items
like Depreciation and writing off of certain deferred revenue expenses and other regular
provisions required for the smooth maintenance and operations of the business. Therefore,
this figure assumes importance of monumental level. In other words, a company having a
reputation of earning regular and consistently increasing Net Profits has greater trust of the
shareholders in the final analysis. The following paragraphs highlight the viewpoint of
pertinent literature.

Alfred Rappaport (2006) in his incisive empirical analysis into ten ways to creating
shareholder value has deduced that the following ten principles being critically important for
a company to create shareholder value on a long-term. These have been delineated as: i) Do
not manage or provide earnings guidance. ii) Make strategic decisions that maximize
expected value, even at the expense of lowering near-term earnings. iii) Make acquisitions
that maximize expected value, even at the expense of lowering near-term earnings. iv) Carry
only assets that maximize value. v) Return cash to shareholders when there are no credible
value-creating opportunities to invest in the business. vi) Reward CEOs and other Senior
Executives for delivering superior long-term returns. vii) Reward operating unit executives
for delivering superior multi-year value. vii) Reward middle-managers and frontline
employees for delivering superior performance on the key value drivers that they influence
directly. viii) Require senior executives to bear the risks of ownership just as shareholders do.
ix) Provide investors with value relevant information.

Jessica Comitto (2011) enunciates that finding value in investments is one of the most
difficult tasks investors face. There are so many ways to measure a company’s value but one
24
of the most popular ways is by using free cash flow. Free cash flow is the investor’s best way
to find companies that have the cash needed for growth within the company and opportunities
to enhance shareholder value.

Michael J. Mauboussin (2011) delineates that a CEO's job is about resource allocation with a
goal of earning a return in excess of the opportunity cost of capital. Thus, an enlightened
CEO learns how the stock market sets prices. The research in this area points to three
salient points: First, the value of the business is the present value of future cash
flows. Second, the stock market reflects cash flows many years into the future — it
is long-term oriented. Third, the market pays for value creation.

José Guedes and Gilberto Loureiro (2007) infer that many European corporations feature a
dominant shareholder with a degree of control over management well in excess of his cash-
flow rights. The principal issue raised by such a regime is not the traditional agency conflict
between entrenched managers and dispersed shareholders studied by academics for decades,
but rather the conflict between controlling shareholder and outside shareholders. The conflict
arises because the controlling shareholder enjoys private benefits of control that are
unavailable to outside shareholders. The consumption of private benefits is of concern to
outsiders if it reduces the value of their equity stake in the firm, as when it entails the
misappropriation of corporate resources or when it leads the firm to pursue inefficient
operating and investment policies. When that occurs, the market value of shares held by
outside investors is adversely affected.

Edward Rizzo (2010) makes an inference that value enhancement to the acquiring company
after acquisition is a subjective argument and reports that a recent study by KPMG observed
to analyze the merger and deals and found that 83 per cent did not boost shareholder value
and 53 per cent actually reduced it. Another study found that the total return to shareholders
on 115 global mergers and acquisitions was a negative 58 per cent!

Richard Lawton (2013) deduces that managing the tension between maximizing shareholder
value and integrating sustainability into corporate strategy requires adaptive leadership at the
Board level.

Alfred Rappaport (1986) suggested seven drivers within a business that can be managed to
create value: a growth in sales, an increase in the operating profit margin, a reduction in the
25
cash tax rate, a reduction in the working capital investment, a reduction in the fixed asset
investment, a reduction in the weighted average cost of capital, an increase in the competitive
advantage period. The theory is that improvements in these value drivers lead to an increase
in shareholder value.

Claire Minchington and Graham Francis (2000) conclude that Shareholder value has become
the mantra in almost every boardroom in the UK. However, as is the case with many new
management ideas, the concept of shareholder value has been around for many years. In
terms of organizational objectives, it is consistent with maximizing shareholders’ wealth. It
differs from traditional approaches to measuring performance in the way in which it
calculates and reports that wealth. However, if companies are to continue to reap real intrinsic
benefits from these measures, it cannot be enough simply to calculate and report these
measures. For an ongoing and sustainable increase in shareholder value to be achieved,
organizational changes must be undertaken to shift the focus of the management away from
profit and towards value drivers.

Uddin Md. Hamid and Osman Diaeldin (2007) conclude that empirical results traced on 178
announcements of dividends between 2001 and 2005 in Saudi Arabia, a non-tax economy,
showed that investors lost 2.20 percent of market value after the dividend announcement,
although the lost value is recovered from the cash dividend received, and they earned 7 per
cent of net cash return after recovering the loss of market value. Sub-sample analyses
showed that announcement of dividend increase may not signal any good information, while
the announcements of dividend decrease and dividend initiation (first-time dividend) may
contain information, although the information signal of the dividend initiation is somewhat
weaker.

Azhagiah R and Sabari Priya N(2008) analyze and conclude that the wealth of the
shareholders is greatly influenced mainly by five variables viz., Growth in Sales,
Improvement in Profit Margin, Capital Investment Decisions(both working capital and fixed
capital), Capital Structure Decisions. Cost of Capital (Dividend on Equity, Interest on Debt)
etc. There is a significant impact of dividend policy on shareholders wealth in Organic
Chemical Companies while the shareholders wealth is not influenced by dividend payout as
far as Inorganic Chemical Companies are concerned.

26
Gulzani, Moncef and Abaoub, Ezzeddine (2012) conclude that dividend payout is highly
appreciated for firms subject to high agency problems. Using a sample of 275 firm-years
listed on the Tunisian Stock Exchange over the period 1998-2007, the results show that
contrary to agency theory predictions, dividend payout of Tunisian firms contributes more to
value creation when the firm has low agency conflicts. We find a positive and high
correlation coefficient for the payouts of firms with shared control and with a majority
financial institution control. These results may be interpreted through the trust assigned by
Tunisian investors to firms that have low agency problems. The results also indicate a strong
positive relationship between the return on assets, the level of debt and firm value. Finally, a
negative relationship has been documented between the financial business sector and firm
value.

Brunzell T, Holm S, Jonsson B (2012) conclude that given the assumption that the sum of
money used for dividends and reinvestments is equal to the profits from operations, the value
of the shareholders wealth is affected by the dividend policy in a world both with and without
taxes

Amalendu Bhunia (2012) concludes that the EVA (Economic Value Added) and FCF (Free
Cash Flow) has been the best predictor of MVA (Market Value Added) in all the industries.
The CVA (Cash Value Added) is positioned in the second place in the list where it is observed
as next best predictor of MVA after EVA and FCF. CFO (Cash from Operations) occupies the
third position with significant association with MVA for 10 years. EBIT (Earnings before
Interest and Tax) is found to be significant in 7 industries out of 12 and emerged as fourth
best predictor jointly with FGV (Future Growth Value). TSR (Total Shareholder Return), and
RONA (Return on Net Assets) respectively occupy fifth and sixth position. NOPAT (Net
Operating Profit after Tax), EPS (Earning Per Share) and ROCE (Return on Capital
Employed) are found to be significant predictors in only 4 industries out of 12 surveyed while
EBITDA (Earnings before Interest, Tax and Depreciation & Amortization) and PE (Price
Earnings ratio) is reported as significant predictor in only three industries. EVA, CFO, CVA
and FCF emerged as best predictors of MVA on an overall basis.
Jayanth Rama Varma (1997) concludes that the key to better corporate governance in India
today lies in a more efficient and vibrant capital market. Of course, things could change in
future if Indian corporate structures also approach the Anglo-American pattern of near
complete separation of management and ownership.

27
Akinyomi Oladele John (2010) conclude that each of the identified variables, viz., pattern of
past dividends, the level of current earnings, current degree of financial leverage, availability
of alternative source of capital, liquidity constraints such as availability of cash, growth and
investment opportunities has a significant influence on dividend decision in Nigerian listed
firms.

A. K. Mishra (2006) conclude that the traditional view of stock splits as cosmetic transactions
that simply divide the same pie into more slices is inconsistent with the significant wealth
effect associated with the announcement of a stock split. However, the empirical evidence
confirms a negative effect on price and return of stock splits. The overall cumulative
abnormal returns after the split are negative. These results suggest that stock splits have
induced the market to revise its optimistic valuation about future firm performance, rejecting
signaling hypothesis to which splits convey positive information to markets. Hence, stock
splits have reduced the wealth of the shareholders. The results also show that presence of a
positive effect on volatility and trading volume following the split events, thus suggesting
that split events enhance liquidity.

S Fowdar et al (2007) deduce that current earnings, retained earnings and liquidity are among
the most significant motivators of dividend payout. Market capitalization rate per sector and
price- to-book value turns out to be statistically insignificant while debt to equity ratio turns
out to be positively related to dividend pay-out ratio which is in sharp contrast from the
implication of the current legislation in Mauritius.

Georgina Peters (2003) conclude that companies like Enron, Tyco and WorldCom all went on
buying sprees using their own high share price to finance the deals. Once that happens, he
says, even companies formerly managed for stability are in play. Either they have to get into
the game or they are likely to be taken over. Tightening up accounting regulations may
improve credibility in the short-term but does not address the critical issue of incentives. As
long as executives are judged – and rewarded – on the basis of shareholder value they will
find new ways to manipulate their share price. That means more corporate scandals are
inevitable.

28
Rotman School of Management (1998) concludes that a reduction in “worthwhile” R&D
helps immediate accounting earnings, at the expense of the firm’s future prospects. If the
market is indeed fixated on accounting earnings, we would expect to see high R&D firms
with depressed earnings and stock prices.

Sandra Wear (2011) concludes that regardless of the importance of defining an owner’s
versus a manager’s role, it’s still a fairly daunting task. The toughest hurdle to overcome is
recognizing the problem; then it comes about determining the solution, and lastly executing
on the defined plan. So communicate the plan, foster a culture that supports the owner-
management boundary and practice what you preach.

Selvam, M et al (2010) conclude that Corporate Restructuring has become a major

component in the financial and economic environment all over the world. Industrial
restructuring has raised important issues for business decisions as well as for public policy
formulation. Since 1991, Indian industries have been increasingly exposed to both domestic
and international competition and competitiveness. The companies started restructuring their
operations around their core business there being M & A. But M & A is an area of potential
good and harm in corporate strategy including manufacturing industry. Therefore, an attempt
has been made to analyze the security returns and to find out the net wealth increase or
decrease to the shareholders of acquiring firms. In India, there are totally 58
manufacturing companies which have undergone mergers and acquisitions during 2000, 2001
& 2002. Thirty percentage from the total population was taken as sample size (i.e.,
17 companies out of 58). The present study is mainly based on secondary data. The Market
Model and Market Adjusted Returns Model analysis are used as tools of analysis.

Leszczynska, Agnieszka (2012) indicate that the assessment was performed by independent
experts-shareholders. Global Reporting Initiative (GRI) standards and methodology served as
a point of reference. Findings – The results point to an evolution in sustainability reports.
Considering the reports prepared in 2005 and 2010, improvement in quality can be observed.
An in-depth analysis of those reports showed an increase in attention to detail of reporting in
the fundamental spheres, i.e. economic, environmental, and social. The author also highly
evaluated clarity and timeliness. However, important gaps were identified in respect of
inclusiveness, relevance of information, and neutrality. Shareholders found general usefulness

29
of sustainability reports insufficient. Originality/value – Previous studies on sustainability
reports aimed at evaluating sustainability development programs or directions in the
evolution of reports but their usefulness has not been examined. No one previously is
believed to have conducted a study of the quality of the reports published by multinational
corporations, with their evaluation from the point of view of shareholders. Therefore, this
paper provides a new insight into the study of sustainability reporting. Apart from
contributing to the debate about shareholder value, the paper confronts current sustainability
reports with their earlier versions.

Amitabh Gupta, Charu Banga (2010) conclude the following. The results gave five broad
factors viz., leverage, liquidity, profitability, ownership structure and growth. These factors
were then subjected to multiple regressions with dividend rate as the dependent variable. The
results of the regression show that leverage, liquidity, ownership structure and growth showed
expected signs whereas profitability did not show the expected sign. Two factors viz.,
leverage and liquidity were found to have a strong relationship with dividend rates of Indian
companies. While leverage was found to be negatively associated, liquidity was positively
related. One point worth mentioning here is that the results are drawn only from the analysis
of financial factors affecting the dividend policy of an Indian company. In practice some non-
financial factors such as foreign collaborators’ shareholding, attitude and behaviour of
management, company policies, etc may also have a bearing on the dividend.

Dr. Marcelo J. Rossi (2006) deduce that the relationship between strategy and value analysis,
far from being conceptual, is statistically significant and therefore it could be quantified. All
strategic performance variables were significantly related to M/B, shareholders’ annual
returns and shareholders’ abnormal returns, indicating collateral value creation processes to
other stakeholders different than shareholders. Findings also showed that industries present
different degrees of differentiation within competitors in determinants and the same
differences were accounted among sectors, industry groups and industries. When the
prediction power of determinants was assessed, the portfolio of top performers companies
were able to explain shareholders’ abnormal returns, being this fact confirmed by the
empirical evidence. Implications of this study were related to strategy modeling, corporate
performance measurement, market research and portfolio management. Future research was
pointed in topics like customers’ value creation, social responsibility and corporate value,

30
determinants differentiation and industries’ regulation, abnormal returns as value creation
measurement standard and quality of management.

Walid Ben-amar and Paul Andre (2006) investigate the relationship between ownership
structure and acquiring firm performance. A large proportion of Canadian public companies
have controlling shareholders (families) that often exercise control over voting rights while
holding a small fraction of the cash flow rights. This is achieved through the concurrent use
of dual class voting shares and stock pyramids. Many suggest that these ownership structures
involve larger agency costs than those imposed by dispersed ownership structures and that
they distort corporate decisions with respect to investment choices such as acquisitions. We
find that average acquiring firm announcement period abnormal returns for our sample of 327
Canadian transactions are positive over the 1998–2002 period.

We do not find that separation of ownership and control has a negative impact on
performance. These results suggest that, contrary to other jurisdictions offering poor minority
shareholder protection or poor corporate governance, separation of control and ownership is
not viewed as leading to value destroying mergers and acquisitions, i.e., market participants
do not perceive families as using M&A to obtain private benefits at the expense of minority
shareholders. We do find a non monotonic relationship between ownership level and
acquiring firm abnormal returns. Ownership of a majority of the cash flow rights has a
negative impact on announcement returns. This is consistent with the view that large
shareholders may undertake less risky projects as their wealth invested in the firm increases.

K S Chalapati Rao, Atulan Guha (2006) conclude that Ownership structure has important
implications for corporate governance and protection of minority shareholders’ interest.
While, following the East Asian crisis, family managements have come under severe
criticism; subsequent empirical exercises suggest that they do have certain merits. For
example, their estimate for East Asia places the share of group‐affiliated one in listed
companies at 70 percent. These ranged from expropriation of minority shareholders,
tunneling, greater possibility of inefficient investments, unrelated diversification, etc. Much
of this evidence was, however, indirect. On the basis that deviations of voting from cash‐flow
rights through the use of pyramiding, cross‐holdings, and dual‐class shares, are associated

31
with lower market values, it was concluded that the risk of expropriation is the major
principal‐agent problem for public corporations in East Asia.

Ken Jensen(2013) infer that to solve the world’s economic crisis, we need brave CEOs and
leaders to step up and declare, “I don’t care what the share value will be for the next two
years. We might not make a profit during this period. But we are going to focus all our
resources on product research and development with the goal to create the best product the
world has ever seen. We’re here to change the world! We are fully committed to delivering
value and a return on investment to our shareholders. Yet it may not be in the next 30 days or
even the next three quarters. I am asking our investors to look at us with a long-term view. I
am asking them to stand by us and risk a much larger return on their investment if they will
agree to fund the innovation required to develop a market-changing product.

Parul Bhatia (2010) concludes that empirical studies had witnessed that the DPS has a
positive significant impact on the determinants of share prices. But the amount of profit of the
company and retained earnings after declaring the dividend do affect the stock prices.
Empirical studies have evidence that the dividend per share and book value (retained
earnings) do have the positive significant correlation with the market price of the share. The
analysis also reveals that it cannot be generalized performance of economy on the sector on a
whole. The performance of a company matters rather than a sector.

N Viswanadham and Poornima luthra (2005) conclude that the study is significant in
extending the measurement of shareholder value using Strategic Profit Model (SPM) and
Economic Value Added (EVA) of listed third party software providers. Reducing fixed assets,
accounts receivables and operating expenditure have been identified as areas that require
attention by the companies in this industry.

William F. Coffin (2008) concludes that one way to provide shareholders regular distributions
is in the form of stock splits and stock dividends. If executed properly, stock splits/dividends
can be a powerful tool to increase the liquidity of a stock, which in turn lowers equity cost of
capital and maximizes shareholder value.

Sujata Kapoor (2009 concludes that in spite of the fact that managers view dividend decisions
as important it cannot be concluded that market rewards a carefully managed dividend policy
32
with higher share price. In India financial managers typically view dividend decisions as an
important part of their job. The typical firm does not follow a residual policy nor leave its
dividend payout to chance. Rather, firms manage their dividends as proposed by Linter’s
model and partially follow stable dividend policy.

Ramezani et al (2001) with the help of multivariate analysis deduce that while shareholders
value (as measured by Jensen’s Alpha) generally rises with earnings and sales growth, there
exists an optimum point beyond which further growth destroys shareholder value and
adversely impacts profitability. Moreover, the analysis shows that firms with moderate
growth in earnings (sales) show the highest rates of return and value creation for their
owners, supporting Fuller and Jensen (2002) warnings about the “dangers of conforming to
market pressures for growth”.

Financial Week (2009), South Africa reports on the return on equity/cost of equity (Roe/Ke)
ratio in McGregor BFA's financial table of companies in South Africa. It states that dividing
Key into the Roe calculates the company's market value to book value which is an indicator
of value creation. If the ratio has a value of less than one, the management is perceived as a
destroying value. Meanwhile, the table shows that only 145 companies listed on the JSE Ltd.
are perceived to create value for shareholders.

All in all, we notice that there are no contemporary studies which focus on the analysis of the
determinants of shareholders value in terms of specific variants of profits in the Indian
context done of leading (large) listed companies. In this study, shareholders value is
measured as Market Value Added (MVA), i.e., the difference between M, i.e., the Market
Value of the Equity Shares and B, i.e. The Book Value of the Equity shares of a Company
(James H. McTaggart, Peter W. Kontes, and Michael C. Mankind (1994), Marakon &
Associates, 1978, Stewart, 1991, p.153)

The important factors which are studied in this research, i.e., the profits of the business,
different variants of profits, viz., PBDIT (Profits before Depreciation, Interest and Taxes.),
PAT (Profits after Taxes). Cash Profits as indicated through Cash from Operations (CFO) and
Free Cash Flows (FCFs). Internationally, Free Cash Flows and Cash from Operations have
been commonly agreed as leading liquid indicators of profits a business firm makes in terms
of cash profits. Key profitability ratios in relation to Sales are Gross Profit Ratio and Net
33
Profit Ratio. Key Profitability Ratios in relation to the Investment made by a Business are
Return on Capital Employed or Return on Investment (ROI), Return on Net worth (RONW)
and the like. But which of these has a serious causal relationship with shareholders value is a
question which is not completely answered. This research intends to study this gap. The
degree of influence that each of the above factors has on the shareholders value is studied
comprehensively and analyzed thoroughly in this research.

CHAPTER III

CONCEPTUAL FRAMEWORK OF THE STUDY

34
CONCEPTUAL FRAMEWORK OF VALUATION OF A BUSINESS

The term ‘valuation’ implies the task of estimating the worth/value of an asset, a security or a
business. The price an investor or a firm (buyer) is willing to pay to purchase a specific
asset/security would be related to this value. Obviously, two different buyers may not have
the same valuation for an asset/business as their perception regarding its worth/value may
vary; one may perceive the asset/business to be of higher worth (for whatever reason) and
hence may be willing to pay a higher price than the other. A seller would consider the
negotiated selling price of the asset/business to be greater than the value of the asset/business
he is selling.

Evidently, there are unavoidable subjective considerations involved in the task and process of
valuation. Inter-se, the task of business valuation is more awesome than that of an asset or an
individual security. In the case of business valuation, the valuation is required not only if
tangible assets(such as plant and machinery, land and buildings, office equipments, and so
on) but also of intangible assets(like goodwill, brands, patents, trademark and so on) as well
as human resources that run/manage the business. Likewise, there is an imperative need to
take into consideration recorded liabilities as well as unrecorded/contingent liabilities so that

35
the buyer is aware of the total sums payable, subsequent to the purchase of a business. Thus,
the valuation process is affected by subjective considerations. In order to reduce the element
of subjectivity, to a marked extent and help the finance manager to carry out a more credible
valuation exercise in an objective manner, the following concepts of value are explained
below:

Book Value

The Book Value of an asset is defined as the amount at which an asset or a security is shown
in the balance sheet of a firm. Normally, the book value of a physical asset is equal to the
initial acquisition cost of an asset less accumulated depreciation. Accordingly, this method of
valuation of assets is as per the going concern concept of accounting. In other words, book
value of an asset shown in balance sheet does not reflect its current sale value.

Book Value of a business however refers to the total book value of all valuable
assets(excluding fictitious assets, such as accumulated losses and deferred revenue
expenditures, like advertisement, preliminary expenses, cost of issue of securities not written
off) less all external liabilities (including preference share capital). It is also referred as net
worth.

Market Value

When compared to book value, market value refers to the price at which an asset/security can
be sold in the market.

Market Value of a business refers to the aggregate market value (as per the prevailing market
price) of all equity shares outstanding. The Market Value Concept of Business is applicable
to only to listed companies.

Intrinsic Value

The intrinsic value of an asset/security is equal to the present value of incremental future cash
inflows which are be obtainable after the acquisition of an asset, discounted at the appropriate
required rate of return(applicable to the specific asset intended to be purchased). It represents
the maximum price the buyer would be willing to pay for such as asset. The principle of
valuation based on the discounted cash flow approach (economic value) is used in capital
budgeting decisions.

36
In case of a business valuation based on its intrinsic value, the value of it is equal to the
present value of the future incremental cash inflows after taxes, likely to be obtained by the
firm intending to purchase it, discounted at the suitable discount rate adjusted for risk, which
may be relevant to the target/acquired business. The intrinsic or the economic value shall
thus be the maximum price at which the business can be sold to an acquiring firm.

IMPORTANT CONCEPTS RELATED TO VALUATION OF COMPANIES

The different methods of valuation of companies with focus on valuation from the point of
view of equity shareholders observed below. These approaches may be viewed as providing
a set of values, pertinent to different needs, depending on the circumstances. Most important
methods are i) Asset Based Method ii) Earnings Based Method iii) Market Value Based
Method.

ASSET BASED METHOD

Asset based approach aims at calculating the value of net assets from the perspective of
equity shareholders. However, on what basis, should the assets be valued is a mute question
which is important to be addressed.

The key issue to be resolved here is whether the assets should be valued at book, market, and
replacement or liquidation value. Popularly, they are valued at the book value.

Thus, the value of net assets is in other words referred as net worth or equity/shareholders
funds. Assuming this value to be positive, it can be calculated as the value available to the
equity shareholders after the payment of all external liabilities. Net assets per share can be
obtained, dividing net assets by the number of equity shares issued and outstanding. Thus,

Net Assets per share = Net Assets/No. of equity shares outstanding

EARNINGS BASED METHOD

This method is basically based on the concept that the value of a business should be related to
the capacity of the firm earning future profits or cash flows. This approach focuses thus on
the future earning capacity of the business which was not considered in the previous method.
Profits can be indicated in the sense of accounting as well as financial management.
Accordingly, there are two kinds of this approach: i) earnings measure on accounting basis
and ii) earnings measure on cash flow basis.

37
 i) Earnings measure on accounting basis-Capitalization Method: As per this
method, the earnings approach of business valuation is based on two major
parameters, that is, the earnings of the firm and the capitalization rate applicable
to such earnings(given the level of risk) in the market. Earnings, in the context of
this method, are the normal expected annual profits. Normally, to smoothen out
the fluctuations in earnings, the average of past earnings (say, of the last three to
five years) is computed.

Apart from averaging, there is an explicit need for making adjustments, to the
profits of the past years, in extraordinary items (which are not likely to occur in
future), with a view to arriving at credible future maintainable profits. The
notable examples of extraordinary/non-recurring items include profits from the
sale of land, losses due to sale of plant and machinery, abnormal loss due to major
fire, theft or natural calamities, substantial expenditure incurred on the voluntary
loss due to major fire, theft or natural calamities, substantial expenditure incurred
on the voluntary retirement scheme (not to be repeated) and abnormal results due
to strikes and lock-outs of major competing firm(s). Obviously, their non-
exclusion will cause distortion in determining sustainable future earnings.

Above all, it will be useful to understand the profile of the business, focusing on
identifying the major growth and income drivers. Are such drivers likely to
continue in future years? If not, projected profits need to be discounted. Finally,
additional income expected in the coming years-say, due to launch of a new
product-should be considered. In brief, the valuer should try to familiarize himself
or herself with all major factors/events that had affected the profits of the business
in the past year(s) and are likely to affect them in the future years too.

Price Earnings Ratio (P/E Ratio): The P/E Ratio (also known as the P/E Multiple) is the
method most widely used by finance managers, investment analysts and equity shareholders
to arrive at the market price of an equity share. The application of this method primarily
requires the determination of earnings per equity share (EPS). The EPS is calculated as per
the equation 1 given below:

38
EPS = Net Earnings Available to equity shareholders during the period/Number of equity
shares outstanding during the period. Equation 1

The net earnings/profits are after deducting taxes, preference dividend, and after adjusting for
exceptional and extraordinary items (related to both incomes and expenses/losses) and
minority interest. Likewise, appropriate adjustments should be made foe new equity issues or
buybacks of equity shares made during the period to determine the number of equity shares.

The EPS is to be multiplied by the P/E Ratio to arrive at the market price of equity share
(MPS).

This is mentioned in the equation 2 given below:

MPS = EPS * P/E Ratio Equation 2

A high P/E Multiple is suggested when the investors are confident about the company’s future
performance/prospects and have high expectations of future returns; high P/E ratios reflect
optimism. On the contrary, a low P/E Multiple is suggested for shares of firms in which
investors have low confidence as well as expectations of low returns in future years, low P/E
ratios reflect pessimism.

The P/E ratio may be derived given the MPS and the EPS with the equation 3 given below

P/E ratio = MPS/EPS Equation 3

The future maintainable earnings/projected future earnings should also be used to determine
EPS. It makes economic sense in that investors have access to future earnings today. There
is a financial and economic justification to compute forward or projected P/E ratios with
reference to projected future earnings, apart from historic P/E ratios. This is all the more true
of present businesses that operate in a highly turbulent business environment. Witness in this
context, the following: “In a dynamic business world, a firm’s past earnings record may not
be an appropriate guide to its future earnings. For example, past earnings may have been
exceptional due to a period of rapid growth. This may not be sustainable in the future...”1

The P/E ratios should however, be used with caution as the published P/E multiples are
normally based on the published financial statements of corporate enterprises. Obviously,
earnings are not adjusted for extraordinary items and therefore, to that extent may be

1
Ramanujam, S. Mergers et al, Tata McGraw-Hill Publishing Co., New Delhi, 2000, p.272.
39
distorted. Besides, all financial fundamentals are often ignored in published financial data.
Finally, they reflect market sentiments, moods and perceptions. For instance, if investors are
upbeat about retail stocks, the P/E ratios of these stocks will be higher to reflect this
optimism. This can be viewed as a weakness as well, in particular when markets make
systematic errors in valuing entire sector. Assuming retail stocks have been overvalued, this
error has to be built into the valuation also2.

In spite of these limitations attributed to the P/E ratio, it is the most widely used measure of
valuation. The major plausible reasons are: i) it is intuitively appealing in that it related price
to earnings. ii) It is simple to compute and is conveniently available in terms of published
data. iii) It can be a proxy for a number of other characteristics of the firm, including risk and
growth3.

ii) Earnings Measure on Cash Flow Basis (DCF Approach): The P/E Approach,
as a measure of valuation of equity shareholders wealth, is essentially based on
accounting profits/earnings. Normally, such earnings are either of the current year
or prospective earnings of the next year. The single year earnings can be
camouflaged by either recording revenues earlier or by postponing expenses.
Ideally, valuation should be based on the likely earnings of all the future years.
The cash flow approach is superior to the accounting profit approach. The
discounted cash flow method is also driven by the firm’s cash flow generating
ability in future years.

Discounted Cash flow approach is used to evaluate capital expenditure proposals in terms of
their potential for creating net present value for the firm. The DCF approach is applied to the
entire business, which may consist of individual capital budgeting projects. Accordingly, the
value of business/firm is equal to the present value of expected future cash flows (CF) to the
firm, discounted at a rate that reflects the riskiness of the cash flows (K0). The following
equation 4 explains the same.

∞
Value of Firm0 = ∑ CF to Firm

2
Damodaran, Aswath, Investment Valuation, John Wiley & Sons, New York, 1996, p. 291,

3
Damodaran, Aswath, Investment Valuation, John Wiley & Sons, New York, 1996, p. 291,

40
 t =1 (1+k0) t ……………………. Equation 4

To use the DCF approach, accounting earnings (as shown by the firm’s income statement) are
to be converted to cash flow figures as shown in Format 1 given below:

Format 1 - Computation of Cash Flows

After tax operating earnings

Plus: Depreciation

Plus: Other non-cash items (say, amortization of non-tangible asset, such as patents,
trademarks, etc and loss on sale of long-term assets).

However, analysts/valuers prefer to discount expected future free cash flows (FCFF) to
operating cash flows (as per Format 1 above) for the purpose of firm valuation. The reason is
that firms, in general, are required to make investments in long-term assets as well as in
working capital to generate/earn future cash flows; hence, the need for adjusting operating
cash flows to free cash flows.

Format 2 below shows computation of operating free cash flows (OCF) for the purpose of
valuation of a business.

Format 2 - Determination of Operating Cash Flows to Firm (OFCFF)

After tax operating earnings*

Plus: Depreciation, amortization and other non-cash items

Less: Investments in long-term assets

Less: Investments in operating net working capital**

= Operating Free Cash flows to Firm (OFCFF)

___________________________________________________________________________
___

*Exclusive of Income from (i) marketable securities and non-operating investments and ii)
extraordinary incomes or losses.

**Addition is to be made in the event of decrease in net working capital.

41
The Free Cash Flow (FCFF) is the legitimate cash flow for the purpose of business valuation
in that it reflects the cash flows generated by a company’s operations for all the providers
(debt and equity) of its “capital” 4. The FCFF is a more comprehensive term as it includes
cash flows due to after tax non-operating income as well as adjustments for non-operating
assets.

Format 3 below exhibits the procedure of determining FCFF:

Operating Free Cash flows (as per Format 2)

Plus: After tax non-operating income/cash flows*

Plus: Decrease (minus increase) in non-operating Assets, say, marketable securities.

= Free Cash Flows to Firm (FCFF)

___________________________________________________________________________
___

*Non-operating income (1-tax rate).

Since the FCFFs are available to all capital providers of a corporate enterprise, the discount
rate to be applied to such cash flows should be indicative of the opportunity cost of the funds
made available by them, weighted by their relative contribution to the total capital of a
corporate enterprise. The opportunity cost is equivalent to the rate of return the investors
expect to earn on other investments of equivalent risk. The cost to the firm equals the
investors’ cost less any tax benefits received by the company itself (say, tax advantage on the
payment of interest)5 plus any tax payments required to be made. (Say, dividend payment tax.

4
Copeland, Tom, et al, Valutaion—Measuring and Managing the Value of Companies, John Wiley & Sons, New
York: 2000, p. 134.

5
Copeland, Tom, et al, Valutaion—Measuring and Managing the Value of Companies, John Wiley & Sons, New
York: 2000, p. 134.

42
The Value of the firm is given by Equation 5 below:

∞
Value of Firm0 = ∑ FCFF to all investors

t =1 (1+k0) t ……………………. Equation 5,

Thus, the value of a firm is the present value of FCFF through infinity. The equity valuation
can be deduced by subtracting the total external liabilities (debt holders and preference
shareholders) from the value of the firm. Alternatively, the value of equity can be obtained,
straight away by discounting future free cash flows available to equity-holders, (FCFE), after
meeting interest, preference dividends and principal payments, the discount rate being rate of
return required by equity investors, that is, the cost of equity (Ke).
∞
Value of Equity0 = ∑ FCFE to equityholderst

t =1 (1+k0) t ……………………. Equation 6

Thus, there are varying connotations of FCFF to serve different needs. However, while the
valuation of a firm and equity use different definitions of FCFF as well as of discount rates,
they provide identical answers as long as the same set of assumptions is used in both the
equations.

MARKET VALUE BASED METHOD

The market price, as shown in the quotations of the stock exchanges, is another method of
calculating the value of a business. The market price of a share can be taken as either i)
twelve months average of the stock exchange prices or ii) the average of the high and low
values of shares during a year. Alternatively, some other fair and equitable method of
averaging (on the basis of the number of months/years) can be worked out. The justification
of market value also as an approximation of the true worth of a company is based on the
assumption that the market quotations by and large indicate the consensus of investors as to

43
the company’s earning potentials and the corresponding risk. This method is widely used in
determining value, especially of large listed firms.

One of the issues here relates to the fact that the market value of a company is influenced not
only by financial fundamentals but frequently also by speculative factors. As a result, this
value can change abruptly due to speculative influences, market sentiments and personal
expectations. Market makers as well as other ‘willing buyers or sellers’ (interested in
purchases or sales) can at times significantly influence these prices. Another limitation of
this approach is that this approach cannot be applied if the shares are unlisted or are not
actively traded.

Apart from the limited applicability of this method only to listed corporate enterprises, whose
shares are actively traded, the valuation of a business is not in tune with the going concern
concept. Nevertheless, it may be/is of immense usefulness in deciding swap ratios of shares
in merger decisions. In fact, the market prices of the two companies can be the objective of
the decision. Alternatively, a certain percentage of premium, above the market price maybe
offered as an inducement to the shareholders of the acquired company to convince them to
agree to sell their shares or to make them agree to the merger decisions. History is replete
with many corporate takeovers which have resorted to this phenomenon. Dr. Reddy
Laboratories Ltd, purchasing a German pharmaceutical company resorted to this. Ranbaxy
Laboratories Ltd of India was purchased by Daichi-Sankyo of Japan at a premium price in the
year 2008.

FAIR VALUE METHOD

The fair value method is not an independent method of share valuation like those discussed
above. This method uses the average/weight age average or one or more of the above
methods. Since this method uses the average concept, its virtue is that it helps in
smoothening out wide variations in estimated valuations as per different methods. In other
words, this approach provides, in a way, the ‘balanced’ figure of valuation.

In general, this method has limited application for business/share valuation. For instance, this
method of valuation of shares had been used till the early 1990’s by the erstwhile Controller
of Capital Issues (CCI) in India, for fixing the price of new equity issues. In case, the equity

44
shares were to be issued at a premium, the amount of premium was based on the CCI
guidelines.

To sum up, no one method is appropriate for all circumstances/situations/requirements.

Therefore, it is important to recognize that the different methods are based on different
assumptions and depending on the circumstances, some methods may be more appropriate
than others. For instance, where there is paucity of information about profits, say (i) in the
case of new companies whose accounts do not serve as a guide to future profits, (ii) in the
case of companies operating at a loss with no prospects of earning profits in the near future
and (iii) in the case of companies having unreliable statistics of profits owing to factors such
as disruption of business, the net asset method of valuation seems would be more appropriate.
In normal situations, the DCF approach (based on the Free Cash Flows) would be suitable. In
the event of wide variations in the valuations as per these two methods, the fair value method
may be used. In fact, it is useful for the finance manager/investor/valuer/analyst to know a
range of values from various perspectives.

In recent years, a number of new approaches/techniques/methods to measure value (with

focus on shareholders) have been developed and practiced. The two major methods are
Market Value Added (MVA) and the Economic Value Added (EVA). These are discussed
below as follows:

MARKET VALUE ADDED METHOD (MVA)

The MVA approach measures the change or the difference in the Market Value of the
Company’s equity with the Book Value of the Equity Capital. This was originally developed
by Marakon Associates, an international consulting firm; the basic idea behind in designing a
value based management framework was to delineate four key steps in the approach the first
among which is to specify the financial determinants of value. In this context, Marakon
approach states that value or wealth (to the shareholders) is measured by the difference
between the difference between the market value and the book value of a company’s equity.
The book value of equity, B, measures approximately the capital contributed by the
shareholders, whereas the market value of equity, M, reflects how productively the firm has
employed the capital contributed by the shareholders, as assessed by the stock market.
Hence, the management creates value for shareholders if M exceeds B, decimates value if M

45
is less than B, and maintains value if M is equal to B. (James M. McTaggart, et al.,, 1994,
Stewart, 1991, p.153). This was equally emphasized by Stewart in studies in 1991.

The Book Value of equity refers to all of the items that are not solvency issues for a company.
According to Stewart, the amount a company has added to, or subtracted from its
shareholders investment in the determinant of Market Value (1991, p.97). If a company’s rate
of return exceeds it cost of capital, the company will sell on the stock markets with a
premium compared to the original capital and this is what determines if the company has
succeeded in creating Market Value (Makelainen, 1998, p.4). A positive or negative MVA
depends upon the ratio of rate of return to cost of capital, which is similar to EVA. A positive
or negative EVA is the same as positive or negative MVA (Stewart 1991, p.153).

MVA = PRESENT VALUE OF ALL FUTURE EVA

The relationship between EVA and MVA has a strong bearing on valuation shown in the
formula below:

MARKET VALUE OF EQUITY = BOOK VALUE OF EQUITY + PV OF ALL FUTURE

EVA

The MVA rate of return concept is similar to that of the yield on a bond. When a bond is
issued with a yield greater than the current market rate then the bond will sell at a premium
(there is positive EVA and so the bond will sell at positive EVA). If the yield of a bond is
lower than the current market rate, then the bond will sell at a discount (there is negative EVA
and so the bond will sell at negative EVA). Since the valuation formula given above is
always equal to DCF and NPV, and then the right estimate of value is always obtained
regardless of what the original book value of equity is.

Though the concept of MVA is generally used in the context of equity investment (and
therefore, having greater applicability for equity shareholders), it can also be adapted to
measure the value from the perspective of all invested funds (i.e., preference capital and debt
(M.Y.Khan and P.K. Jain, 2014).

The MVA approach cannot be used for all types of firms. It is applicable to only companies
whose share prices are available in the stock market. In this sense, this approach is confined
to listed companies more so to those whose shares are actively traded. Besides, the value

46
provided by this method may indicate wide changes at times, depending on the state of the
capital market/stock market in the country.

ECONOMIC VALUE ADDED (EVA)

The EVA method is based on the past performance of the corporate enterprise. The
underlying economic principle in this method is to determine whether the firm is earning a
higher rate of return on the entire invested funds than the cost of such funds (measured in
terms of the weighted average cost of capital, WACC). If the answer is positive, the
company’s management is adding to the shareholders value by earning extra for them. On
the contrary, if the WACC is higher than the corporate earning rate, the company’s operations
have eroded the existing wealth of its equity shareholders. In operational terms, the method
attempts to measure economic value added (or destroyed) for equity shareholders, by the
firm’s operations in a given year.

Since WACC takes care of the financial costs of all providers of invested funds in a corporate
enterprise, it is imperative that operating profits after taxes (and not net profits after taxes)
should be considered to measure EVA. The accounting profits after taxes, as reported by the
income statement, need adjustments for interest costs. The profits should be the net operating
profits after taxes and the cost of funds will be the product of the total capital supplied
(including retained earnings) and WACC.

CONCEPTUAL FRAMEWORK OF SHAREHOLDER VALUE MAXIMIZATION

While shareholders value is measured from the point of view of shareholders so as to assess if
the company is generating adequate value to their investment or not, the above analysis and
historical concepts point to the fact that MVA on a long term is one of the most plausible
indicator of a shareholder value. Thus, if shareholders’ wealth is to be maximized, not only
the share price in the near term should be aimed to be kept high, but the long term impact of
the short-term decisions like Working Capital Decisions, Pricing Decisions, Capital
Budgeting Decisions, Cost of Capital Decisions, even decisions like employee compensation
and rewards have to be viewed from their long term impact on shareholder value
maximization and then made in the light of the same. The Book Value of an equity share
indicates the present worth of a share invested in a business as found the financial statements.
With all its limitations, it is still a strong indicator as to how much money has been accrued
by the company that belongs to the shareholders collectively and individually. The Market
47
Price of a share too, more particularly on a long term reflects how effectively a firm is able to
invest the funds belonging to the shareholders and creating value for them, notwithstanding
internal and external constraints encountered by a business.

EFFICIENT CAPITAL MARKETS: DISCUSSION ON THE EFFICIENT MARKET

HYPOTHESIS (EMH): IT’S ROLE AND ITS BASIS FOR SHAREHOLDER VALUE
DETERMINATION

The Efficient Market Hypothesis (EMH) is based on the assumption that security prices
accurately reflect available information and respond rapidly to new information as soon as it
becomes available. This Efficient Market Theory comes in three flavours, relating to
different ideas of “available information”. The weak form (or randon walk theory) says that
prices reflect all information in the past prices. The semi strong form says that prices reflect
all publicly available information, and the strong form holds that prices reflect all acquirable
information.

The efficient market idea should not to be misunderstood. It does not say that there are no
taxes or costs; it does not say that there are not some clever people and some stupid people.
It merely implies that competition in capital markets is very tough – there are no money
machines or arbitrage opportunities, and security prices reflect the true underlying values of
assets.

Extensive empirical testing of the EMH began around 1970. By 2004, after 30 years of work,
the tests have uncovered dozens of ways to make easy money. Unfortunately, the work does
not translate into dozens of ways to make easy money. Superior returns are elusive. For
example, only a few mutual fund managers can generate superior returns for a few years in a
row, and then only in small amounts. Statisticians can beat the market, but real investors
have a much harder time of it.

DEGREE OF EMPIRICAL EVIDENCE AND EXCEPTIONS TO THE EMH

The Efficient Market Theory is strong, but no theory is perfect; there must be exceptions.

Some apparent exceptions could simply be coincidences, for the more that researchers study
stock performance, the more strange coincidences are likely to be revealed. For example,
48
there is evidence that daily returns around new moons have been roughly double those around
full moons.

Some researchers believe that the EMH ignores important aspects of human behavior. For
example, psychologists find that people tend to place too much emphasis on recent events
when they are predicting the future.

During the dot com boom of the late 1990s, stock prices rose to astronomic levels. The
NASDAQ Composite index rose 580% from the beginning of 1995 to its peak in March 2000
and then fell by nearly 80%. Such exceptional phenomena were not confined to the United
States. For example, stock prices on Germany’s Neuer Market rose 1,600 percent in the three
years from its foundation in 1997, before falling by 95% in October, 2002.

In the late 1980s, there was a surge in the prices of Japanese stock and real estate. At one
point, the land that the Imperial Palace stands on in Central Tokyo was worth the same as all
the land in California or in the whole of Canada.

May be such extreme price movements can be explained by standard valuation techniques.
However, others argue that stock prices are liable to speculative bubbles, where investors are
caught up in a scatty whirl of irrational exuberance. But, why don’t hard-headed professional
investors bail out of the overpriced stocks? Perhaps they would do so if it was their money at
stake, but maybe there is something in the way their performance is measured and rewarded
that encourages them to run with the herd.

Such unresolved issues exist. Much more research is needed before we have a full
understanding of why asset prices go sometimes out of line with what appears to be their
discounted future payoffs.

MACRO-ECONOMIC FACTORS AND THEIR IDEAL INFLUENCE ON

SHAREHOLDER VALUE

The following paragraphs also delineate as to how the behavior of some of the macro
economic factors ideally impact the environment surrounding capital markets and finally
shareholder value.

INTEREST RATES AND THEIR IDEAL IMPACT ON CAPITAL MARKETS, ECONOMIC

ENVIRONMENT AND SHAREHOLDERS VALUE:

49
Determinants

Changes in interest rates structure depend on reasons that are both internal and external to
financial markets:

1. Different types of interest rate are linked and influence each others, so that the
functioning of the financial markets and their international relationships explain a good deal
of interest rate fluctuations.

2. Economic performance, perspective and expectations of potential loan receivers as well

as in the overall economy play an important role.

To keep things easy, we could say that interest rates are determined in negotiations, which
are more or less public, binding a larger or narrower number of contravenes more or less
depending on publicly available benchmark rates.

In a sentence, interest rates are set within institutional agreements.

Central bank policy is one of the most powerful factors impacting on these agreements,
for example through the instrument of direct determination of official discount rate or the rate
for refinancing operations.

An increase of money offered in the interbank market by the central bank is conducive to
a fall in the interbank rate, upon which many contracts are based.

To the extent the Ministry of Finance influences the interest rates on its own bonds, it
provides an important reference point for the economy.

Since for many banks the risky commercial loans to firms are alternative to safe
Government Bonds, there are paradoxically situations in which the interest rate policy in the
hands of the Government not less than of the central bank.

International tendencies exert an important influence on domestic conditions as well,

since financial markets are now global in scope and there is a growing co-operation among
central banks.

50
 Still, domestic commercial bank policies say the last words on loan agreements and
conditions.

In general, an increase of interest rates may be provoked by the following factors

alternatively or cumulatively:

1. An anti-inflationary policy of the central bank, based on restrictions to the growth of the
nominal money supply and on rising discount interest rate;
2. A policy by the central bank aimed at revaluating the currency or defending it from
devaluation,
3. An attempt of the government of covering public deficit by issuing more bonds in an
unwilling market.
4. An attempt of banks of widening their margins, possibly as a reaction to losses,
5. Any increase in other interest rates, also foreign rates arisen for whatsoever reason.

By contrast, a fall in interest rates may be justified especially by the following reasons:
1. An expansionary policy of the central bank,
2. the requests of industrialists and trade unions for cheaper money in front of a crisis,
3. A loose monetary policy due to a commitment to a fast export-led growth;
4. At the end of an inflationary phase;
5. the relaxation of the need for defending the exchange rate.

Impact on other variables

The traditional effects on an increase of interest rates are, among others, the following:
1. a fall in stock exchange and in the value of other assets (as private and Government
bonds or houses and real estate);
2. A fall in profitability of firms;
3. A fall in private investment;
4. A fall in consumption credit;
5. An inflow of foreign capital for buying bonds;
6. An upward pressure on exchange rate;
7. A larger public expenditure to pay for a previously cumulated public debt, whose burden
might lead to reduction in other chapters in public expenditure;
8. A narrower disposable income for households having a large debt taken at variable rates;

51
9. A larger disposable income for households that have lent to others at variable rates (e.g.
they own government bonds with variable rates);
10. A redistribution of income from debtors to lenders (in the part of debt that has variable
rates).

If the rate is kept higher for a longer period of time, also newly agreed fixed rate
instruments will adjust up.

Still, the general environment in which the rise takes place is crucial, since such effects
can be completely absorbed by other (more powerful) forces. A booming economy might
absorb a small increase in the interest rates possibly well.

Similarly, a non-linear relationship could be worth considering between the size of rate
increase and the differentiated effects on real and financial markets.

In fact, a small change in the official discount rate might arguably have no real effect at
all, while triggering substantial echos on financial markets.

By contrast, a large and abrupt increase in general interest rates can have devastating
effects on crucial real variables, exerting a depressing pressure on GDP and the economy at
large. In particular, if prices in the real estate (including housing) market and Treasury bonds
are falling, their value as collateral for loans would be reduced. The credit crunch would
squeeze private investment. If the business environment is such that the State begins to delay
due payments to firms and has difficulties in re-finacing its debt (with some risk of default,
even if just in long term perspective) banks might be compelled to reduce credit for current
business transactions across the supply chain.

A chain of bankruptcies would close down plants, select the surviving firms, and
reduce employment. At the local scale, entire neighbor hoods and towns would economically
collapse, with empty buildings and dismissed industrial estate, looking for a future urban
regeneration.

The effects will be spread unevenly across industries, with some being much more
vulnerable. For instance, there is a strong relationship between interest rates and real estate
growth or fall, since all sides of the housing and non-residential market usually leverage debt
(the purchaser but also the producer of the new real estate). Many sales are inter-linked, with
52
a purchase made by owners that are able to sell their asset and add only the difference (or
extract it, depending on the difference in prices between the two sales), which further
contributes to the high sensitivity of the sector to interest rates.

Long-term trends

Interest rates fluctuate over time with an historical ceiling, i.e. a maximum level. Even though
in high-inflation periods the nominal interest rate can reach extremely high levels, for long
decades a ceiling of up to 10-11% is a rule for many countries.

Nominal interest rates have a minimum floor of zero.

INFLATION RATE AND ITS IDEAL IMPACT ON CAPITAL MARKETS,

ECONOMIC ENVIRONMENT AND SHAREHOLDERS VALUE:

Simply put, inflation is a rise in prices of several items over a period of time. It is measured
through various indices and each provides specific information about the prices of items that
it represents. The index could be the Wholesale Price Index (WPI) or the Consumer Price
Index (CPI) for specified categories of people like agricultural workers or urban non-manual
employees. Each of the indices is created in a specific manner with a certain year as the base
year and they consider the price change over a year.

To tame inflation, the government usually hikes interest rates. This tends to make debt
instruments attractive relative to equities as the former carry a lower risk (small savings
instruments are risk free as they are guaranteed by the government). This results in some
amount of investments shifting from equity to debt.However, high inflation is not always bad
and low inflation need not always be good for equity markets, as the impact will differ for
companies and sectors across different time horizons. The first thing to consider is the items
where prices are rising. For example a rise in oil prices will impact a wide range of items
from food products to those that require transportation.

An index used for measuring inflation comprises several items having different weightage
and hence the index moves according to the price changes in these items. For an individual,
the various quoted price indices are usually not an exact measure of the inflation that they are
witnessing because their spending will not match exactly with the inflation index
composition. More important, the consumers' expenditure basket will not be adequately

53
represented by a price index because items like education fees or various services that they
avail of are usually not a part of the price index.

A rise in prices of several items means that the input prices for production of various goods
and services are rising. In these cases market analysts and fund managers will always
consider the net impact on the margin of the entity that they are tracking.

While there might be an increase in the input prices, it has to be considered in the backdrop
of the company's ability to pass on the price hike to the end-user. If a company is able to
sustain its profit margin despite high inflation, the stock price is likely to hold. If the high
inflation sustains, at some stage it will lead to a chain reaction across the economy, pushing
up interest rates and even affecting demand. An increase in interest rates will push up
borrowing costs for corporates while lower demand will hurt growth in revenues. This is
likely to impact sentiment for the stock market as a whole.

GDP GROWTH RATE AND ITS IDEAL IMPACT ON CAPITAL MARKETS,

ECONOMIC ENVIRONMENT AND SHAREHOLDERS VALUE:

The Gross Domestic Product (GDP) in India expanded 4.10 percent in the first quarter of
2015 over the previous quarter. GDP Growth Rate in India averaged 1.93 percent from
1996 until 2015, reaching an all time high of 7.40 percent in the second quarter of 2013
and a record low of -3.40 percent in the second quarter of 2014.

In India, the growth rate in GDP measures the change in the seasonally adjusted value of the
goods and services produced by the Indian economy during the quarter. India is the
world’s tenth largest economy and the second most populous. The most important and
the fastest growing sector of Indian economy are the services. Trade, hotels, transport
and communication; financing, insurance, real estate and business services and
community, social and personal services account for more than 60% of the GDP.
Agriculture, forestry and fishing constitute around 12 per cent of the output, but employ
more than 50% of the labour force. Manufacturing accounts for 15% of GDP,
construction for another 8 % and mining, quarrying, electricity, gas and water supply
for the remaining 5%.

54
 GDP GROWTH RATE IN INDIA IN A FEW RECENT QUARTERS

Source: http://www.tradingeconomics.com/india/gdp-growth.

GDP GROWTH: CONCEPT AND CURRENT STATUS IN INDIA

GDP refers to the total market value of all goods and services that are produced within a
country per year. It is an important indicator of the economic strength of a country. Real GDP
is adjusted for price changes and is therefore regarded as a key indicator for economic
growth. In 2012, India's real gross domestic product growth was at about 5.08 percent
compared to the previous year.

Gross domestic product (GDP) growth rate in India:

Recent years have witnessed a shift of economic power and attention to the strengthening
economies of the BRIC countries: Brazil, Russia, India, and China. The growth rate of gross
domestic product in the BRIC countries is overwhelmingly larger than in traditionally strong
55
economies, such as the United States and Germany.

While the United States can claim the title of the largest economy in the world by almost any
measure, China nabs the second-largest share of global GDP, with India racing Japan for
third-largest position. Despite the world-wide recession in 2008 and 2009, India still managed
to record impressive GDP growth rates, especially when most of the world recorded negative
growth in at least one of those years.

Part of the reason for India’s success is the economic liberalization that started in 1991and
encouraged trade subsequently ending some public monopolies. GDP growth has slowed in
recent years, due in part to skyrocketing inflation. India’s workforce is expanding in the
industry and services sectors, growing partially because of international outsourcing —
a profitable venture for the Indian economy. The agriculture sector in India is still a global
power, producing more wheat or tea than anyone in the world except for China. However,
with the mechanization of a lot of processes and the rapidly growing population,
India’s unemployment rate remains relatively high.

Thus, we observe that there is a close connection between the growth rate in India’s GDP and
the shareholders value as the prime motivator for growth in India particularly in the corporate
sector is the shareholder value. The growth rate is relatively much better compared to
developed countries like USA, Japan, Germany, France and other similar countries. It is
therefore a small wonder that the Indian companies and Indian companies’ shares are being
under a scanner by the developed countries to make smart investment of their pension and
other funds of Financial Institutional Investors (FIIs) apart from foreign individual investors
who are keen on enjoying the party that Indian equity markets offer to them in the present and
in the future.

56
 CHAPTER IV

PROFILE OF THE INDUSTRIES REPRESENTED IN THE SAMPLE

OF LISTED COMPANIES

57
 LISTED COMPANIES IN INDIA – A BRIEF OVERVIEW

In India, the total number of listed companies ranges about 5500 – 6000. Among those,
companies’ whose shares are relatively actively traded range about 2000-2500. The
companies are listed predominantly under the National Stock Exchange of India Ltd (NSE)
and the Bombay Stock Exchange (BSE). The population of listed companies whose turnover
is at least Rs.3000 crores+ during the FY 2013-14 is no more than 1000. The sample of 120
companies is chosen from the above category of companies which is considered as the
population of the companies from which the sample of 120 companies is chosen. Thus the
pareto paradox seem to apply to the listed companies in India too, wherein about 20% of the
number of listed companies contribute to about 80% of the turnover and market capitalization
and shareholder value while the remaining 80% of the listed companies contribute to around
20% of the turnover and shareholder value. However, this fact needs to be viewed seriously
with a pinch of salt. The number of companies includes all the medium and large enterprises
which are among the listed companies. There are a host of small and to some extent medium
sized companies which do contribute to the revenues in a particular industry, however, this
study since, it is confined to listed companies in India, restricts itself to the medium and large
companies among the listed companies in India.

The total number of listed companies in India is 5749 6 in BSE. The number of shares listed
companies in NSE is 16967. However, the shares which are listed in NSE are also listed in
BSE. So, the total count of the listed companies does not exceed 5749 in India. It is
noteworthy to note that the bulk of the companies in terms of quantity constitute those with
an annual average turnover ranging from 500 crores to 1500 crores. In other words, the
number of companies whose average annual turnover ranges above 1500-2000 crores in the
total population of companies is relatively less as noted before. Therefore the sample of
companies selected for the study invariably comprises the medium and large scale companies.

BRIEF PROFILE OF THE INDUSTRY CATEGORY OF THE SAMPLE

COMPANIES:

6
https://en.wikipedia.org/wiki/Bombay_Stock_Exchange

7
https://en.wikipedia.org/wiki/National_Stock_Exchange_of_India
58
 TABLE 1 - SAMPLE OF 120 COMPANIES
(CATEGORIZED INTO MAJOR INDUSTRY TYPE)

S.No Industry No of Companies

1 Auto 7
2 Cement 6
3 FMCG 10
4 Energy 22
5 Manufacturing 17
6 Infrastructure 7
7 IT/ITES 3
8 Pharmaceuticals 8
9 Services 34
10 Textiles 6
TOTAL 120

CHART 1 - SAMPLE OF 120 COMPANIES

(CATEGORIZED INTO MAJOR INDUSTRY TYPE)

PROMINENT INDUSTRIES IN INDIA – A BRIEF OVERVIEW

The following pages contain a brief profile of the various industries that are represented in
the sample of the 120 listed companies chosen in this research. This is also a microcosm of

59
the various industries which comprise the listed companies in India. India is now at an
inflexion point wherein the services sector is having a dominant role in contributing towards
the GDP gradually overtaking the other three prominent sectors, viz., agriculture and allied
activities and manufacturing. It is reported that the share of services in Indian GDP is over
60%. Among the services sector, financial services sector like banking has a major share.
This is followed by sectors like the energy sector comprising power manufacturing and oil
and gas. Companies manufacturing cement comprise cement industry which is a major one
in manufacturing. Again, Consumer Goods or the FMCG (Fast Moving Consumer Goods) is
a big business in India. This is more so with diverse and comprehensive demographic profile
of Indian population. India is also famous for its textile industries which have been in
existence since many years. Now that the Twelfth Five Year Plan (2012-17) is in progress
wherein Infrastructure Sector is given highest priority, many companies involved in
Infrastructural Development in India like L & T, Gammon India Ltd comprise the
Infrastructure Industry. India is also home to a large number of leading and internationally
competent pharmaceutical companies. This comprises the Pharmaceutical Industry. Another
sector which has gained worldwide popularity about Indian manufactured products is the
Automobiles. This Industry is home to many Indian and Foreign Companies which have
their subsidiaries manufacturing automobiles. Las but not the least is the IT sector in India
which has been an erstwhile growing Industry contributing immensely to shareholders value
by virtue of being bestowed with competent English speaking and competent, skillful
workforce in the IT sector. The following pages contain a brief profile of the above
mentioned industries.

SERVICE INDUSTRY IN INDIA – AN OVERVIEW

Introduction

60
The services sector with an around 57 per cent contribution to the gross domestic product
(GDP), has made rapid strides in the last few years and emerged as the largest and fastest-
growing sector of the economy. Besides being the dominant sector in India’s GDP, it has also
contributed substantially to foreign investment flows, exports, and employment. India’s
services sector covers a wide variety of activities that have different features and dimensions.
They include trade, hotel and restaurants, transport, storage and communication, financing,
insurance, real estate, & business services, community, social and personal services and
services associated with construction. Services in India are emerging as a prominent sector in
terms of contribution to national and states’ incomes, trade flows, foreign direct investment
(FDI) inflows, and employment.
The compound annual growth rate (CAGR) of services sector GDP was 8.5 per cent for the
period 2000-01 to 2013-14.
As per the survey, in India, the growth of services-sector gross domestic product (GDP) has
been higher than that of overall GDP between the FY01- FY14. Services constitute a major
portion of India’s GDP with a 57 per cent share in GDP at factor cost (at current prices) in
2013-14, an increase of 6 per cent points over 2000-01.
The shift from primary and secondary activities to tertiary activities by the citizens of a
country indicates that it is on the path of progress. The growth in the services sector can be
attributed mostly to the emergence of the Indian Information Technology (IT) and IT enabled
Services (ITeS) sectors as well as e-commerce.

Market Size

The services sector in India comprises a wide range of activities such as transportation,
logistics, financial, business process outsourcing services, healthcare, trading, and
consultancies, among many others.
The HSBC India Services PMI stood at 51.1 in November 2014 – a reading above 50 signals
expansion.
According to the data provided by International Data Corporation (IDC), the total mobile
services market revenue in India is expected to touch US$ 37 billion in 2017 growing at a
compound annual growth rate (CAGR) of 5.2 percent.
The growth in the ITeS sector has resulted in increasing competition between the different
brands in the e-commerce sector. As a result, it is expected that the e-commerce sector will
generate close to 150,000 jobs within the next 2-3 years.
The logistics sector in India which was valued at US$ 101 billion in 2013 is expected to grow
by 10 per cent per annum to reach US$ 136 billion by 2016, according to Mr R Dinesh,
Chairman, CII Institute of Logistics Advisory Council and Joint Managing Director, TVS
Sons Ltd.

61
Investments

The Indian services sector has attracted the highest amount of FDI equity inflows in the
period April 2000-December 2014, amounting to about US$ 41,755.46 million which is about
18 per cent of the total foreign inflows, according to the Department of Industrial Policy and
Promotion (DIPP).
Some of the developments and major investments by companies in the services sector in the
recent past are as follows:
 Zomato has acquired Cibando, one of Italy’s largest restaurant search services. With
this acquisition, the company has a presence in 20 countries. Zomato further aims to
widen its international presence by entering 15 more countries in 2015.
 The private security services industry in India is expected to register a growth of over
20 per cent over the next few years, doubling its market size to Rs 80,000 crore (US$
12.94 billion) by 2020.
 Snapdeal.com has acquired gifting recommendation technology platform
Wishpicker.com. The acquisition will enable Snapdeal to further personalise user
experience and drive conversions through intelligent recommendations.
 The Government of India has awarded a contract worth Rs 1,370 crore (US$ 221.63
million) to Ricoh India Ltd and Telecommunications Consultants India Ltd (TCIL) to
modernise 129,000 post offices through automation.
 Global online food delivery marketplace Foodpanda has acquired TastyKhana in
India. Now, Foodpanda will have a selection from over 2,500 restaurants in 10 cities.
 Taxi service aggregator Ola plans to scale up operations to 100 cities from 19
currently. The company, which is looking at small towns for growth, also plans to
invest in driver eco-system, such as training centres and technology upgrade.

Government Initiatives

Strong and consistent emphasis on self-reliance in its economic development programmes

over the years by the Government of India has also enabled India to build up a big and
versatile cadre of professionals. They now have expertise and skills across a vast and wide-
ranging spectrum of disciplines, such health care, tourism, education, engineering,
communications, transportation, information technology, banking, finance, management,
among others.
The Government of India has adopted a few initiatives in the recent past. Some of these are as
follows:

62
  The Government of India plans to take mobile network by December 2016 to nearly
10 per cent of Indian villages that are still unconnected.
 The Reserve Bank of India (RBI) has allowed third-party white label automated teller
machines (ATM) to accept international cards, including international prepaid cards,
and has also allowed white label ATMs to tie up with any commercial bank for cash
supply.
 The Government of India has launched tourist visa on arrival (TVoA) enabled by
electronic travel authorisation (ETA) to 43 countries.
 India and Japan held a Joint Working Group conference for Comprehensive
Cooperation Framework for Information and Communication Technologies (ICT).
India also offered Japan to manufacture ICT equipment in India.
 Citizens of India is expected to get a minimum of 2 megabits per second (MBPS) Wi-
Fi speed at every government owned service point such as railways stations, airports,
bus stops, hospitals and all government departments that deal with the public on a
daily basis.

Road Ahead

Services sector growth is governed by both domestic and global factors. The sector is
expected to perform well in FY16. Some improvement in global growth and recovery in
industrial growth will drive the services sector to grow 7.4 per cent in FY16 (FY15: 7.3 per
cent). The performance of trade, hotels and restaurants, and transport, storage and
communication sectors are expected to improve in FY16. Loss of growth momentum in
commodity-producing sectors had adversely impacted transport and storage sectors over the
past two years. The financing, insurance, real estate and business services sectors are also
expected to continue their good run in FY16. The growth performance of the community,
social and personal services sector is directly linked with government expenditure and we
believe that the government will remain committed to fiscal consolidation in FY16.

MANUFACTURING INDUSTRY IN INDIA – AN OVERVIEW

Introduction

With launch of the ‘Make in India’ initiative, Mr Narendra Modi, the Prime Minister of India,
aims to give global recognition to the Indian economy and also place India on the world map
as a manufacturing hub.

63
India has also set for itself an ambitious target of increasing the contribution of
manufacturing output to 25 per cent of gross domestic product (GDP) by 2025, from 16 per
cent currently.

India's economy is expected to grow at 7.4 per cent in 2014-15 as per a Government forecast.
According to a new formula which uses 2011-12 as the new 'base year', the revised statistics
showed inflation-adjusted economic growth rate for October-December 2014 at 7.5 per cent,
making India the fastest growing major economy in the world.

Market Size

Business conditions in the Indian manufacturing sector continued to improve in January 2015
fuelled by accelerated growth of output, marking the third straight month of expansion on the
HSBC Services Purchasing Managers' Index (PMI). The PMI rose to 52.4 points in January
2015 from 51.1 in December 2014. The composite PMI that combines both services and
manufacturing sectors rose to 53.3 points in January 2015 from 52.9 in the previous month.
India’s manufacturing sector could touch US$ 1 trillion by 2025, according to a report by
Mckinsey and Company. There is potential for the sector to account for 25-30 per cent of the
country’s GDP and create up to 90 million domestic jobs by 2025.

In a major boost to the 'Make in India' initiative, the Government has received confirmation
from top technology firms such as GE, Bosch, Tejas and Panasonic regarding their decision
to invest in the electronic, medical, automotive and telecom manufacturing clusters in India.
"We have received 57 investment proposals of over Rs 19,000 crore (US$ 3.05 billion) of
which 30 proposals worth Rs 6,500 crore (US$ 1.04 billion) have been approved," said Mr
Ravi Shankar Prasad, Union Minister for Communications and Information Technology,
Government of India.

The domestic market size of the chemical industry is around US$ 118 billion and it is
approximately 3 per cent of the global chemical market, according to a report by Tata
Strategic Management Group. It is highly diversified with more than 80,000 chemicals and
currently accounts for 15 per cent of manufacturing GDP which makes it very crucial for the
economic development of the country.

Investments

64
The Government of India has received investment proposals for electronics manufacturing
worth Rs 18,000 crore (US$ 2.89 billion) for 2015-16 and expects the figure to double in
another two years.

India has become one of the most attractive destinations for investments in the manufacturing
sector. Some of the major investments and developments in this sector in the recent past are:

 US-based First Solar Inc and China’s Trina Solar have plans to set up manufacturing
facilities in India. Clean energy investments in India increased to US$ 7.9 billion in
2014, helping the country maintain its position as the seventh largest clean energy
investor in the world.
 Samsung Electronics Co Ltd has invested Rs 517 crore (US$ 83.11 million) towards
the expansion of its manufacturing plant in Noida, Uttar Pradesh (UP) under the UP
Mega Policy. “Samsung India Electronics is committed to strengthen its
manufacturing infrastructure and will gradually expand capacity at this plant to meet
the growing domestic demand for mobile handsets, as per the company.
 India is currently among the top 10 sourcing countries for IKEA. The plan is to
double sourcing from India to €630 million (US$ 688.61 million) by 2020.

Government Initiatives

In a bid to push the 'Make in India' initiative to the global level, Mr Narendra Modi, Prime
Minister of India, plans to pitch India as a manufacturing destination at the World
International Fair in Germany's Hannover. Mr Modi is likely to showcase India as a business
friendly destination to attract foreign businesses to invest and manufacture in the country.
The Government of India has taken several initiatives to promote a healthy environment for
the growth of manufacturing sector in the country. Some of the notable initiatives and
developments are:

 The government has asked New Delhi's envoys in over 160 countries to focus on
economic diplomacy to help government attract investment and transform the 'Make
In India' campaign a success to boost growth during the annual heads of missions
conference. Prime Minister Mr Modi has also utilised the opportunity to brief New
Delhi's envoys about the Government's foreign policy priority and immediate focus on
restoring confidence of foreign investors and augmenting foreign capital inflow to
increase growth in manufacturing sector.

65
  The Government of Uttar Pradesh (UP) has secured investment deals valued at Rs
5,000 crore (US$ 803.77 million) for setting up mobile manufacturing units in the
state.
 The Government of Maharashtra has cleared land allotment for 130 industrial units
across the state with an investment of Rs 6,266 crore (US$ 1.01 billion)
 Dr Jitendra Singh, Union Minister of State (Independent Charge) of the Ministry of
Development of North Eastern Region (DoNER), MoS PMO, Personnel, Public
Grievances & Pensions, Atomic Energy and Space, Government of India, has
announced the 'Make in Northeast' initiative beginning with a comprehensive tourism
plan for the region.

Road Ahead

The Government of India has an ambitious plan to locally manufacture as many as 181
products. The move could help infrastructure sectors such as power, oil and gas, and
automobile manufacturing that require large capital expenditure and revive the Rs 1.85
trillion (US$ 29.74 billion) Indian capital goods business.

India is an attractive hub for foreign investments in manufacturing sector. Several mobile
phone, luxury and automobile brands, among others, have set up or are looking to establish
their manufacturing bases in the country.

With impetus on developing industrial corridors and smart cities, the government aims to
ensure holistic development of the nation. The corridors would further assist in integrating,
monitoring and developing a conducive environment for the industrial development and will
promote advance practices in manufacturing.

INFRASTRUCTURE INDUSTRY IN INDIA – AN OVERVIEW

Introduction

A key driver of the economy, Infrastructure is highly responsible for propelling India’s
overall development. The industry enjoys intense focus from the top officials of the
Government for initiating policies that would ensure time-bound creation of world class
infrastructure in the country. This sector includes power, bridges, dams, roads and urban
infrastructure development.

Market Size

66
The Indian power sector has an investment potential of US$ 250 billion in the next 4-5 years,
providing immense opportunities in power generation, distribution, transmission and
equipment, according to Mr Piyush Goyal, Union minister of coal, power and renewable
energy.
The total approximate earnings of Indian Railways on originating basis during April 1, 2014
to December 31, 2014 were Rs 114,656.13 crore (US$ 18.42 billion) compared to Rs
101,856.45 crore (US$ 16.37 billion) during the same period last year, registering an increase
of 12.57 per cent.
The total approximate earnings from goods during 1st April 2014 – 31st December 2014 were
Rs 77,161.55 crore (US$ 12.4 billion) compared to Rs 68,776.35 crore (US$ 11.05 billion)
during the same period last year, registering an increase of 12.19 per cent.
Meanwhile, the number of export and import containers moving through major ports in India
expanded 7.34 percent year-over-year from April to October 2014, as a result of the Modi
Government’s efforts to make port development a major priority.
Foreign direct investment (FDI) received in construction development sector from April 2000
to January 2015 stood at US$ 24,028.19 million, according to the Department of Industrial
Policy and Promotion (DIPP).

Recent Developments

India is witnessing significant interest from international investors in the infrastructure space.
Many Spanish companies are keen on collaborating with India on infrastructure, high speed
trains, renewable energy and developing smart cities
 The government has unveiled plans to invest US$ 137 billion in its decrepit rail
network over the next five years, heralding Prime Minister Narendra Modi's
aggressive approach to building infrastructure needed to unlock faster economic
growth. Over the next year, India will increase investment by about a half to US$
16.15 billion including funds raised by market borrowing.
 Indostar Capital Finance Ltd and Reliance Capital Ltd have invested Rs 200 crore
(US$ 32.15 million) in Alliance group, a real estate company. The consortium of
institutions has invested in the holding company of Alliance group, Alliance
Infrastructure Projects Pvt. Ltd.
 Andhra Pradesh-based regional airline Air Costa will add eight aircrafts before 2016
to its existing four aircrafts. The airline, which reported an operating profit in the
month of December, 2014 for the first time, said that it will be a pan-India player by
the end of 2015
 Union government-owned Kolkata Port Trust has signed an agreement with the West
Bengal government to set up a new port at Sagar Island in South 24 Parganas district

67
 through a joint venture (JV) between the two. The Sagar Island port is estimated to
cost Rs 11,900 crore (US$ 1.91 billion) and will be the first port to be built by the
Union government in 14 years.
 Larsen and Toubro Ltd (L&T) has announced that its building and factories business
under L&T Construction has secured orders worth Rs 2,521 crore (US$ 405.27
million) in December 2014. In a statement, the firm said that these orders were from
both the domestic and international markets.
 Private equity funds and non-banking financial companies have found a niche within
Gurgaon. Over the past 15 months, New Gurgaon, which is an area between Manesar
and old Gurgaon, has seen investments in real estate projects by several private equity
funds. Singapore sovereign wealth fund GIC recently put in Rs 150 crore (US$ 24.11
million) in a joint venture with realty firm Vatika group to develop two projects in this
area of Gurgaon.

Government Initiatives

The Indian Government is taking every possible initiative to boost the infrastructure sector.
Some of the steps taken in the recent past are being discussed hereafter.
The Reserve Bank of India (RBI) has notified 100 per cent foreign direct investment (FDI)
under automatic route in the construction development sector. The new limit is effective 2
December 2014, RBI said in a notification on its website.
Recently, the Government has relaxed rules for FDI in the construction sector by reducing
minimum built-up area as well as capital requirement and liberalised the exit norms. The
Cabinet has also approved the proposal to amend the FDI policy.
India and the US have signed a memorandum of understanding (MoU) in order to establish
Infrastructure Collaboration Platform. The document showcases the relationship between
both the Governments which intend to facilitate US industry participation in Indian
infrastructure projects to improve the bilateral commercial relationship and benefit both the
Participants' economies. The MoU’s scope envisages efforts in the areas of Urban
Development, Commerce and Industry, Railways, Road Transport and Highways, Micro
Small and Medium Enterprises, Power, New & Renewable Energy, Information and
Broadcasting, Communications & Information Technology, Water Resources, River
Development and Ganga Rejuvenation.

Road Ahead

68
Indian port sector is poised to mark great progress in the years to come. It is forecasted that
by the end of 2017 port traffic will amount to 943.06 MT for India’s major ports and 815.20
MT for its minor ports.
Along with that, Indian aviation market is expected to become the third largest across the
globe by 2020, according to industry estimates. The sector is projected to handle 336 million
domestic and 85 million international passengers with projected investment to the tune of
US$ 120 billion. Indian Aviation Industry that currently accounts for 1.5 per cent of the gross
domestic product (GDP), has been instrumental in the overall economic development of the
country. Given the huge gap between potential and current air travel penetration in India, the
prospects and possibilities of growth of Indian aviation market are enormous.

PHARMACEUTICAL INDUSTRY IN INDIA – AN OVERVIEW

Introduction

The Indian pharmaceuticals market is third largest in terms of volume and thirteen largest in
terms of value, as per a pharmaceuticals sector analysis report by equity master. The market is
dominated majorly by branded generics which constitute nearly 70 to 80 per cent of the
market. Considered to be a highly fragmented industry,consolidation has increasingly become
an important feature of the Indian pharmaceutical market.
India has achieved an eminent global position in pharma sector. The country also has a huge
pool of scientists and engineers who have the potential to take the industry to a very high
level.
The UN-backed Medicines Patents Pool has signed six sub-licences with Aurobindo, Cipla,
Desano, Emcure, Hetero Labs and Laurus Labs, allowing them to make generic anti-AIDS
medicine Tenofovir Alafenamide (TAF) for 112 developing countries.

Market Size

The Indian pharmaceutical industry is estimated to grow at 20 per cent compound annual
growth rate (CAGR) over the next five years, as per India Ratings, a Fitch Group company.
Indian pharmaceutical manufacturing facilities registered with US Food and Drug
Administration (FDA) as on March 2014 was the highest at 523 for any country outside the
US.
We expect the domestic pharma market to grow at 10-12 per cent in FY15 as compared to 9
per cent in FY14, as per a recent report from Centrum Broking. The domestic pharma growth
rate was 11.9 per cent in October 2014, highlighted the report.

69
Gujarat clocked the highest growth rate in pharmaceuticals market at 22.4 per cent during
November 2014, surpassing the industry growth rate, which grew by 10.9 per cent, as per
data from the market research firm AIOCD Pharma softtech AWACS.
Also, growing at an average rate of about 20 per cent, India's biotechnology industry
comprising bio-pharmaceuticals, bio-services, bio-agriculture, bio-industry and
bioinformatics may reach the US$ 7 billion mark by the end of FY15, according to an
industry body. Biopharma is the largest sector contributing about 62 per cent of the total
revenue, with revenue generation to the tune of over Rs 12,600 crore (US$ 2.03 billion). The
bio-pharma sector comprises vaccines, therapeutics and diagnostics.

Investments

The Union Cabinet has given its approval to amend the existing FDI policy in the
pharmaceutical sector in order to cover medical devices. The Cabinet has allowed FDI up to
100 per cent under the automatic route for manufacturing of medical devices subject to
specified conditions.
The drugs and pharmaceuticals sector attracted cumulative foreign direct investment (FDI)
inflows worth US$ 12,813.02 million between April 2000 and December 2014, according to
data released by the Department of Industrial Policy and Promotion (DIPP).
Some of the major investments in the Indian pharmaceutical sector are as follows:
 Stelis Biopharma has announced the ground-breaking for construction of its
customised, multi-product, biopharmaceutical manufacturing facility at Bio-Xcell
Biotechnology Park in Nusajaya, Johor, Malaysia's park and ecosystem for industrial
and healthcare biotechnology at a total project investment amount of US$ 60 million.
 Pharma major Strides Arcolab has entered into a licensing agreement with US-based
Gilead Sciences Inc to manufacture and distribute the latter's low-cost Tenofovir
Alafenamide (TAF) product used for HIV treatment in developing countries. The
licence to manufacture Gilead's low-cost drug extends to 112 countries.
 Apollo Hospitals Enterprise (AHEL) plans to add another 2,000 beds over the next
two financial years, at a cost of around Rs 1,500 crore (US$ 242.57 million), as per
Mr Prathap C Reddy, Founder and Executive Chairman, Apollo Hospitals.
 CDC, the UK’s development finance institution, has invested US$ 48 million in
Narayana Hrudayalaya hospitals, a multi-speciality healthcare provider. With this
investment, Narayana Health will expand affordable treatment in eastern, central and
western India.
 Cadila Healthcare Ltd has announced the launch of a biosimilar for Adalimumab - the
world’s largest selling drug for rheumatoid arthritis and other auto immune disorders.
The drug will be marketed under the brand name Exemptia at one-fifth of the price for

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 the branded version-Humira. Cadila’s biosimilar is the first to be launched by any
company in the world and is a finger print match with the original in terms of safety,
purity and potency of the product, as per the company.
 Torrent Pharmaceuticals has entered into an exclusive licensing agreement with
Reliance Life Sciences for marketing three biosimilars in India — Rituximab,
Adalimumab and Cetuximab.
 Piramal Enterprises Ltd has acquired US-based Coldstream Laboratories for US$ 30.6
million in an all-cash transaction.
 Indian Immunologicals Ltd (IIL) plans to set up a new vaccine manufacturing facility
in Pondicherry with an investment of Rs 300 crore (US$ 48.53 million).
 SRF Ltd has acquired Global DuPont Dymel, the pharmaceutical propellant business
of DuPont, for US$ 20 million.

Government Initiatives

The Addendum 2015 of the Indian Pharmacopoeia (IP) 2014 is published by the Indian
Pharmacopoeia Commission (IPC) on behalf of the Ministry of Health & Family Welfare,
Government of India. The addendum would play a significant role in improving the quality of
medicines which in turn promote public health and accelerate the growth and development of
pharma sector.
The Government of India has unveiled 'Pharma Vision 2020' aimed at making India a global
leader in end-to-end drug manufacture. It has reduced approval time for new facilities to
boost investments. Further, the government has also put in place mechanisms such as the
Drug Price Control Order and the National Pharmaceutical Pricing Authority to address the
issue of affordability and availability of medicines.
Romania is keen to tie up with the Indian pharmaceutical companies for research and develop
new drugs. "Romania will collaborate with India for license acquisition to sale India's drugs
in Europe," said Mr Mario Crute, Counselor in Ministry of health in Romania at GCCI. The
country will tie up with the Indian pharmaceutical companies for research and develop new
drugs.
Some of the major initiatives taken by the government to promote the pharmaceutical sector
in India are as follows:
 Indian and global companies have expressed 175 investment intentions worth Rs
1,000 crore (US$ 161.78 million) in the pharmaceutical sector of Gujarat. The
memorandums of understanding (MoUs) would be signed during the Vibrant Gujarat
Summit.
 Telangana has proposed to set up India's largest integrated pharmaceutical city spread
over 11,000 acres near Hyderabad, complete with effluent treatment plants and a

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 township for employees, in a bid to attract investment of Rs 30,000 crore (US$ 4.85
billion) in phases. Hyderabad, which is known as the bulk drug capital of India,
accounts for nearly a fifth of India's exports of drugs, which stood at Rs 90,000 crore
(US$ 14.56 billion) in 2013-14.

Road Ahead

The Indian pharma market size is expected to grow to US$ 85 billion by 2020. The growth in
Indian domestic market will be on back of increasing consumer spending, rapid urbanisation,
raising healthcare insurance and so on.
Going forward, better growth in domestic sales will depend on the ability of companies to
align their product portfolio towards chronic therapies for diseases such as such as
cardiovascular, anti-diabetes, anti-depressants and anti-cancers are on the rise.
Moreover, the government has been taking several cost effective measures in order to bring
down healthcare expenses. Thus, governments are focusing on speedy introduction of generic
drugs into the market. This too will benefit Indian pharma companies. In addition, the thrust
on rural health programmes, life saving drugs and preventive vaccines also augurs well for
the pharma companies.

FMCG INDUSTRY IN INDIA – AN OVERVIEW

Introduction
India’s consumer confidence continues to be the highest globally and has improved in the
second quarter of calendar year 2015 (Q2), riding on a positive economic environment and
low inflation. Nielsen’s findings reveal that the consumer confidence of urban India increased
by one point in the second quarter of 2015 from that in the preceding quarter. Urban India’s
consumer confidence is 131 in the second quarter of 2015, up three points from 128 in the
previous corresponding period. The current score helps India stay on top of the global
consumer confidence index for the quarter and is followed by the Philippines (122) and
Indonesia (120). Confidence in India has risen for the seven consecutive quarters.
Global corporations view India as one of the key markets from where future growth is likely
to emerge. The growth in India’s consumer market would be primarily driven by a favourable
population composition and increasing disposable incomes. A recent study by the McKinsey
Global Institute (MGI) suggests that if India continues to grow at the current pace, average
household incomes will triple over the next two decades, making the country the world’s
fifth-largest consumer economy by 2025, up from the current 12th position.
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According to a report by Boston Consulting Group (BCG) and the Confederation of Indian
Industry (CII), India’s robust economic growth and rising household incomes would increase
consumer spending to US$ 3.6 trillion by 2020. The maximum consumer spending is likely to
occur in food, housing, consumer durables, transport and communication sectors. The report
further stated that India's share of global consumption would expand more than twice to 5.8
per cent by 2020.
India’s market is consumer driven, with spending anticipated to more than double by 2025.
The Indian consumer segment is broadly segregated into urban and rural markets, and is
attracting marketers from across the world.
Market size
The growing purchasing power and rising influence of the social media have enabled Indian
consumers to splurge on good things.
A study by US-based networking solution giant CISCO, reveals that in India, the second-
largest smartphone market globally, the number of smartphones is expected to grow strongly
to over 650 million by 2019.
According to CISCO’s Visual Networking Index (VNI) global mobile data traffic forecast for
2014–19, in India, one of the world's fastest growing Internet market, the number of tablets is
estimated to reach more than 18 million by 2019.
Rating agency Crisil estimates that online retailing, both direct and through marketplaces,
will grow threefold to become a Rs 50,000 crore (US$ 8.06 billion) industry by 2016. Also,
the growth in Internet retail is expected to boost offline retail stores.
Investments
Following are some major investments and developments in the Indian consumer market
sector.
 FMCG major Hindustan Unilever (HUL) announced a reorganisation of its go-to-
market operations from the traditional four sales branches to 14 consumer clusters in
order to provide services to diverse consumers across channels and geographies. The
company has termed the initiative as “Winning in Many Indias”.
 Hero Group is set to acquire a majority stake in direct-to-home devices manufacturer
Mybox Technologies through its subsidiary Hero Electronix. The deal is the first step
by Hero Group, which operates in numerous business verticals, towards entering the
consumer electronics market.

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  In a series of strategic buy-outs this year, SnapDeal, which acquired online utility
service provider Freecharge and financial services portal RupeePower, has signalled
its ambition to build a service platform so as to stand out in an online marketplace,
which until now was dominated by an array of products from cameras to apparel and
furniture.
 Chinese technology major Huawei is entering the consumer broadband networking
segment in India, with a range of devices aimed at homes and SOHO customers. With
the aim to strengthen its position in the Indian market, online cashback and coupon
site CashKaro.com plans to list about 50 global retailers over the next six months,
according to one of its founders.
 Smartphone brand Gionee is entering the urban market in a big way through tie-ups
with India’s top large format retailers. The company’s smartphones will now be
available at stores such as Spice, The Mobile Store, Mobiliti World, Jumbo
Electronics, Croma Retail and Planet M retail, expanding its overall footprint to over
a thousand retail stores.
Government Initiatives
The Government of India has allowed 100 per cent Foreign Direct Investment (FDI) in the
electronics hardware-manufacturing sector through the automatic route. The government has
also enabled 51 per cent FDI in multi-brand retail and 100 per cent in single-brand retail so as
to attract more foreign investment into the country.
With the demand for skilled labour growing among Indian industries, the government plans
to train 500 million people by 2022 and is also encouraging private players and entrepreneurs
to invest in the venture. Many government, corporate and educational organisations are
working towards providing training and education to create a skilled workforce.
Road Ahead
According to a recently published TechSci Research report, "India Food Services Market
Forecast & Opportunities, 2020", the food services market in India is expected to expand at a
CAGR of over 12 per cent through 2020, primarily driven by increasing disposable income,
changing lifestyle, and changing tastes and preferences of consumers. Another major factor
propelling the demand for food services in India is the growing youth population, primarily in
the country’s urban regions. India has a large base of young consumers who form the
majority of the workforce and, due to time constraints, barely get time for cooking.

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According to the report titled "India Machine-to-Machine (M2M) Modules Market
Opportunities & Forecast, 2020", the M2M modules market in India is expected to exceed
US$ 4.4 billion by 2020. The market research firm stated that over the last few years, India
has become one of the fastest growing markets for M2M modules in Asia-Pacific (APAC).
Research firm Nielsen projected that rural India’s FMCG market will surpass the US$ 100
billion mark by 2025. Online portals are expected to play a key role for companies trying to
enter the hinterlands. The Internet has contributed in a big way, facilitating a cheaper and
more convenient means to increase a company’s reach.

TEXTILE INDUSTRY IN INDIA – AN OVERVIEW

Introduction
India’s textiles sector is one of the mainstays of the national economy. It is also one of the
largest contributing sectors of India’s exports contributing 11 per cent to the country’s total
exports basket. The textiles industry is labour intensive and is one of the largest employers.
The industry realised export earnings worth US$ 41.57 billion in 2013-14.
The textile industry has two broad segments, namely handloom, handicrafts, sericulture,
power looms in the unorganised sector and spinning, apparel, garmenting, made ups in the
organised sector.
The Indian textiles industry is extremely varied, with a hand-spun and handwoven sector at
one end of the spectrum, and the capital intensive sophisticated mill sector at the other. The
decentralised power looms/ hosiery and knitting sector form the largest and knitting sector
form the largest section of the Textiles Sector. The close linkage of the Industry to agriculture
and the ancient culture, the traditions of the country make the Indian textiles sector unique in
comparison to the textiles industry of other countries. This also provides the industry with the
capacity to produce a variety of products suitable to the different market segments, both
within and outside the country.
Market Size
The Indian textiles industry, currently estimated at around US $108 billion, is expected to
reach US $ 141 billion by 2021. The industry is the second largest employer after agriculture,
providing direct employment to over 45 million and 60 million people indirectly. The Indian
Textile Industry contributes approximately 5 per cent to GDP, and 14 per cent to overall
Index of Industrial Production (IIP).
The Indian textile industry has the potential to grow five-fold over the next ten years to touch
US$ 500 billion mark on the back of growing demand for polyester fabric, according to a
study by Wazir Advisors and PCI Xylenes and Polyester. The US$ 500 billion market figure

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consists of domestic sales of US$ 315 billion and exports of US$ 185 billion. The current
industry size comprises domestic market of US$ 68 billion and exports of US$ 40 billion,
according to Mr Prashat Agarwal, Managing Director, Wazir Advisors.
Apparel exports from India have registered a growth of 17.6 per cent in the period April—
September 2014 over the same period in the previous financial year.
Investments
The textiles sector has witnessed a spurt in investment during the last five years. The industry
(including dyed and printed) attracted foreign direct investment (FDI) worth US$ 1,522.51
million during April 2000 to December 2014.
Some of the major investments in the Indian textiles industry are as follows:
 Reliance Industries Ltd (RIL) plans to enter into a joint venture (JV) with China-
based Shandong Ruyi Science and Technology Group Co. The JV will leverage RIL's
existing textile business and distribution network in India and Ruyi's state-of-the-art
technology and its global reach.
 Giving Indian sarees a ‘green’ touch, Dupont has joined hands with RIL and Vipul
Sarees for use of its renewable fibre product Sorona to make an ‘environment-
friendly’ version of this ethnic ladieswear.
 Raymond has launched ‘Regio Italia’, a luxurious, elite and finest Italian fabric for its
customers. Regio Italia is a fine collection of fabrics from Italy with the latest designs
that is carefully woven and specially handpicked assortment of the best designs in
formal and occasion menswear suiting fabrics.
 Snapdeal has partnered with India Post to jointly work on bringing thousands of
weavers and artisans from Varanasi through its website. “This is an endeavour by
Snapdeal and India Post to empower local artisans, small and medium entrepreneurs
to sustain their livelihood by providing a platform to popularise their indigenous
products,” said Mr Kunal Bahl, CEO and Co-Founder, Snapdeal.
 Welspun India Ltd (WIL), part of the Welspun Group has unveiled its new spinning
facility at Anjar, Gujarat - the largest under one roof in India. The expansion project
reflects the ethos of the Government of Gujarat’s recent ‘Farm-Factory-Fabric-
Fashion-Foreign’ Textile Policy, which is aimed at strengthening the entire textile
value-chain.
Government Initiatives
The Indian government has come up with a number of export promotion policies for the
textiles sector. It has also allowed 100 per cent FDI in the Indian textiles sector under the
automatic route.
Some of initiatives taken by the government to further promote the industry are as under:
 Duty free entitlement to garment exporters for import of trimmings, embellishments
and other specified items increased from 3 per cent to 5 per cent. This initiative is

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 expected to generate an additional RMG exports estimated at Rs 10,000 crore (US$
1.61 billion).
 The government has also proposed to extend 24/7 customs clearance facility at 13
airports and 14 sea ports resulting in faster clearance of import and export cargo.
 The proposal for imposing duty on branded items was dropped providing relief to the
entire value chain.
 The Ministry of Textiles has approved a 'Scheme for promoting usage of geotechnical
textiles in North East Region (NER)' in order to capitalise on the benefits of
geotechnical textiles. The scheme has been approved with a financial outlay of Rs 427
crore (US$ 69.12 million) for five years from 2014-15.
 The Ministry of Textiles, Government of India plans to enter into an agreement with
Flipkart to provide an online platform to handloom weavers to sell their products.
 The foundation stone of the Trade Facilitation Centre and Craft Museum was laid by
Mr Narendra Modi, Prime Minister of India at Varanasi.
 Detailed arrangement for purchase of cotton from the farmers by the Cotton
Corporation of India Ltd (CCI) under the Minimum Support Price Operation was
monitored. 343 purchase centers were finalised in consultation with the State
Governments after meetings with officers of CCI and the cotton producing states,
resulting in streamlining of operations.
Road Ahead
The future for the Indian textile industry looks promising, buoyed by both strong domestic
consumption as well as export demand. With consumerism and disposable income on the rise,
the retail sector has experienced a rapid growth in the past decade with the entry of several
international players like Marks & Spencer, Guess and Next into the Indian market. The
organised apparel segment is expected to grow at a compound annual growth rate (CAGR) of
more than 13 per cent over a 10-year period.

CEMENT INDUSTRY IN INDIA – AN OVERVIEW

Introduction
India's cement industry is a vital part of its economy, providing employment to more than a
million people, directly or indirectly. Ever since it was deregulated in 1982, the Indian
cement industry has attracted huge investments, from both Indian and foreign investors,
making it the second largest in the world. The industry is currently in a turnaround phase,
trying to achieve global standards in production, safety, and energy-efficiency.
India has a lot of potential for development in the infrastructure and construction sector and
the cement sector is expected to largely benefit from it. Some of the recent major government

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initiatives such as development of 100 smart cities are expected to provide a major boost to
the sector.
Expecting such developments in the country and aided by suitable government foreign
policies, several foreign players such as Lafarge, Holcim and Vicat have invested in the
country in the recent past. A significant factor which aids the growth of this sector is the
ready availability of the raw materials for making cement, such as limestone and coal.
Market Size
The cement market in India is expected to grow at a compound annual growth rate (CAGR)
of 8.96 percent during the period 2014-2019.
In India, the housing sector is the biggest demand driver of cement, accounting for about 67
per cent of the total consumption. The other major consumers of cement include
infrastructure at 13 per cent, commercial construction at 11 per cent and industrial
construction at nine per cent.
To meet the rise in demand, cement companies are expected to add 56 million tonnes (MT)
capacity over the next three years. The cement capacity in India may register a growth of
eight per cent by next year end to 395 MT from the current level of 366 MT. It may increase
further to 421 MT by the end of 2017. The country's per capita consumption stands at around
190 kg.
A total of 188 large cement plants together account for 97 per cent of the total installed
capacity in the country, while 365 small plants account for the rest. Of these large cement
plants, 77 are located in the states of Andhra Pradesh, Rajasthan and Tamil Nadu. The Indian
cement industry is dominated by a few companies. The top 20 cement companies account for
almost 70 per cent of the total cement production of the country.
Investments
On the back of growing demands, due to increased construction and infrastructural activities,
the cement sector in India has seen many investments and developments in recent times.
According to data released by the Department of Industrial Policy and Promotion (DIPP),
cement and gypsum products attracted foreign direct investment (FDI) worth US$ 3,084.89
million between April 2000 and December 2014.
Some of the major investments in Indian cement industry are as follows:
 Dalmia Cement (Bharat) Ltd has invested around Rs 2,000 crore (US$ 321.12
million) in expanding its business in North East over the past two years. The company
currently has three manufacturing plants in the region — one in Meghalaya and two in
Assam.
 JSW Group plans to expand its cement production capacity to 30 million tonnes per
annum (MTPA) from 5 MTPA now by setting up grinding units closer to its steel
plants.

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  UltraTech Cement Ltd has charted out its next phase of greenfield expansion after a
period of aggressive acquisitions over the last two years. Following its takeover of
two cement plants owned by the Jaypee group, UltraTech has plans to set up two
greenfield grinding units in Bihar and West Bengal, according to Mr O P Puranmalka,
MD, UltraTech.
 UltraTech Cement Ltd has agreed to buy two cement plants and related power assets
of Jaiprakash Associates Ltd in Madhya Pradesh for Rs 5,400 crore (US$ 867.28
million).
 JSW Cement Ltd has planned to set up a 3 MTPA clinkerisation plant at Chittapur in
Karnataka at an estimated cost of Rs 2,500 crore (US$ 401.55 million).
 Andhra Cements Ltd has commenced the commercial production in the company's
cement plants – Durga Cement Works at Dachepalli, Guntur and Visakha Cement
Works at Visakhapatnam.
Government Initiatives
In the 12th FiveYear Plan, the government plans to increase investment in infrastructure to
the tune of US$ 1 trillion and increase the industry's capacity to 150 MT.
The Cement Corporation of India (CCI) was incorporated by the Government of India in
1965 to achieve self-sufficiency in cement production in the country. Currently, CCI has 10
units spread over eight states in India.
In order to help the private sector companies thrive in the industry, the government has been
approving their investment schemes. Some such initiatives by the government in the recent
past are as follows:
 The Government of Tamil Nadu has launched low priced cement branded 'Amma'
Cement. The sale of the cement started in Tiruchi at Rs 190 (US$ 3.05) a bag through
the Tamil Nadu Civil Supplies Corporation (TNCSC). Sales commenced in five
godowns of the TNCSC and will be rolled out in stages with the low priced cement
available across the state from 470 outlets.
 The Government of Kerala has accorded sanction to Malabar Cements Ltd to set up a
bulk cement handling unit at Kochi Port at an investment of Rs 160 crore (US$ 25.68
million).
 The Andhra Pradesh State Investment Promotion Board (SIPB) has approved
proposals worth Rs 9,200 crore (US$ 1.47 billion) including three cement plants and
concessions to Hero MotoCorp project. The total capacity of these three cement plants
is likely to be about 12 MTPA and the plants are expected to generate employment for
nearly 4,000 people directly and a few thousands more indirectly.
 India has joined hands with Switzerland to reduce energy consumption and develop
newer methods in the country for more efficient cement production, which will help
India meet its rising demand for cement in the infrastructure sector.

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  The Government of India has decided to adopt cement instead of bitumen for the
construction of all new road projects on the grounds that cement is more durable and
cheaper to maintain than bitumen in the long run.
Road Ahead
The eastern states of India along with the border states will be the newer and virgin markets
for cement companies and will contribute to their bottom line in future. In the next 10 years,
India will become the main exporter of clinker and gray cement to the Middle East, Africa,
and other developing nations of the world. Cement plants near the ports, for instance the
plants in Gujarat and Visakhapatnam, will have an added advantage for exports and will
logistically be well armed to face stiff competition from cement plants in the interior of the
country.
A large number of foreign players are also expected to enter the cement sector in the next 10
years, owing to the profit margins, constant demand, and right valuation. Cement companies
will go for global listings either through the FCCB route or the GDR route.
With help from the government in terms of friendlier laws, lower taxation, and more
infrastructure spending, the sector will grow and will take India’s economy forward along
with it.

ENERGY INDUSTRY IN INDIA – POWER SECTOR – AN OVERVIEW

Introduction
Power is one of the most critical components of infrastructure crucial for the economic
growth and welfare of nations. The existence and development of adequate infrastructure is
essential for sustained growth of the Indian economy.
India’s power sector is one of the most diversified in the world. Sources of power generation
range from conventional sources such as coal, lignite, natural gas, oil, hydro and nuclear
power to viable non-conventional sources such as wind, solar, and agricultural and domestic
waste. Electricity demand in the country has increased rapidly and is expected to rise further
in the years to come. In order to meet the increasing demand for electricity in the country,
massive addition to the installed generating capacity is required.
Market Size
Indian power sector is undergoing a significant change that has redefined the industry
outlook. Sustained economic growth continues to drive electricity demand in India. The
Government of India’s focus on attaining ‘Power For All’ has accelerated capacity addition in
the country. At the same time, the competitive intensity is increasing at both the market and
supply sides (fuel, logistics, finances, and manpower).
The Planning Commission’s 12th Five-Year Plan estimates total domestic energy production
to reach 669.6 million tonnes of oil equivalent (MTOE) by 2016–17 and 844 MTOE by

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2021–22. By 2030–35, energy demand in India is projected to be the highest among all
countries according to the 2014 energy outlook report by British oil giant, BP.
As of July 2015, total thermal installed capacity stood at 191.6 gigawatt (GW), while hydro
and renewable energy installed capacity totalled 41.9 GW and 36.5 GW, respectively. At 5.8
GW, nuclear energy capacity remained broadly constant compared with the previous year.
Indian solar installations are forecasted to be approximately 2,200 megawatt (MW) in 2015,
according to Mercom Capital Group, a global clean energy communications and consulting
firm.
India’s wind energy market is expected to attract investments totalling Rs 1,00,000 crore
(US$ 15.7 billion) by 2020, and wind power capacity is estimated to almost double by 2020
from over 23,000 MW in June 2015, with an addition of about 4,000 MW per annum in the
next five years.
Investment Scenario
Around 293 global and domestic companies have committed to generate 266 GW of solar,
wind, mini-hydel and biomass-based power in India over the next 5–10 years. The initiative
would entail an investment of about US$ 310–350 billion.
Between April 2000 and May 2015, the industry attracted US$ 9.7 billion in FDI.
Some major investments and developments in the Indian power sector are as follows:
 Inox Wind Ltd, a subsidiary of Gujarat Fluorochemicals, a wind energy solutions
provider, plans to double its manufacturing capacity to 1,600 MW at a total
investment of Rs 200 crore (US$ 31.6 million) by the end of the next financial year.
 The Dilip Shanghvi family, founders of Sun Pharma, acquired 23 per cent stake in
Suzlon Energy, with a preferential issue of fresh equity for Rs 1,800 crore (US$ 284.8
million).
 Reliance Power Ltd signed an accord with the Government of Rajasthan for
developing 6,000 MW of solar power projects in the state over the next 10 years.
 Hilliard Energy plans to invest Rs 3,600 crore (US$ 600 million) in Ananthapur
district of Andhra Pradesh in the solar and wind power sector for the generation of
650 MW of power.
 Solar technology provider SunEdison signed a definitive agreement to acquire
Continuum Wind Energy, Singapore, with assets in India. The company,
headquartered in Belmont, California, would take over 242 MW of operating wind
assets that Continuum owns and operates in Maharashtra and Gujarat as well as 170
MW of assets under construction.
 Japanese internet and telecommunications giant SoftBank, along with Bharti
Enterprises (of Sunil Mittal) and Taiwanese manufacturing giant Foxconn, plan to
invest US$ 20 billion in solar energy projects in India.
Government Initiatives

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The Government of India has identified power sector as a key sector of focus so as to
promote sustained industrial growth. Some initiatives by the Government of India to boost
the Indian power sector:
 A Joint Indo-US PACE Setter Fund has been established, with a contribution of US$ 4
million from each side to enhance clean energy cooperation.
 The Government of India announced a massive renewable power production target of
175,000 MW by 2022; this comprises generation of 100,000 MW from solar power,
60,000 MW from wind energy, 10,000 MW from biomass, and 5,000 MW from small
hydro power projects.
 The Union Cabinet of India approved 15,000 MW of grid-connected solar power
projects of National Thermal Power Corp Ltd (NTPC).
 The Indian Railways signed a bilateral power procurement agreement with the
Damodar Valley Corporation (DVC). The agreement was signed between North
Central Railway and DVC. This is the first time the Railways will directly buy power
from a supplier.
 US Federal Agencies committed a total of US$ 4 billion for projects and equipment
sourcing, one of the biggest deals for the growing renewable energy sector in India.
 On 20 January 2015, a Memorandum of Collaboration (MoC) was signed in New
Delhi between all Indian Institute of Technology (IITs) and Oil & Natural Gas
Corporation (ONGC) to work towards a collective research and development (R&D)
programme for developing indigenous technologies to enhance exploration and
exploitation of hydrocarbons and alternative sources of energy.
 The Reserve Bank of India (RBI) has notified to include renewable energy under
priority sector lending (PSL). Therefore, banks can provide loans up to a limit of US$
2.36 million to borrowers for renewable energy projects.
 The Andhra Pradesh Government plans to establish an ‘Energy University’, which
would focus on research orientation and development of energy efficiency, energy
conservation, and renewable sources.
The Road Ahead
The Indian power sector has an investment potential of Rs 15 trillion (US$ 237 billion) in the
next 4–5 years, thereby providing immense opportunities in power generation, distribution,
transmission, and equipment, according to Union Minister Mr Piyush Goyal.
The government’s immediate goal is to generate two trillion units (kilowatt hours) of energy
by 2019. This means doubling the current production capacity to provide 24x7 electricity for
residential, industrial, commercial and agriculture use.
The government had revised the National Solar Mission with the electricity production target
of 100,000 MW by 2022. The government has also sought to restart the stalled hydro power

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projects and increase the wind energy production target to 60 GW by 2022 from the current
20 GW.

ENERGY INDUSTRY IN INDIA – OIL & GAS SECTOR – AN OVERVIEW

Introduction
The oil and gas sector is one of the six core industries in India. It is of strategic importance
and plays a pivotal role in influencing decisions across other important spheres of the
economy.
In 1997–98, the New Exploration Licensing Policy (NELP) was envisioned to deal with the
ever-growing gap between demand and supply of gas in India. As per a recent report, the oil
and gas industry in India is anticipated to be worth US$ 139,814.7 million by 2015. With
India’s economic growth closely linked to energy demand, the need for oil and gas is
projected to grow further, rendering the sector a fertile ground for investment.
To cater to the increasing demand, the Government of India has adopted several policies,
including allowing 100 per cent foreign direct investment (FDI) in many segments of the
sector, such as natural gas, petroleum products, and refineries, among others. The
government’s participation has made the oil and gas sector in the country a better target of
investment. Today, it attracts both domestic and foreign investment, as attested by the
presence of Reliance Industries Ltd (RIL) and Cairn India.
Market Size
Backed by new oil fields, domestic oil output is anticipated to grow to 1 MBPD by FY16.
With India developing gas-fired power stations, consumption is up more than 160 per cent
since 1995. Gas consumption is likely to expand at a CAGR of 21 per cent during FY08–17.
Domestic production accounts for more than three-quarters of the country’s total gas
consumption.
India increasingly relies on imported LNG; the country was the fifth-largest LNG importer in
2013, accounting for 5.5 per cent of global imports. India’s LNG imports are forecasted to
increase at a CAGR of 33 per cent during 2012–17.
State-owned ONGC dominates the upstream segment (exploration and production),
accounting for approximately 60 per cent of the country’s total oil output (FY13).
IOCL operates 11,214 km network of crude, gas and product pipelines, with a capacity of 1.6
MBPD of oil and 10 million metric standard cubic metre per day (MMSCMD) of gas. This is
around 30 per cent of the nation’s total pipeline network. IOCL is the largest company,
operating 10 out of 22 Indian refineries, with a combined capacity of 1.3 MBPD.
Investment
According to data released by the Department of Industrial Policy and Promotion (DIPP), the
petroleum and natural gas sector attracted foreign direct investment (FDI) worth US$
6,519.53 million between April 2000 and January 2015.
83
Following are some of the major investments and developments in the oil and gas sector:
 Kirloskar Oil Engines Ltd (KOEL) and MTU Friedrichshafen, GmbH have signed a
memorandum of understanding (MoU). The MoU lays down exclusive cooperation on
the building and commissioning of emergency diesel gensets (EDG).
 CDP Bharat Forge GmbH has acquired 100 per cent equity shares of Mécanique
Générale Langroise (MGL) for € 11.8 million (US$ 12.91 million). The acquisition
would consolidate Bharat Forge’s position in the oil and gas sector by enhancing
service offerings and geographical reach.
 Technip has won a € 100 million (US$ 109.37 million) contract from Oil and Natural
Gas Corporation (ONGC) to build an onshore oil and gas terminal in Andhra Pradesh.
 Essar Oil Ltd has signed a deal with Russia-based OAO Rosneft to import 10 million
tonnes (MT) of crude oil per year for 10 years.
 The oil marketing companies have reduced the price of non-subsidised liquefied
petroleum cooking gas (LPG) by Rs 43.5 (US$ 0.69) per cylinder. The companies
have also reduced jet fuel rates by 12.5 per cent, the sixth straight reduction in prices
since August 2014.
 Reliance Industries Ltd (RIL) and Mexican state-owned company Petroleos
Mexicanos (Pemex) have entered into a memorandum of understanding (MoU) for
cooperation in the oil and gas sector.
 GAIL Global USA LNG LLC (GGULL) has signed an agreement with the US-based
WGL Midstream Inc for sourcing gas required to produce 2.5 MT of liquefied natural
gas (LNG) a year at the Cove Point Terminal in Maryland, US.
Government Initiatives
Two landmark initiatives for energy efficiency – Design Guidelines for Energy Efficient
Multi-Storey Residential Buildings and Star Ratings for Diesel Gensets and for Hospital
Buildings – were launched by Mr Dharmendra Pradhan, Minister of State with Independent
Charge for Petroleum and Natural Gas, Government of India.
Some of the major initiatives taken by the Government of India to promote oil and gas sector
are:
 India and Norway have discussed bilateral relationship between the two countries in
the field of oil and natural gas and decided to extend cooperation in hydrocarbon
exploration.
 To strengthen the country`s energy security, oil diplomacy initiatives have been
intensified through meaningful engagements with hydrocarbon rich countries.
 PAHAL - Direct Benefit Transfer for LPG consumer (DBTL) scheme launched in 54
districts on November 11, 2014 and expanded to rest of the country on January 1,
2015 will cover 15.3 crore active LPG consumers of the country.

84
  24 x 7 LPG service via web launched to provide LPG consumers an integrated
solution to carry out all services at one place, through MyLPG.in, from the comfort of
their home.
 Special dispensation for North East Region: For incentivising exploration and
production in North East Region, 40 per cent subsidy on gas price has been extended
to private companies operating in the region, along with ONGC and OIL.
 The Cabinet Committee on Economic Affairs (CCEA), chaired by Prime Minister Mr
Narendra Modi, has approved a mechanism for procurement of Ethanol by Public
Sector Oil Marketing Companies (OMCs) to carry out the Ethanol Blended Petrol
(EBP) Program.

Road Ahead
By 2015-16, India’s demand for gas is set to touch 124 MTPA against a domestic supply of
33 MTPA and higher imports of 47.2 MTPA, leaving a shortage of 44 MTPA, as per
projections by the Petroleum and Natural Gas Ministry of India. Moreover, Business Monitor
International (BMI) predicts that India will account for 12.4 per cent of Asia-Pacific regional
oil demand by 2015.

AUTOMOBILE INDUSTRY IN INDIA – AN OVERVIEW

Introduction
The Indian auto industry is one of the largest in the world with an annual production of 21.48
million vehicles in FY 2013-14.
The automobile industry accounts for 22 per cent of the country's manufacturing gross
domestic product (GDP).
An expanding middle class, a young population, and an increasing interest of the companies
in exploring the rural markets have made the two wheelers segment (with 80 per cent market
share) the leader of the Indian automobile market. The overall passenger vehicle segment has
14 per cent market share.
India is also a substantial auto exporter, with solid export growth expectations for the near
future. Various initiatives by the Government of India and the major automobile players in
the Indian market is expected to make India a leader in the Two Wheeler and Four Wheeler
market in the world by 2020.
Market Size
Sales of commercial vehicles in India grew 5.3 per cent to 52,481 units in January 2015 from
a year ago, according to Society of Indian Automobile Manufacturers (SIAM).
Sales of cars also grew for a third month in a row to 169,300 units in January 2015, up 3.14
per cent from the year-ago period.

85
Car market leader Maruti Suzuki India witnessed 8.6 per cent higher sales at approximately
118,551 units in February 2015, out of which 107,892 were sold in domestic market and
10,659 units were exported.
Hyundai Motor India Ltd (HMIL) reported a 2.4 per cent growth in total sales at 47,612 units
in February, compared with 46,505 units in the same month last year.
In the two-wheeler segment, Hero MotoCorp witnessed sales of 484,769 units in February
2015.
TVS Motor Co posted 15 per cent higher sales at 204,565 units against 177,662 units.
Bajaj Auto sold a total of 243,000 two and three-wheelers segment.
Investments
To match production with demand, many auto makers have started to invest heavily in
various segments in the industry in the last few months. The industry has attracted foreign
direct investment (FDI) worth US$ 12,232.06 million during the period April 2000 to
February 2015, according to the data released by Department of Industrial Policy and
Promotion (DIPP).
Some of the major investments and developments in the automobile sector in India are as
follows:
 DSK Hyosung has announced to set up a plant in Maharashtra and is planning to add
10-15 dealerships in the next financial year (FY 15-16) mostly in the tier-II cities and
introduce more models in the 250cc segment.
 Germany-based luxury car maker Bayerische Motoren Werke AG’s (BMW) local unit
has announced to procure components from seven India-based auto parts makers.
 Mahindra Two Wheelers Limited (MTWL) has acquired 51 per cent shares in France-
based Peugeot Motocycles (PMTC).
 Suzuki Motor Corp is planning to sell the automobiles made in the Gujarat plant, in
Africa.
 Tata Motors Ltd, India’s largest automobile maker, will sell trucks in Malaysia,
Vietnam and Australia to strengthen its presence in the Asia-Pacific region.
Government Initiatives
The Government of India encourages foreign investment in the automobile sector and allows
100 per cent FDI under the automatic route. Excise duty on small cars, scooters, motorcycles
and commercial vehicles was reduced in February last year to 8 per cent from 12 per cent to
boost the ‘Make in India’ initiative of the Indian government.
Some of the major initiatives taken by the Government of India are:
 Under the Union budget of 2015-16, the Government has announced to provide credit
of Rs 850,000 to farmers, which is expected to boost the tractors segment. The
government is aligning to ensure that at least one family member is economically

86
 strong to support the family. This is expected to improve the sentiments of entry-level
two-wheelers.
 The Government plans to promote eco-friendly cars in the country i.e. CNG based
vehicle, hybrid vehicle, electric vehicle and also made mandatory of 5 per cent
ethanol blending in petrol.
 The government has formulated a Scheme for Faster Adoption and Manufacturing of
Electric and Hybrid Vehicles in India, under the National Electric Mobility Mission
2020 to encourage the progressive induction of reliable, affordable and efficient
electric and hybrid vehicles in the country.
 The Automobile Mission Plan for the period 2006–2016, designed by the government
is aimed at accelerating and sustaining growth in this sector. Also, the well-established
Regulatory Framework under the Ministry of Shipping, Road Transport and
Highways, plays a part in providing a boost to this sector.

INFORMATION TECHNOLOGY (IT) INDUSTRY IN INDIA – AN OVERVIEW

Introduction
India is the world's largest sourcing destination for the information technology (IT) industry,
accounting for approximately 52 per cent of the US$ 124-130 billion market. The industry
employs about 10 million Indians and continues to contribute significantly to the social and
economic transformation in the country.
The IT industry has not only transformed India's image on the global platform, but has also
fuelled economic growth by energising the higher education sector especially in engineering
and computer science. India's cost competitiveness in providing IT services, which is
approximately 3-4 times cheaper than the US, continues to be its unique selling proposition
(USP) in the global sourcing market.
The Indian IT and ITeS industry is divided into four major segments – IT services, business
process management (BPM), software products and engineering services, and hardware.
The IT-BPM sector in India grew at a compound annual growth rate (CAGR) of 25 per cent
over 2000-2013, which is 3-4 times higher than the global IT-BPM spend, and is estimated to
expand at a CAGR of 9.5 per cent to US$ 300 billion by 2020.
India has emerged as the fastest growing market for Dell globally and the third largest market
in terms of revenue after the US and China, said Mr Alok Ohrie, Managing Director, Dell
India.
Market Size

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India, the fourth largest base for young businesses in the world and home to 3,000 tech start-
ups, is set to increase its base to 11,500 tech start-ups by 2020, as per a report by Nasscom
and Zinnov Management Consulting Pvt Ltd.
India’s internet economy is expected to touch Rs 10 trillion (US$ 161.26 billion) by 2018,
accounting for 5 per cent of the country’s gross domestic product (GDP), according to a
report by the Boston Consulting Group (BCG) and Internet and Mobile Association of India
(IAMAI). In December 2014, India’s internet user base reached 300 million, the third largest
in the world, while the number of social media users and smartphones grew to 100 million.
Public cloud services revenue in India is expected to reach US$ 838 million in 2015, growing
by 33 per cent year-on-year (y-o-y), as per a report by Gartner Inc. In yet another Gartner
report, the public cloud market alone in the country was estimated to treble to US$ 1.9 billion
by 2018 from US$ 638 million in 2014. The increased internet penetration and rise of e-
commerce are the main reasons for continued growth of the data centre co-location and
hosting market in India.
Investments
Indian IT's core competencies and strengths have placed it on the international canvas,
attracting investments from major countries. The computer software and hardware sector in
India attracted cumulative foreign direct investment (FDI) inflows worth US$ 13,788.56
million between April 2000 and December 2014, according to data released by the
Department of Industrial Policy and Promotion (DIPP).
The private equity (PE) deals increased the number of mergers and acquisitions (M&A)
especially in the e-commerce space in 2014. The IT space, including e-commerce, witnessed
240 deals worth US$ 3.8 billion in 2014, as per data from Dealogic.
India also saw a ten-fold increase in the venture funding that went into internet companies in
2014 as compared to 2013. More than 800 internet start-ups got funding in 2014 as compared
to 200 in 2012, said Rajan Anandan, Managing Director, Google India Pvt Ltd and Chairman,
IAMA.
Most large technology companies may have so far focused primarily on bigger enterprises,
but a report from market research firm Zinnov highlighted that the small and medium
businesses will present a lucrative opportunity worth US$ 11.6 billion in 2015 and US$ 25.8
billion in 2020. Moreover, India has nearly 51 million such businesses of which 12 million
have a high degree of technology influence and are looking to adopt newer IT products, as
per the report.

88
Some of the major investments in the Indian IT and ITeS sector are as follows:
 Wipro has won a US$ 400 million, multi-year IT infrastructure management contract
from Swiss engineering giant ABB, making it the largest deal for the technology
company.
 Tech Mahindra has signed a definitive agreement to acquire Geneva-based SOFGEN
Holdings. The acquisition is expected to strengthen Tech Mahindra’s presence in the
banking segment.
 Tata Consultancy Services (TCS) plans to set up offshore development centres in
India for Japanese clients in a bid to boost the company's margin in the market.
 Reliance is building a 650,000 square feet (sq ft) data centre in India—its 10th data
centre in the country—with a combined capacity of about 1 million sq ft and an
overall investment of US$ 200 million.
 Intel Corp plans to invest about US$ 62 million in 16 technology companies, working
on wearable, data analytics and the Internet of Things (IoT), in 2015 through its
investment arm Intel Capital. The Indian IoT industry is expected be worth US$ 15
billion and to connect 28 billion devices to the internet by 2020.
 Keiretsu Forum, a global angel investor network, has forayed into India by opening a
chapter in Chennai. With this, the Silicon Valley-based network will have 34 chapters
across three continents.
Government Initiatives
The adoption of key technologies across sectors spurred by the 'Digital India Initiative' could
help boost India's gross domestic product (GDP) by US$ 550 billion to US$ 1 trillion by
2025, as per research firm McKinsey.
Some of the major initiatives taken by the government to promote IT and ITeS sector in India
are as follows:
 India and the United States (US) have agreed to jointly explore opportunities for
collaboration on implementing India's ambitious Rs 1.13 trillion (US$ 18.22 billion)
‘Digital India Initiative’. The two sides also agreed to hold the US-India Information
and Communication Technology (ICT) Working Group in India later this year.
 India and Japan held a Joint Working Group conference for Comprehensive
Cooperation Framework for ICT. India also offered Japan to manufacture ICT
equipment in India.

89
  The Government of Telangana began construction of a technology incubator in
Hyderabad—dubbed T-Hub—to reposition the city as a technology destination. The
state government is initially investing Rs 35 crore (US$ 5.64 million) to set up a
60,000 sq ft space, labelled the largest start-up incubator in the county, at the campus
of International Institute of Information Technology-Hyderabad (IIIT-H). Once
completed, the project is proposed to be the world’s biggest start-up incubator housing
1,000 start-ups.
 Bengaluru has received US$ 2.6 billion in venture capital (VC) investments in 2014,
making it the fifth largest recipient globally during the year, an indication of the
growing vibrancy of its startup ecosystem. Among countries, India received the third
highest VC funding worth US$ 4.6 billion.
Road Ahead
Internet should be a basic human right, say 87 per cent of internet users in India, compared
with 83 per cent globally, according to a report by Centre for International Governance
Innovation (CIGI).
India continues to be the topmost offshoring destination for IT companies followed by China
and Malaysia in second and third position, respectively. Emerging technologies present an
entire new gamut of opportunities for IT firms in India. Social, mobility, analytics and cloud
(SMAC) collectively provide a US$ 1 trillion opportunity. Cloud represents the largest
opportunity under SMAC, increasing at a CAGR of approximately 30 per cent to around US$
650-700 billion by 2020. Social media is the second most lucrative segment for IT firms,
offering a US$ 250 billion market opportunity by 2020.
The US$ 12 billion plus rising Indian e-commerce business market is witnessing a rush of
hiring and may need 100,000 people over the next six months, as per industry experts. The
industry offers a slew of opportunities and scope for innovation thereby attracting the young
mind to push their limits.

90
 CHAPTER V

DATA ANALYSIS AND INTERPRETATION

91
I) DESCRIPTIVE STATISTICS RELATED TO THE PARAMETERS FOR
SHAREHOLDERS VALUE AND IMPORTANT VARIANTS OF PROFITS:

The first few pages below contain the descriptive statistics related to the 120 companies
included in the sample of companies studied. The data related to the important
determinants of shareholders value comprising different variants of profits is the main
point of contention of this research. The data is collected relating to shareholders value,
i. e., Market Value Added (MVA) and its determinants as parameters. The figures
incorporated in these statistical tests constitute the average annual figures of each of
these parameters during the nine year period of study. These constitute profits and its
important variants included in this research, viz., Return on Net Worth(RONW), Cash
From Operations(CFO), Return On Investment(ROI), Earnings Before Depreciation,
Interest and Taxes(EBDIT), Free Cash Flows(FCF) and Earnings After Taxes(EAT).

92
 Descriptive Statistics

Mean Std. Deviation N

MVA 7261.7481 20717.49592 120
FCF 923.667 3263.3676 120
CFO 1660.125 3988.4874 120
EAT 1484.358 2786.5945 120
EBDIT 3267.375 6034.5602 120
ROI 14.4760 13.30897 120
RONW 19.083 14.9737 120

The above descriptive statistics reveal some very interesting features of the independent
variables collected in the study.

The Market Value Added (MVA) shows an average of Rs.7261 crores. This is the average
MVA (Rs. Cr) of a company per annum. This indicates that all in all there is a good MVA
figure by the large and well traded stocks which of course were the ingredients of the 120
companies’ sample. This figure shows that the companies were able to generate this many
crores above the book value of the equity of the company. The companies all in all were able
to deliver an appreciable value to the shareholders during the period of the study barring
exceptions. The Standard Deviation of the same is about Rs.20717 crores which is
understandable given the wide disparity in the sales of companies and the volatility that exists
in the capital market.

The Free Cash Flows (FCF) figure shows an average of Rs.923 crores. The Free Cash Flows
(FCF) figure shows the average FCF (Rs. Cr) of a company per annum. This indicates that
the leading listed companies have generated on an average Cash Flow from Operations
exceeding its average annual capital expenditures, i.e., annual FCFs of Rs.923 crores per
annum which is a reasonably appreciable figure. The Standard Deviation of the same is
Rs.3263 crores. This is also to be understood in the light of the fact that some companies in
order to meet their capital expenditures or in an aggressive drive for growth have invested in
heavy capital expenditures and the result was that there were even negative FCFs in certain
cases. So the risk in obtaining the Free Cash Flows is really high and critical.

The figure of Cash From Operations (CFO) is showing an impressive figure of Rs. 1660
crores. This indicates that the companies were able to generate average annual cash from
93
operations of this magnitude. The standard deviation of the same is Rs. 3998 crores. This is
also to be undertstood in the light of the fact that the companies sometimes may have good
profit figures or good profit margins, however, the depreciation and other capital expenditures
which may have been written off or other capital transactions might consume a bulk of these
profits leaving the cash from operations at a lesser and even at negative figures at times.

The figures of Profits After Taxes (PAT) show an impressive figure of Rs. 1484 crores. This
indicates that the companies were on an average able to make a Net Profit (PAT) of Rs. 1484
crores during the period of the study. The Standard Deviation of the same is found to be Rs.
2786 crores. This is to be considered in the light of the fact that there are possible situations,
which happened particularly in case of public sector banks and some of the industrial
manufacturing companies where the net profits were quite low or negative in certain
situations. This has happened due to the compounded effect of the macro-economic, social
and political environment prevailing in the industry in which the companies were operating,
combined in certain cases with some serious internal flaws in case of some of the Indian
manufacturing companies and banks.

The figure of Profits Before Depreciation, Interest and Taxes (PBDIT) shows an average
figure of Rs. 3267 crores. This shows that on an average the companies were able to make
an operating profit of Rs. 3267 crores. Given the wide diversity of the firms taken
constituting different industries and sizes, this seems to be an impressive figure. It also goes
to say that the difference between the Operating Profits(PBDIT) and the Net Profit(PAT) goes
to , i.e., 1783 crores on an average per annum was spent on depreciation, interest and taxes
collectively by the firms. This is almost as good as the figure of Net Profit. This speaks that
all in all, the companies have to spend/lose an equal amount of net profits on an average per
annum for depreciation, interest and taxes.

The Return on Investment (ROI) figure is showing an average of 14.47%. This shows that
the companies were on an average earning Rs.14.47 for every Rs.100 invested per annum.
The Standard Deviation of the same is 13.31%. This also shows that there may be wide
fluctuations in the same given the disparity in sales of companies, category of industry of the
companies, scale of operations and the growth drive, initiative and environment prevailing in
the industry and economy and other factors impacting the return on investment.

94
The Return on Net Worth (RONW) ratio is showing an average of 19.08%. RONW measures
the return on shareholders’ funds. There shall be a significant difference between the ROI
and the RONW if the company has more debt funds employed. This research has revealed
that there are firms on the one side having zero debt and others which have about even 80-
95% debt in the capital structure. It is unfortunate to note that some of the firms have
resorted to heavy debt without any serious consideration of their earning potential and the
financial risk that accompanies the same. It is also a pointer to the fact the banks and lenders
have lent to companies without establishing their creditworthiness in a comprehensive sense.
The Standard Deviation of the same is 14.97%.

II) REGRESSION RESULTS WITH MVA (MARKET VALUE ADDED) AS

THE DEPDENDENT VARIABLE AND INDEPENDENT VARIABLES
TAKEN AS IMPORTANT VARIANTS OF PROFITS, i.e., RONW, CFO,
ROI, EBDIT, FCF AND EAT:

The following few pages contain a description of the regression results taking the dependent
variable as the MVA and independent variables taken as RONW, CFO, ROI, EBDIT, FCF
AND EAT taking Average figures of the dependent variable and the independent variables
during the period of the study, i.e., 2005-06 to 2013-14. A detailed calculation of 120
companies’ Average figures of each of the above dependent and independent variables has
been made in another excel worksheet considering the 9 year average of each of the above
independent variables. The data was fed into SPSS 19.0 and has been checked for the
required appropriateness for the purpose and later the regression results were obtained. The
key observations and interpretations may be summarized as follows:

Regression

95
 Notes
Output Created 29-JUL-2015 14:12:07
Comments
Active Dataset DataSet2
Filter <none>
Weight <none>
Input
Split File <none>
N of Rows in Working 120
Data File
User-defined missing values are
Definition of Missing
treated as missing.
Missing Value Handling
Statistics are based on cases with no
Cases Used
missing values for any variable used.
REGRESSION
/MISSING LISTWISE
/STATISTICS COEFF OUTS R
ANOVA
Syntax /CRITERIA=PIN(.05) POUT(.10)
/NOORIGIN
/DEPENDENT MVA
/METHOD=ENTER FCF CFO
EAT EBDIT ROI RONW.
Processor Time 00:00:00.00
Elapsed Time 00:00:00.05
Memory Required 3076 bytes
Resources
Additional Memory 0 bytes
Required for Residual
Plots

Regression

Variables Entered/Removeda
Model Variables Variables Method
Entered Removed
RONW, CFO, . Enter
1 ROI, EBDIT,
FCF, EATb
a. Dependent Variable: MVA
b. All requested variables entered.
96
 Model Summary
Model R R Square Adjusted R Std. Error of
Square the Estimate
1 .556a .309 .272 17675.85466
a. Predictors: (Constant), RONW, CFO, ROI, EBDIT, FCF, EAT

ANOVAa
Model Sum of Df Mean Square F Sig.
Squares
15771292134.3 6 2628548689.051 8.413 .000b
Regression
06
35305249707.3 113 312435838.118
1 Residual
35
51076541841.6 119
Total
41
a. Dependent Variable: MVA
b. Predictors: (Constant), RONW, CFO, ROI, EBDIT, FCF, EAT

Coefficientsa
Model Unstandardized Coefficients Standardized t Sig.
Coefficients
B Std. Error Beta
(Constant) -2309.137 2770.277 -.834 .406
FCF -1.184 .981 -.187 -1.207 .230
CFO 1.988 1.156 .383 1.721 .088
1 EAT 3.826 1.892 .515 2.022 .046
EBDIT -.893 .664 -.260 -1.344 .182
ROI 163.029 205.285 .105 .794 .429
RONW 117.441 176.366 .085 .666 .507
a. Dependent Variable: MVA

DESCRIPTIVES VARIABLES=MVA FCF CFO EAT EBDIT ROI RONW

97
 /STATISTICS=MEAN STDDEV VARIANCE RANGE MIN MAX.

DISCUSSION ABOUT THE REGRESSION EQUATION: While it is well known that

profits are one of the most important determinants of shareholders value, this research
focuses on identifying which variant(s) among the profits is/are a close determinant of
shareholders value. The above regression analysis has taken taking MVA as the Dependent
Variable and FCF, CFO, EAT, EBDIT, ROI, and RONW as the Independent Variables points
to the fact that all the six variants of profits named above do contribute to shareholder value.
R value of 0.556 indicates that all the Independent Variables together have a collective
positive correlation of 0.56 to the Dependent Variable, i.e., the MVA. R square value of
0.309 indicates that the different variants of profits as mentioned above predict about 0.31%
of the Dependent Variable, i.e., the MVA. Among the Independent Variables, we notice that
the Independent Variables with an acceptable ‘p’ value of 0.088 and 0.046 are Cash From
Operations (CFO) and Earnings After Taxes (EAT) respectively which relatively contribute
significantly to the Market Value Added.

However, since the R square value of 0.308 indicates that the different variants of profits
predict the value of MVA, i.e., the Dependent Variable to the extent of 30.8%. It is also a
keen pointer to the fact that the shareholder value metric .i.e., MVA also is predictable based
on a host of other factors impacting the same. As is observed and known in the area of
finance, the term shareholders value is a quite complex phenomenon which is determined,
calculated and perceived from different key view points. Common to all these viewpoints is
the view that the consistent shareholder value delivered to the shareholders is based on
consistent profitability of the company. This research is hinged on identifying which among
the variants of profits contribute significantly to shareholders’ value as can be verified from
empirical research related to listed companies in India. However, beyond this, the other
prominent factors which affect shareholders value may be mentioned as follows. The
Individual Company risk factors like the composition and viability of the product/project
portfolio of the firm, the ability of the company to consistently perform better than its peers
in the competitive market with a tangible competitive edge, the efficiency, motivation and
adaptability level of the employees and the like also do have their own impact on the

98
investors’ perception of the demand or otherwise of the shares. Apart from the above
company factors, several industry factors like the growth cycle in which the industry itself is
operating at the given time period, product life cycles of the products/services/projects which
are the key income generating avenues of the business, the legal and other
constraints/developments imposed on the operating environment also do have their own
impact on the perception, demand of the shares in the capital market. Apart from the above,
the factors in the country like the interest rates, inflation rates, GDP growth rate, political
exigencies, relative strength of the country’s economic fundamentals and the like, all of these
have a definite impact on the investors/shareholders perception/demand for a company’s
shares apart from profitability which does have a foundational impact on the shareholders
value of a business.

III) REGRESSION RESULTS WITH MVA (MARKET VALUE ADDED) AS

THE DEPENDENT VARIABLE AND INDEPENDENT VARIABLES
TAKEN AS IMPORTANT VARIANTS OF PROFITS, i.e., RONW, CFO,
ROI, EBDIT, FCF, EAT AND DIVIDENDS .

Regression Statistics
Multiple R 0.575
R Square 0.331
Adjusted R
Square 0.289
Standard Error 17471.364
Observations 120

ANOVA
Significan
df SS MS F ce F
1688870118 241267159
Regression 7 1 7 7.904 0.000
3418784066
Residual 112 1 305248577
5107654184
Total 119 2

Coefficien Standard P- Lower Upper

ts Error t Stat value 95% 95%
6128.61
Intercept 139.725 3022.599 0.046 0.963 -5849.167 8

99
 Av.EBDIT(Rs.
cr) -0.631 0.671 -0.940 0.349 -1.960 0.698
Av.EAT(Rs. cr) 3.755 1.871 2.007 0.047 0.048 7.462
Av.Divds(Rs.) -538.021 281.203 -1.913 0.058 -1095.188 19.147
Av. ROI (%) 227.658 205.703 1.107 0.271 -179.915 635.231
Av.RONW (%) 75.011 175.731 0.427 0.670 -273.177 423.200
Av.CFO(Rs.Cr) 1.805 1.146 1.575 0.118 -0.466 4.076
Av. FCF(Rs.Cr) -1.132 0.970 -1.167 0.246 -3.055 0.790

DISCUSSION ABOUT THE REGRESSION EQUATION: The above regression

incorporating Dividends as the 7th Independent Variable in addition to the previous 6
independent variables clearly shows that Dividends have a p value of 0.058 which is
absolutely close to 0.05 and so one can safely say that in addition to PAT and CFO which
have been found as significant determinants of shareholders value, Dividends can also be
considered as one of the significant determinants of shareholders value as measured by MVA.
The R square value is enhanced to 0.33 and the Multiple R value is also enhanced to 0.57
which explains that consistent Dividends in addition to the other profit variants do contribute
to shareholder value.

100
 IV) CORRELATION RESULTS

CORRELATION RESULTS OF THE DATA OF 120 COMPANIES AVERAGE

VALUES

Correlations
MVA FCF CFO EAT EBDIT ROI RONW

Pearson Correlation 1 .371** .480** .499** .395** .229* .193*

MVA Sig. (2-tailed) .000 .000 .000 .000 .012 .035

N 120 120 120 120 120 120 120

Pearson Correlation .371** 1 .859** .752** .677** .117 .067

FCF Sig. (2-tailed) .000 .000 .000 .000 .204 .466

N 120 120 120 120 120 120 120

Pearson Correlation .480** .859** 1 .887** .798** .059 .031

CFO Sig. (2-tailed) .000 .000 .000 .000 .521 .739

N 120 120 120 120 120 120 120

Pearson Correlation .499** .752** .887** 1 .907** .131 .083

EAT Sig. (2-tailed) .000 .000 .000 .000 .155 .365

N 120 120 120 120 120 120 120

Pearson Correlation .395** .677** .798** .907** 1 .039 .062

EBDI .000 .000 .000 .000 .675 .500
Sig. (2-tailed)
T
N 120 120 120 120 120 120 120
ROI Pearson Correlation .229* .117 .059 .131 .039 1 .780**
Sig. (2-tailed) .012 .204 .521 .155 .675 .000

101
 N 120 120 120 120 120 120 120

Pearson Correlation .193* .067 .031 .083 .062 .780** 1

RON .035 .466 .739 .365 .500 .000
Sig. (2-tailed)
W
N 120 120 120 120 120 120 120

**. Correlation is significant at the 0.01 level (2-tailed).

*. Correlation is significant at the 0.05 level (2-tailed).

DISCUSSION ABOUT THE CORRELATION MATRIX: The Correlation matrix as

indicated above throws some intriguing observations. Primarily, Let us observe the
parameter which is the bone of contention of this research, i.e., the MVA (Market Value
Added) of the companies. We notice that the MVA has maximum positive correlation with
EAT (Earnings After Taxes) at 0.499, which vouches along with the Regression Equation as
having the most acceptable ‘p’ value among the independent variables of 0.048. This is
immediately followed by the parameter CFO (Cash From Operations) which has the next
nearest positive correlation of 0.48 which is also going along with the next acceptable ‘p’
value of 0.088 as shown in the Regression Equation. MVA is also found to have a positive
correlation of 0.395 with the Operating Profit, popularly known and indicated in Indian
financial statements at EBDIT (Earnings Before Depreciation, Interest and Taxes); this too is
found to have the next least ‘p’ value of 0.182. This is followed by Free Cash Flows which
has the next highest positive correlation of 0.371 going along with the next lest ‘p’ value of
0.230 in the Regression Equation. These are followed by ROI (Return on Investment) ratio
having a positive correlation of 0.229, and then followed by RONW (Return on Net Worth)
having a positive correlation of 0.193.

V) CHI SQUARE TEST TO CHECK IF THERE IS A SIGNIFICANT

ASOCIATION BETWEEN THE SIZE OF A COMPANY(TURNOVER)
AND THE INDUSTRY TO WHICH IT BELONGS TO

CHI TEST TO CHECK FOR INDEPENDENCE OF ATTRIBUTES

ACTUAL VALUES(No of companies)

Av.Turn
102
 over
Aut Ceme Ene Ind I Phar Servic Tot
(Rs.Cr) o nt CG rgy Mfg Infra T ma es Text al
(1000-
4000) 1 2 4 4 4 3 1 4 12 4 39
(4001-
10000) 3 3 3 7 9 3 0 4 8 2 42
(10001
cr+) 3 1 3 11 4 1 2 0 14 0 39
7 6 10 22 17 7 3 8 34 6 120

Av.Turn
over EXPECTED VALUES(No of companies)
Aut Ceme Ene Ind Infr I Phar Servic
(Rs.Cr) o nt CG rgy Mfg a T ma es Text Total
(1000-
4000) 2 2 3 6 5 2 1 3 12 2 38
(4001-
10000) 1 2 4 8 6 2 1 3 12 2 41
(10001
cr+) 2 2 3 6 5 2 1 3 12 2 38
Total 5 6 10 20 16 6 3 9 36 6 117

CHI TEST RESULT FOR INDEPENDENCE VALUE OBTAINED IS 0.1

Note: CG – Consumer Goods, Ind Mfg – Industrial Manufacturing, IT – Information

Technology, Text - Textiles

DISCUSSION ABOUT THE CHI TEST RESULT: The above table and the chitest results
show that there is no significant association between the turnover of a company and the
industry category to which it belongs.

103
Hence, as far as Hypothesis 8 (page 18), The Null Hypothesis (H 08) is accepted that there is
no significant association between the turnover brackets of companies and its industry
category as noted above.

VI) INDUSTRY WISE COMPARISION OF MARKET VALUE (MV) AND

MARKET VALUE ADDED (MVA) BASED ON MAJOR CATEGORY OF
INDUSTRIES

The following tables and graphs illustrate, examine and interpret the trend in the Market
Value (MV), i.e., the Market Capitalization of the companies in the sample of 120 based on
the industry to which the company belongs to. For practical purposes, all the 120 companies
are categorized into the following industries, viz., Automobiles and Automobile
Components(numbering 7 companies), Cement(comprising 6 companies), Energy(comprising
Oil and Gas, electricity generation, petroleum companies and the like of a large scale nature
and leading ones, numbering 22 companies), Infrastructure(comprising companies in
Construction and more so involved directly on a large scale in infrastructural development of
India like L & T, Hindustan Construction Company, etc., numbering 7 companies), Industrial
Manufacturing( all manufacturing companies of a large scale not falling in the remaining
categories, numbering 17 companies), IT/ITES(Information Technology/Information
Technology Enabled Services, numbering 3 companies of large scale nature and leading
ones), Pharmaceuticals(numbering 8 companies), Banking and Services(comprising mostly
banking and a few financial services, hospitality and airway companies, numbering 34
companies), Consumer Goods(comprising mostly FMCG, i.e., Fast Moving Consumer Goods
Companies, numbering 9 companies) and finally Textiles(comprising 6 companies), these
companies are taken as a representative of the large and leading ones in India. The
representative indexes from which they are chosen are the ET 500 Index in India.
104
 Table 2 – AVERAGE MV AND MVA OF AUTO INDUSTRY FROM 2005-06 TO 2013-14

AUTO AUTO
Year INDUSTRY INDUSTRY
AVG
AV MV(Rs.Cr) MVA(Rs.Cr)
2005-06 2948.31 1243
2006-07 11464.04 9447
2007-08 4784.46 2433
2008-09 4099.21 550
2009-10 5830.86 3441
2010-11 9100.80 6739
2011-12 15261.31 13313
2012-13 17241.27 14623
2013-14 21072.58 18661

CHART 2 - AVERAGE MV AND MVA OF AUTO INDUSTRY FROM 2005-06 TO

2013-14

105
INTERPRETATION: There are seven companies under this sector which are included in the
sample analyzed.The above table and indicate that in case of automobile and automobile
component industry, there was a consistent increase in Market Value(Market Capitalization)
and the Shareholders Value Metric, Market Value Added of the companies during 2005-06 to
2013-14 subject to the exception that during the years 2007-08 to 2008-09, there is a steep
decrease in both the parameters, viz., Market Value and Market Value Added This could be
attributed to the fact of the slowdown in the general economic environment during these
years after the aftermath of the US recession and other compounding effects during the
period.

The most important observation noted above is that the approximate percentage of Average
MVA to MV approximately ranges from 60-80% except during the years 2007-08 and 2008-
09 which ranges from 10-20%. This only indicates that while all in all there is adequate
MVA to MV ratio during all but the exceptional years, the companies were able to generate
much value to shareholders. The difference between MVA and MV represents the Book
Value of the equity of the companies.

Table 3 – AVERAGE MV AND MVA OF CEMENT INDUSTRY FROM 2005-06 TO

2013-14

CEMENT
Year CEMENT INDUSTRY INDUSTRY
AV MV(Rs.Cr.) AV MVA(Rs.Cr.)
106
 2005-06 4018.64 2399
2006-07 5958.58 3673
2007-08 7783.87 4790
2008-09 5336.36 1942
2009-10 6058.01 2242
2010-11 9198.94 4063
2011-12 10333.61 4821
2012-13 13165.97 7629
2013-14 15458.73 11420

CHART 3 - AVERAGE MV AND MVA OF CEMENT INDUSTRY FROM 2005-06 TO

2013-14

INTERPRETATION: The above table and indicate that in case of automobile and automobile
component industry, there was a consistent increase in Market Value(Market Capitalization)
and the Shareholders Value Metric, Market Value Added of the companies during 2005-06 to
2013-14 subject to the exception that during the years 2008-09 to 2009-10, there is a
somewhat steep decrease in both the parameters, viz., Market Value and Market Value Added
This could be attributed to the fact of the slowdown in the general economic environment,

107
manufacturing, construction during these years after the aftermath of the US recession and
other compounding effects during the period.

The most important observation noted above is that the approximate percentage of Average
MVA to MV approximately ranges from 50-70% except during the years 2007-08 and 2008-
09 which ranges from 20-30%. This only indicates that while all in all there is adequate
MVA to MV ratio during all but the exceptional years, the companies were able to generate
much value to shareholders. The difference between MVA and MV represents the Book
Value of the equity of the companies.

Table 4 – AVERAGE MV AND MVA OF ENERGY INDUSTRY FROM 2005-06 TO

2013-14

ENERGY ENERGY
Year INDUSTRY INDUSTRY
AVG MVA
AVG MV(Rs.Cr) (Rs.Cr)
2005-06 12236.59 1473.40
2006-07 15214.22 2497.88
2007-08 24372.49 9721.59

2008-09 27771.41 13545.50

2009-10 38385.05 18220.10
2010-11 53761.55 30975.71
2011-12 45618.11 21272.14
2012-13 44236.37 17861.51
2013-14 44528.17 15448.17

CHART 4 - AVERAGE MV AND MVA OF ENERGY INDUSTRY FROM 2005-06 TO

2013-14

108
INTERPRETATION: There are 22 firms which are included from this industry in the sample
chosen. The above table and graph indicate that the Market Value (MV) and the Market Value
Added (MVA) have peaked during the year 2010-11 while gradually increasing from the year
2005-06. The difference between MVA and MV represents the Book Value of the equity of
the companies.

However, the figure of MVA in proportion to Market Value and in the absolute sense is very
low during the first two years, i.e., 2005-06 and 2006-07. This picks up gradually till 2011,
after which we observe that there is a kind of stagnancy in the Market Value and the MVA of
the companies. This can be possibly attributed to the fact that the government is bound to
subsidize petrol and diesel which are the key products of the industry/. It also implies that the
companies, particularly, the public sector ones like the IOC, BPCL and HPCL are bound by
the administered price mechanism which depends on the crude oil price fluctuations in the
international market. All in all, we notice that the percentage of MVA to MV is ranging from
30-50% while in the initial two years it is below 20%. There is a significant contribution to
Market Value Added by the companies in the later years.

109
Table 5 – AVERAGE MV AND MVA OF INFRASTRUCTURE INDUSTRY FROM
2005-06 TO 2013-14

INFRASTRUCTURE INFRASTRUCTURE
Year INDUSTRY INDUSTRY
AVG MV(Rs.Cr) AVG MVA(Rs.Cr)
2005-06 813 116
2006-07 1987 284
2007-08 4099 586
2008-09 7849 1121
2009-10 7897 1128
2010-11 12144 1735
2011-12 10731 1533
2012-13 10392 1485
2013-14 14961 2137

CHART 5 - AVERAGE MV AND MVA OF INFRASTRUCTURE INDUSTRY FROM

2005-06 TO 2013-14

110
INTERPRETATION: There are seven companies under this sector which are included in the
sample analyzed. It is quite interesting to note that there is a somewhat erratic yet a
significant trend in the increase in the Average Market Value (MV) of the Companies in
infrastructure sector. This speaks volumes about the manner of inconsistent, yet vital growth
that is taking place in the infrastructure industry in India. However, the Market Value Added
(MVA) in proportion to the Market Value is abysmally low throughout the period of the
study. The difference between MVA and MV represents the Book Value of the equity of the
companies.

This also speaks a lot about the huge investment needs of the industry for which most of the
companies are having shortage of funds. Some of the companies have a huge component of
loans in their balance sheets which adds significantly to their financial expenses in terms of
interest costs which eats into the profit margins. The wafer thin margins the companies
survive on owing to the long gestation period of the projects are also one of the reasons for
low market value added. The government’s failure to invest in the infrastructure sector
adequately, even though, infrastructure sector was declared as the priority sector during the
XIIth Five Year Plan (2012-17) is also one of the important reasons for the companies not
contributing much to the value of the shareholders during the period of the study.

111
 Table 6 – AVERAGE MV AND MVA OF INDUSTRIAL MANUFACTURING
INDUSTRY FROM 2005-06 TO 2013-14

INDL MFG INDL MFG

Year INDUSTRY INDUSTRY
AVG AVG
MV(Rs.Cr) MVA(Rs.Cr)
2005-06 2841 17
2006-07 3776 318
2007-08 7131 2719
2008-09 11864 6002
2009-10 12317 1186
2010-11 21845 6700
2011-12 22375 3010
2012-13 16416 -7658
2013-14 13928 2103

CHART 6 - AVERAGE MV AND MVA OF INDUSTRIAL MFG FROM 2005-06 TO

2013-14

112
INTERPRETATION: There are seventeen firms which are under this category which are
included in the sample analyzed. The above table and graph show an interesting observation.
While the industrial manufacturing sector’s companies have increased gradually in terms of
their Market Value (MV) till 2011-12, there is a clear slowdown in manufacturing noted after
this Financial Year. The figure of Market Value Added(MVA) is also ranging from about 0-
2% of MV in the initial two years to 10-30% during the other years, except during the year
2012-13, it is noticeable that the MVA is negative, i.e., the price at which the companies’
shares were traded were less than their book value. The difference between MVA and MV
represents the Book Value of the equity of the companies.

As was noted from the developments in this sector, rise in input costs without a proportionate
rise in the selling prices, huge competition, reduced demand, difficulty in getting and
servicing loans are some of the major reasons we notice that industrial manufacturing despite
being robust, contributing to the backbone of the economy, producing some of the essential
industrial and consumer goods items, were not able to generate adequate value to the
shareholders as can be noted above. It is also quite interesting to note that there was a
negative average market value added during the year 2012-13. This speaks volumes about
how manufacturing sector has taken a huge setback during this year; profits of a good number
of companies were low or were in the red during this period.

113
Table 7 – AVERAGE MV AND MVA OF IT INDUSTRY FROM 2005-06 TO 2013-14

Year IT INDUSTRY IT INDUSTRY

AVG MV(Rs.Cr) AVG MVA
2005-06 6409 4389
2006-07 15646 12794
2007-08 20097 16300
2008-09 13737 9086
2009-10 16214 10933
2010-11 49232 42389
2011-12 71739 63081
2012-13 78634 67256
2013-14 86119 71494

CHART 7 - AVERAGE MV AND MVA OF IT INDUSTRY FROM 2005-06 TO 2013-14

114
INTERPRETATION: There are three bench mark firms which belong to this sector which
are included in the sample analyzed. The above table and graph show some remarkable
observations. The IT and the ITES industry as a whole has significantly grown during the
years 2005-06 to 2013-14. However, as is popularly known, there was a setback in the years
2008-09 and 2009-10, much due to the US recession. Later, the companies have displayed
much resilience by bounciing back to high levels of MV and MVA during the later years. It is
quite pertinent to note that the ratio of MVA to MV ratio of the companies is significantly
high throughout the period of the study, MVA is about 70-90% of the MV in all of the years
including when reduced growth happened during the years of recission, i.e., 2008-09 and
2009-10. The difference between MVA and MV represents the Book Value of the equity of
the companies.

This also shows that the shareholders are demanding, profit margins are high and
shareholders value delivery is highly keen on the agenda of the management of the top IT
companies. By the way, the companies included in this sector in this sample were those of
large scale nature. However, the trend is quite wonderful to note that Indian IT companies
are delivering value to shareholders who are spread all over the world despite a major chunk
owned by the promoter shareholders from India.

115
Table 8 – AVERAGE MV AND MVA OF PHARMA INDUSTRY FROM 2005-06 TO
2013-14

PHARMA
Year PHARMA INDUSTRY INDUSTRY
AVG MV(Rs.Cr) AVG MVA(Rs.Cr)
2005-06 846 474
2006-07 900 481
2007-08 1283 667
2008-09 1432 812
2009-10 1089 259
2010-11 1766 907
2011-12 1641 778
2012-13 1411 516
2013-14 1163 268

CHART 8 - AVERAGE MV AND MVA OF PHARMA INDUSTRY FROM 2005-06 TO

2013-14

116
INTERPRETATION: There are eight firms which belong to this sector which are included in
the sample analyzed. The above table and graph show a noticeable development related to
pharmceutical companies based at India. While there was a constant increase in the MV and
MVA from 20005-06 to 2008-09, there seems to be a setback during the year 2009-10 and
also there seems to be a smart recovery during the year 2010-11 folllowed by a decline in the
MV and MVA during the years 2011-12 upto 2013-14. It is also noteworthy to see that the
proportion of MVA to MV has remained around 30-50% except during the last two years
wherein there is a significant decrease in the proportion of MVA to the MV of the companies.
The difference between MVA and MV represents the Book Value of the equity of the
companies.

This shows that the companies were not able to devliver adequate value to the shareholders
during the last two years of the study period. However, another noteowrthy point is that the
size of the companies is on a range of a hundreds of crores of rupees at the most, i.e., not
more than about 1700 crores in terms of Market Value Added, which speaks of the stiff
competition and the kind of spread of the company’s products in the Indian and export
markets. Off shore markets are also facing stiff competition, substitute products existing in
certain cases apart from regulatory restraints which impose strict restrictions on the size and
nature of products produced and sold by the pharmaceutical industries.

117
Table 9 – AVERAGE MV AND MVA OF BANKING & SERVICES INDUSTRY FROM
2005-06 TO 2013-14

BANKING & BANKING &

SERVICES SERVICES
Year INDUSTRY INDUSTRY
AVG AVG
MV(Rs.Cr) MVA(Rs.Cr)
2005-06 4037 -417
2006-07 4069 -1052
2007-08 7392 -54
2008-09 6481 -2061
2009-10 9559 -449
2010-11 13284 1239
2011-12 16872 2011
2012-13 16953 -622
2013-14 18135 -1184
CHART 9 - AVERAGE MV AND MVA OF BANKING & SERVICES INDUSTRY
FROM 2005-06 TO 2013-14

118
INTERPRETATION: There are 34 firms which belong to this sector which are included in
the sample analyzed. It is quite interesting to note that the above sector comprising
predominantly banking entities and a few of other service industries consistently increase in
terms of their Market Value(MV) throughout the period of the study. However, the ironical
tragedy is that the MVA is not only abysmally low, but most of the years it is negative,
barring during the years 2010-11 and 2011-12. The difference between MVA and MV
represents the Book Value of the equity of the companies.

This indicates as is popularly known during the recent years that the banking industry is in a
somewhat pathetic situation as fas as its contirbution to the value of the shareholders. Most
of the banking entities’ shares are trading at a market value that is below their book value.
This was clearly evidenced from the observations of the market and book values of a number
of banks during the during the data collection phase of this study. One of the popular and
dominant reasons for the same may be atrributable to the highly alarming levels of Non
Performing Assets(NPAs) of banking during the last decade which have become worse
compared to the preceding decades . Even in the Parliament, there were discussions about
this. This speaks volumes about how the government is in a way inadvertently and subtly
protecting the government banks by infusing more funds from the tax payers money rather
than the banks tightening their belts by restricting exposure to bad loans in the final analysis.

119
Table 10 – AVERAGE MV AND MVA OF CONSUMER GOODS INDUSTRY FROM
2005-06 TO 2013-14

CON GOODS CON GOODS

Year INDUSTRY INDUSTRY
AV MV(Rs.Cr.) AV MVA(Rs.Cr.)
2005-06 8604 6756
2006-07 10799 8789
2007-08 12917 10473
2008-09 13417 10570
2009-10 14479 11372
2010-11 27289 23643
2011-12 35020 31020
2012-13 46026 41198
2013-14 40836 35028

CHART 10 - AVERAGE MV AND MVA OF CONSUMER GOODS INDUSTRY FROM

2005-06 TO 2013-14

120
INTERPRETATION: There are ten companies under this sector which are included in the
sample analyzed. It is quite interesting to note that the Consumer Goods Industry Average
figures have shown a regular increase in terms of the Average Market Value(MV) and the
Average Market Value Added(MVA) throughout the period of the study. While the growth in
both of the above parameters was slack during the first four years, it has increased
tremendously during the years 2009-10 to 2012-13. However, it has somewhat tapered off
during the year 2013-14. It is quite expectable that this industry is in a resilient stage
thereafter. The average MVA to MV ratio is found to be exceptionally high in case of this
industry which is about 70-85% during all the years. The difference between MVA and MV
represents the Book Value of the equity of the companies.

This speaks as to the margins, profits and value that are delivered to the shareholders which
has remained consistently high and is showing an impressive increasing trend throughout the
period of the study. However, the slight tapering off of the trend during the year 2013-14
probably could be attributed to the uncertainty prevailing during the political transition during
the year wherein there was a change in guard of our government. The Consumer Goods
Industry is bestowed with another advantage that it is not highly subject to seasonal
fluctuations as most of the items are constantly required by the growing population of the
country.

Table 11 – AVERAGE MV AND MVA OF TEXTILES/GARMENTS INDUSTRY FROM

2005-06 TO 2013-14
121
 TEXTILE
Year TEXTILE INDUSTRY INDUSTRY
AV MV(Rs.Cr.) AV MVA(Rs.Cr.)
2005-06 4508 2955
2006-07 5009 3202
2007-08 4157 1957
2008-09 4110 1717
2009-10 3403 1274
2010-11 4350 1909
2011-12 5275 2554
2012-13 5321 2325
2013-14 4526 1254

CHART 11 - AVERAGE MV AND MVA OF TEXTILES/GARMENTS INDUSTRY

FROM 2005-06 TO 2013-14

INTERPRETATION: There are six companies under this sector which are included in the
sample analyzed. It is noteworthy that the absolute figures of Market Value(MV) and Market
Value Added(MVA) have not shown a significant change during the years of the study. The

122
proportion of MVA to MV ranges between 25-60%. The industry itself therefore appears to
be in a somewhat stagnant stage. It is also interesting to note that the figues of MVA and MV
have decreased from 2006-07 to 2009-10 and also in between 2012-13 and 2013-14. The
difference between MVA and MV represents the Book Value of the equity of the companies.

The above graph indicates that the MVA also moves more or less in tandem with the MV of
the companies during the years. However, during the years 2007-08 to 2009-10 and also
during the year 2013-14, we find that the proportion of MVA to MV is relatively lower. It
also speaks indirectly about the thin margins, competition, changes in technology, fashions
and expectatations of the customers, internal problems like the employee rewarding and
management which are critical to this industry.

VII) INDUSTRY WISE COMPARISION OF NET PROFITS (PROFITS

BEFORE DEPRECIATION AND TAXES (PBDIT) AND PROFITS AFTER
TAXES (PAT) BASED ON MAJOR CATEGORY OF INDUSTRIES

Table 12 – AVERAGE EBDIT AND EAT OF AUTO INDUSTRY FROM FY 2005-06 TO

2013-14

AUTO
Year INDUSTRY AUTO INDUSTRY
AVG
EBDIT(Rs.Cr) AV EAT(Rs.Cr)
2005-06 1205 567
2006-07 1442 703
2007-08 1525 752
2008-09 1289 559
2009-10 2029 1166
2010-11 2004 1236
2011-12 1988 1131
2012-13 2238 1069
2013-14 2431 1161

Chart 12 – AVERAGE EBDIT AND EAT OF AUTO INDUSTRY FROM FY 2005-06

TO 2013-14

123
INTERPRETATION: There are seven companies under this sector which are included in the
sample analyzed. It is quite inquisitive to note from the above table and graph that the
automobile industry while it was almost consistently and gradually growing from the year
2005-06 to 2013-14, there is an an exceptional year, i.e., 2008-09 wherein we find that there
is a signficiant dent in both the EBDIT and EAT. This could be attributable to the reduced
sales caused by the general reduced level of incomes, and correspondingly on demand,
prominently due to US recession and its impact on the general demand for automobiles
during the year. The EBDIT figures have a little more than doubled while the important
component of profit, i.e., the EAT have also a little more than doubled during the period. It is
very interesting to note that while the figures of EBDIT have increased by about 10% p.a
during the last three years, i.e., 2011-12 to 2013-14, the figures of EAT have not increased by
at the most more than 2-4% during the period. This speaks as to how the input costs have
escalated and have started to consume more expenditures out of the EBDIT. Due to stiff
competition, the companies are not able to pass on the increase the costs in operating and
input costs to the consumers by incerasing the prices very easily.

124
Table 13 – AVERAGE EBDIT AND EAT OF CEMENT INDUSTRY FROM FY 2005-06
TO 2013-14

CEMENT CEMENT
Year INDUSTRY INDUSTRY
AV
AV EBDIT(Rs.Cr.) EAT(Rs.Cr.)
2005-06 470 226
2006-07 1226 776
2007-08 1521 885
2008-09 1314 749
2009-10 1473 778
2010-11 1306 635
2011-12 1597 827
2012-13 1828 812
2013-14 1501 647

Chart 13 – AVERAGE EBDIT AND EAT OF CEMENT INDUSTRY FROM FY 2005-06

TO 2013-14

125
INTERPRETATION: There are six companies under this sector which are included in the
sample analyzed. The above table and graph show that there is a noticeable increase in both
the EBDIT and the EAT during the year 2006-07. However, we notice that thereafter, with
the onset of 2008-09, there is observed to be period of not so big difference in the net profit
figures and the EBDIT figures during the years 2008-09 and 2013-14. However, despite the
figures taking a dip during the period 2008-09 and 2010-11, there is a somewhat resilient
phase during the years 2011-12 and 2012-13, however, again during the year 2013-14, there
is a dent in both the figures. All in all, we can say that the growth rate per annum has not
improved despite getting sustatined at more or less the same level in between the years 2009-
10 and 2013-14.

This speaks of a growing, yet a somewhat volatile nature of growth in the industry. The
demand for cement is obviously linked to the degree of construction activity. We notice that
the growth which was robust till 2006-07 had taken a dip after the year 2008-09. All in all,we
notice that the net profits of companies have consistently remained stagnant without growing
much after the year 2008-09. This shows that companies have been trying to increase
shareholders value, however, there seeems to be constraints from the external factors like
reduced demand and internal forces like rise in input costs, labour costs and inflation.

126
Table 14 – AVERAGE EBDIT AND EAT OF ENERGY INDUSTRY FROM FY 2005-06
TO 2013-14

ENERGY ENERGY
Year INDUSTRY INDUSTRY
AVG AVG
EBDIT(Rs.Cr) EAT(Rs.Cr)
2005-06 3585 1874
2006-07 4566 2414
2007-08 5325 2915
2008-09 5044 2367
2009-10 6253 2937
2010-11 6792 3250
2011-12 7148 3241
2012-13 7159 3056
2013-14 7965 3570

Chart 14 – AVERAGE EBDIT AND EAT OF ENERGY INDUSTRY FROM FY 2005-06

TO 2013-14

127
INTERPRETATION: There are twenty two companies under this sector which are included
in the sample analyzed. The above table and graph indicate the figures of EBDIT and EAT
have doubled during the period of the study. There is a slight and noticeable dent in both the
figures during the year 2008-09. However, we notice that there is a gradual and improved
resilience thereafter. The figures of EAT are showing a somewhat impressive trend. EAT is
also almost in tandem with the change in MVA as can also be verified through the regression
results. The slight dent in the year 2008-09 can be partly due to the impact of US recession.
The reduced growth in profits per year and a somewhat volatile growth can be also possibly
attributed to the fact that the government is bound to subsidize petrol and diesel which are the
key products of the industry. It also implies that the companies, particularly, the public sector
ones like the IOC, BPCL and HPCL are bound by the administered price mechanism which
depends on the crude oil price fluctuations in the international market. All in all, we notice
that the percentage of EAT to EBDIT is ranging from 30-50% throughout the period of the
study. There is a significant contribution to profits and shareholders’ value by the companies
in the later years though the rate of growth p.a. has not improved very much.

128
Table 15 – AVERAGE EBDIT AND EAT OF INFRASTRUCTURE INDUSTRY FROM
2005-06 TO 2013-14

INFRASTRUCTURE INFRASTRUCTURE
Year INDUSTRY INDUSTRY
AVG EBDIT(Rs.Cr) AVG EAT(Rs.Cr)
2005-06 555 297
2006-07 748 384
2007-08 1041 544
2008-09 1402 749
2009-10 1646 867
2010-11 1574 802
2011-12 1683 802
2012-13 1745 821
2013-14 1717 705

Chart 15 – AVERAGE EBDIT AND EAT OF INFRASTRUCTURE INDUSTRY FROM

2005-06 TO 2013-14

INTERPRETATION: There are seven companies under this sector which are included in the
sample analyzed. The above table and graph show that the figures of EBDIT and EAT have
129
increased by 3 times and about 2.5 times during the study. The approximate propotion of
EAT to EBDIT is between the range of 40-50%. Since most of the companies have huge
gestation for their constrcution activities, good amount of debt is employed by most of the
firms. Therefore, the component or share of interest is reasonably high. Unlike the industries
like automobiles and cement which have noticeably taken a dent in 2008-09, there is no dent
observed in case of infrastructure industry. In other words, this indicates that this is one of
the industry which has remained more or less oblivious to the impact of the US recession.
However, despite all the intentions and efforts of the government to promote and develop
infrastructure during the XIIth Five Year Plan(2012-17), not much growth on a year-on-year
basis has taken place. The MVA figures also show that the companies were also not able to
deliver high value to the shareholders in this industry during the period of the study.
Compounded problems like huge debt content in the capital strucutre, low financing by the
government of projects, Public Private Partnership(PPP) models envisaging huge period of
receovery of investments made, rising interest costs, technology and raw material costs have
contributed to the industry not being able to make good profit margins. Despite contributing
to infrastructure development in the country, this secotor could not deliver adequate value to
the shareholders.

Table 16 – AVERAGE EBDIT AND EAT OF INDUSTRIAL MFG INDUSTRY FROM

2005-06 TO 2013-14

INDL MFG INDL MFG

Year INDUSTRY INDUSTRY
AVG
AVG EBDIT(Rs.Cr) EAT(Rs.Cr)
2005-06 1343 777
2006-07 1913 1153
2007-08 2317 1418
2008-09 2293 1382
2009-10 2404 1528
2010-11 2942 1866
2011-12 3064 1766
2012-13 2833 1415
2013-14 2350 1065

Chart 16 – AVERAGE EBDIT AND EAT OF INDUSTRIAL MFG INDUSTRY FROM

2005-06 TO 2013-14
130
INTERPRETATION: There are seventeen firms which are under this category which are
included in the sample analyzed. The above table and graph show that the manfuacturing
industry has increased in terms of EBDIT by about 1.75 times and the EAT figures have
increased by about 1.5 times during the period of the study. The figures of Net Profits have
more or less moved in tandem with the MVA as can be noted from the graph relating to MVA.
i.e., the MVA was abysmally low during the period of the study, more so during the year
2012-13 and 2008-09 Overall, the size of the above profit figures speak of the somewhat
slack growth in this sector upto the year 2010-11 and thereafter a decline is slowly noticeable
in the overall profits and other parameters of this indusry upto 2013-14. There seems to be a
recovery slowly happening after the years 2013-14 more so after the new government came
to power and other developments like the boosting measures provided to the manufacturing
sector, a very gradual and phased reduction in the interest rates and the like. The companies
were not able to deliver much value during the period of the study as the companies were
bursting with activity plagued with the huge burden of interests costs, rise in input costs, huge
operating costs for the firms which have had excessive investment in fixed assets, huge pay
roll bills for companies which have already had many people on their rolls.

131
Table 17 – AVERAGE EBDIT AND EAT OF IT/ITES INDUSTRY FROM 2005-06 TO
2013-14

IT/ITES IT/ITES
Year INDUSTRY INDUSTRY
AVG AVG
EBDIT(Rs.Cr) EAT(Rs.Cr)
2005-06 1140 923
2006-07 1545 1282
2007-08 1873 1538
2008-09 1888 1575
2009-10 2386 1942
2010-11 3163 2564
2011-12 4799 3731
2012-13 5674 4375
2013-14 8436 6308

CHART 17 – AVERAGE EBDIT AND EAT OF IT/ITES INDUSTRY FROM 2005-06

TO 2013-14

132
INTERPRETATION: There are three bench mark firms which belong to this sector which are
included in the sample analyzed. The above table and graph indicate that there is an
aggressive growth in terms of the EBDIT and EAT during the period of the study. The figure
of EBDIT has increased by 7 times whereas the figure of EAT has increased by about 6.5
times during the period. Huge recovery and resilience is being seen from the year 2009-10 to
2013-14. The figures of EBDIT and EAT increase by 2 and about 2.4 times respectively
during this period. Noteworthy is the point that there is a dent in the figures between the
years 2008-09 and 2009-10 which was an obvious result of the US subprime crisis. The
figure of MVA is found to have an even more severe dent in the years 2007-08, 08-09.
However, all in all, the profits indicate that there is good delivery of value by these
companies to the shareholders. The companies included in the sample comprise the large and
the leading ones, therefore they act as a bench mark of IT sector’s capability to deliver
maximum value to the shareholders.

Table 18 – AVERAGE EBDIT AND EAT OF PHARMA INDUSTRY FROM 2005-06 TO

2013-14

PHARMA PHARMA
Year INDUSTRY INDUSTRY
AVG AVG
EBDIT(Rs.Cr) EAT(Rs.Cr)

133
 2005-06 420 260
2006-07 687 484
2007-08 779 563
2008-09 739 494
2009-10 960 631
2010-11 999 678
2011-12 1005 621
2012-13 1242 698
2013-14 1727 1025

Chart 18 – AVERAGE EBDIT AND EAT OF PHARMA INDUSTRY FROM 2005-06

TO 2013-14

INTERPRETATION: There are eight firms which belong to this sector which are included in
the sample analyzed. The above table and graph show interesting results. The levels of

134
EBDIT and EAT have increased by about 4 and 3.2 times respectively. This shows that the
profitability of the pharmaceutical companies is gradually and consistently rising unlike in
case of Infrastructure and Industrial Manufacturing Companies. The MVA levels as noted
previously have peaked up to 2008-09, took a downturn in 2009-10, increased in 2010-11 and
had a gradual downturn during the period 2012-13 and 2013-14. The figures of EAT in
particular have peaked up to 2007-08, took a downturn in 2008-09, had a gradual and slight
increase up to 2010-11, again took a slight decrease in 2011-12, again gradually and
consistently increased up to 2013-14. This shows that the industry is aggressive, resilient and
having a reasonably robust growth rate in terms of the growth of the key parameters, viz., the
Sales, MVA, EBDIT and EAT. The proportion of EAT to EBDIT is observed to be in the
range of 40-70%. In other words, the amount of depreciation and interest is not very high
unlike in case of some of the infrastructure companies which ranged between 50 – 90%.
However, there needs to be proper care of the debt content in terms of servicing the same and
ensuring companies maintain the competitive edge in order to sustain the already attained
levels of growth as reflected through the MVA, EBDIT and EAT levels of the company.

Table 19 – AVERAGE EBDIT AND EAT OF BANKING & SERVICES INDUSTRY

FROM 2005-06 TO 2013-14

BANKING & SERVICES BANKING & SERVICES

Year INDUSTRY INDUSTRY
AVG EBDIT(Rs.Cr) AVG EAT(Rs.Cr)
2005-06 1398 676
2006-07 1673 825
2007-08 2139 1166
2008-09 2521 1400
2009-10 3102 1680
2010-11 4135 1951
2011-12 4759 2106
2012-13 5846 2449
2013-14 9260 3238

Chart 19 - AVERAGE EBDIT AND EAT OF BANKING & SERVICES INDUSTRY

FROM 2005-06 TO 2013-14

135
INTERPRETATION: There are 34 firms which belong to this sector which are included in
the sample analyzed. The above table and graph indicate that the figures of EBDIT and EAT
increase by about 6 and 4.5 times during the period of the study. While in absolute terms the
profits have consistently increased (both EBDIT and EAT), EBDIT has increased much more
in proportion compared to EAT. The trend in MVA is quite an indicator as to how the
companies in this industry, i.e., Banking and Services, (predominantly the firms which have
been included in this sector comprise to a large extent government banks, a little proportion
of these held by private banks and a small chunk of them constitute remaining services like
hospitals, telecommunication companies and airways) have not contributed any significantly
towards shareholders value or have contributed negatively. The MVA trend shows that the
levels of MVA were quite low or negative up to 2008-09. This increases very little showing
some positive figures during the years 2010-11 and 2011-12. This speaks of the hollow in
the Banking Sector caused to a large extent by the NPAs (Non Performing Assets) of PSU
Banks though the figure of Market Value per se has increased during the period.

The trend in the figures of EBDIT and EAT has shown that they increase gradually from
2005-06 up to 2012-13, again showing a very high increase during the year 2013-14. This
shows the positive hopes and expectations from the newly formed government and the newly
appointed governor of Reserve Bank to some extent. EAT has gradually increased in all the
years up to 2013-14.
136
The proportion of EAT to EBDIT is about 30-40%. This speaks about the share of interest in
the total financial and operating expenses of the above banking and other services firms. The
amount and proportion of interest seems to be high in respect of almost all the service
organizations. This poses financial risk which has already attained inappropriate proportions
and it needs to be reduced. The share of depreciation is marginal as the proportion of the
same in total operating profit is minimal in case of almost all the organizations.

Table 20 – AVERAGE EBDIT AND EAT OF CONSUMER GOODS INDUSTRY FROM

2005-06 TO 2013-14

CON GOODS CON GOODS

Year INDUSTRY INDUSTRY
AV EBDIT(Rs.Cr.) AV EAT(Rs.Cr.)
2005-06 765 523
2006-07 893 580
2007-08 1097 740
2008-09 1134 716
2009-10 1353 778
2010-11 1643 1058
2011-12 2006 1322
2012-13 2309 1495
2013-14 2320 1452

Chart 20 – AVERAGE EBDIT AND EAT OF CONSUMER GOODS INDUSTRY

FROM 2005-06 TO 2013-14

137
INTERPRETATION: The number of companies constituting this sector and included in the
sample are 10. The figures of EBDIT and EAT during the study period show some
interesting revelations. First, EBDIT is noticed to increase by about 2.8 times while EAT is
found to increase by 2.4 times during the period of the study. This indicates the comparative
growth in this sector which has been less compared to aggressively grown sectors like IT,
Services and Pharmaceuticals. This shows the restricted growth pattern due to external and
internal factors pertaining to companies in this sector. The relative performance of MVA
also reveals that the real increase in MVA has taken place from the year 2010 upto 2012-13
while it slightly tapers off during the year 2013-14. This shows how in the year 2013-14,
business sentiment in general was not favourable, while in this sector there is a noticeable
stagnancy. The EAT figures indicate a slightly different trend in comparison with MVA.
EAT figures gradually took off till 2007-08, reduced marginally in 2008-09 and started
picking up from 2009-10, increased highly from 2010-11 to 2012-13, however, even the EAT
moves in tandem with MVA, in the sense that it tapers off slightly in the year 2013-14.

The proportion of EAT to EBDIT is about 60-70%, it indicates a rather healthy trend. All in
all, there is not much debt employed which poses less financial risk in this sector compared to
sectors like banking and services, pharmaceuticals wherein the relative content of debt was
found to be high. The content of depreciation is also not too high. This shows a healthy
trend, that this industry is not plagued with much financial risk which somewhat corrodes
shareholders value.

138
Table 21 – AVERAGE EBDIT AND EAT OF TEXTILE INDUSTRY FROM 2005-06 TO
2013-14

TEXTILE
Year TEXTILE INDUSTRY INDUSTRY
AV EBDIT(Rs.Cr.) AV EAT(Rs.Cr.)
2005-06 511 232
2006-07 725 351
2007-08 888 428
2008-09 778 330
2009-10 960 481
2010-11 738 332
2011-12 716 303
2012-13 823 332
2013-14 953 356

Graph 21 – AVERAGE EBDIT AND EAT OF TEXTILE INDUSTRY FROM 2005-06

TO 2013-14

139
INTERPRETATION: The number of companies chosen and included in this sample is six.
Prima facie, the levels of EBDIT and EAT are found to increase by about 1.7 and 1.6 times
which indicates that not much growth has happened in this sector during the period of the
study.

The level of change in MVA vs. EAT also shows some interesting indications. MVA is found
to slightly increase in between the years 2005-06 and 2006-07. Thereafter we find that the
figure of MVA shows a gradual decrease from 2006-07 up to 2009-10, it shows slight
recovery during the years up to 2012-13, it goes down slightly again in the year 2013-14.
The absolute figures of MVA show an overall decrease during the period with intermittent
ups and downs which is not a healthy trend as far as shareholder value is concerned. When
compared to MVA, EAT figure shows a gradual and slight increase from 2005-06 up to
20007-08, slightly reduces in 2008-09, shows a slight recovery in 2009-10, dips again in
2010-11 and somewhat again in 2011-12, slightly recovers in 2012-13 and 2013-14. It
remains more or less stagnant throughout the period though slightly increasing and
decreasing intermittently. EAT has on an overall basis remained stagnant while MVA has
reduced which shows a negative picture of the industry to the shareholders.

The figures of EBDIT and EAT indicate the following changes. EBDIT marginally increased
up to 2007-08, slightly reduces in 2008-09, again improves marginally in 2009-10, and again
shows a gradual tapering off till 2011-12; it shows a slight recovery in 2012-13 and 2013-14.

140
There is an observable overall mild increase in its levels. EAT more or less moved in tandem
with EBDIT except that in between the years 2012-13 and 2013-14, there is not much change.

The proportion of EAT to EBDIT also shows some interesting developments. It was about
40-50% from 2005-06 up to 2009-10. However, afterwards, there are some startling
indicators. It went down up to 30-40% which shows greater financial risk in later years
which is not a healthy trend as it imposes excess costs of servicing debt, the primary
component being interest costs and other exigent expenses while procuring and servicing
debt.

VIII) INDUSTRY WISE COMPARISION OF CASH FROM OPERATIONS

(CFO) AND FREE CASH FLOWS (FCF) BASED ON MAJOR CATEGORY
OF INDUSTRIES

Table 22 – AVERAGE CFO AND FCF OF AUTO INDUSTRY FROM FY 2005-06 TO

2013-14

AUTO INDUSTRY AUTO INDUSTRY

Year AVG AVG
CFO(Rs.Cr) FCF(Rs.Cr)
2005-06 434 -36
2006-07 1081 498
2007-08 1678 702
2008-09 838 -63
2009-10 2007 195
2010-11 1268 -126
2011-12 1746 1194
2012-13 1958 -927
2013-14 2605 1005

141
 Chart 22 – AVERAGE CFO AND FCF OF AUTO INDUSTRY FROM FY 2005-06 TO
2013-14

INTERPRETATION: The number of companies chosen from this sector and included in the
sample is seven. On a peripheral view of the above table and graph, we notice that there is an
inconsistent, yet an overall increasing trend in the CFO from the beginning till the end of the
study period wherein it is found to increase by 3 to 4 times on an overall basis. The figures
of FCFs show an increase in some of the years, i.e., 2006-07, 2007-08, 2011-12 and 2013-14.
142
They show negative figures during the years 2008-09, 2010-11 and 2012-13. The negative
figures of FCFs could be due to reduced demand and some of the companies have resorted to
huge capital expenditures during some years where the FCFs were showing negative figures.

The relative performance of MVA and CFO shows an impressive positive correlation. While
the MVA figures rose from the year 2005-06 gradually, it was low during the year 2008-09,
and again consistently rose till 2013-14. The CFO figures as shown in the graph above rises
from 2005-06 to 2007-08, takes a dip in 2008-09, rises in 2009-10, takes a dip again in 2010-
11 and rises consistently thereafter till 2013-14. This amazingly posits that there is a very
close correlation and if the fact may be extrapolated, we can even say that the one of the real
determinant of shareholders value after the net profits or Profits After Taxes of a Company
are the Cash From Operations (CFOs). The empirical evidence as depicted above cutting
across the different type of automobile companies is undeniable.

The difference between CFO and FCFs are found to be huge during the years 2008-09, 2010-
11 and 2012-13 possibly due to huge investments in capital expenditure by some companies
and reduced demand in general particularly in the year 2008-09 as can be noted explicitly
through empirical data above apart from common knowledge about the impact of US
recession and its after effect during this year.

Table 23 – AVERAGE CFO AND FCF OF CEMENT INDUSTRY FROM FY 2005-06

TO 2013-14

CEMENT CEMENT INDUSTRY

Year INDUSTRY AVG AVG
CFO(Rs.Cr) FCF(Rs.Cr)
2005-06 808 516
2006-07 1103 521
2007-08 1103 670
2008-09 1412 327
2009-10 1172 -146
2010-11 931 -1487
2011-12 1068 598
2012-13 1173 681
2013-14 1261 409

143
 Chart 23 – AVERAGE CFO AND FCF OF CEMENT INDUSTRY FROM FY 2005-06
TO 2013-14

INTERPRETATION: There are six companies which are included in the sample from this
sector. On a preliminary glance at the figures of CFO and FCFs during the study period, it is
found that CFO figures gradually increase up to 1.5 times while FCF figures on an overall
basis do not show much increase. However, it shows low and even negative figures of big
amounts during 2009-10 and 2010-11 respectively.

The comparative change in MVS vs. CFO figures presents a rather interesting picture. CFO
figures increase gradually up to 2008-09; this is despite other variants of profits including
MVA taking a dip this year, which shows the resilience cement companies have built into
themselves. In other words, the cash generated from operations has remained oblivious of the
144
US recession. Later the CFO figures take a dip gradually of mild magnitude in the years
2009-10 and 2010-11. These figures then rise consistently up to 2013-14. The overall trend
of CFO indicates that it rises by about 1.5 times during the period of the study. The figures
of MVA too increases firmly and consistently from 2005-06 to 2007-08, takes a dip in 2008-
09 later gradually it rises to more than 4 times the initial period value. (From Rs.2000 cr+ to
Rs.10000 cr+.)

The above comparision shows that the CFO is more or less in sync or having positive
correlation with the MVA albeit at a lower proportion. This further supports the regression
results which show that CFO is one of the independent variables highly influential or being a
determinant of MVA.

The difference between CFO and FCF figures too present an interesting picture. While the
figures of CFO have increased on an overall basis by 1.5 times, FCF figures are increasing in
the initial three years, take very low and highly negative figures in the next three years.
Particularly in the year 2010-11, it is observed that during this year, one of the large
companies, viz., Ultratech cement had invested in huge amount of capital expenditures,
which is the primary reason for the FCF figure to take very low and even a negative figure.

Table 24 – AVERAGE CFO AND FCF OF ENERGY INDUSTRY FROM FY 2005-06

TO 2013-14

ENERGY ENERGY
Year INDUSTRY INDUSTRY
AVG
CFO(Rs.Cr) AVG FCF(Rs.Cr)
2005-06 2547 1168
2006-07 2822 1256
2007-08 2141 1308
2008-09 2322 -229
2009-10 2995 -1417
2010-11 5056 3030
2011-12 4042 2946
2012-13 5249 2607
2013-14 7523 4728

145
 Chart 24 – AVERAGE CFO AND FCF OF ENERGY INDUSTRY FROM FY 2005-06
TO 2013-14

INTERPRETATION: The number of industries included in the sample from this sector is 22.
On a preliminary view, the CFO figures show an overall increase of nearly 3 times with
slightly intermittent ups and downs during the period. FCF figures showing more volatility
increase by about 4 times. The figures of CFOs are seen to increase in between 2005-06 and
2006-07, again decreasing between 2006-07 & 2007-08, show consistent increases till 2010-
11, take a slight dip in 2011-12, and again increase highly in the next two years up to 2013-
14. The figures of FCFs indicate slight increase from 2005-06 to 2007-08, take a severe dip
to negative figures during 2008-09 and 2009-10, the reason for the FCF figures to be negative
could be attributed to the existence of high capital expenditures during these years in respect

146
of some companies. FCF figure improves again in 2010-11, takes a moderate dip for two
years in a row during 2011-12 and 2012-13, and again shows a very high increase in between
2012-13 and 2013-14.

The trend in MVA vs. CFO indicates the following: While the trend in CFO change was noted
above, the MVA figures indicate that they have gradually increased from very low figures in
2005-06 to high figures consistently till 2010-11, after which we find that the MVA figures
show a gradual and mild decrease till 2013-14, this shows that the companies in this sector
are beset with macro-economic and external risks apart from the internal need for financing
their operations and capital expenditure from time to time. Some of the important external
factors that affect these companies are the crude oil prices, pricing of the energy products as
the former constitutes most important and major raw material consumed and the latter is the
final price levied to customers. The companies could not therefore increase the shareholders
value much in terms of its growth rate, particularly in between the years 2010-11 and 2013-
14. However, the momentum was showing a somewhat growing trend as this industry has to
keep pace with the increasing and changing expectations of products like petrol, diesel and
electricity. Thus, on an overall basis, the change in CFO is having a somewhat low positive
correlation with the MVA change during the period. It shows that there is a slight aberration
as far as the influence of CFO on the MVA as far as energy industry is concerned during this
period.

All of the above indicates that energy industries are vulnerable to cash flow crises at times
and some of them may surely erode shareholders value and also face financial risk due to
employment of debt to finance the cash flow crises.

Table 25 – AVERAGE CFO AND FCF OF INFRASTRUCTURE INDUSTRY FROM

FY 2005-06 TO 2013-14

INFRASTRUCTURE INFRASTRUCTURE
Year INDUSTRY INDUSTRY
AVG CFO(Rs.Cr) AVG FCF(Rs.Cr)
2005-06 228 123
2006-07 270 101
2007-08 450 289
2008-09 472 318
2009-10 829 689
147
 2010-11 621 451
2011-12 414 253
2012-13 519 424
2013-14 392 384

Chart 25 – AVERAGE CFO AND FCF OF INFRASTRUCTURE INDUSTRY FROM

FY 2005-06 TO 2013-14

INTERPRETATION: The number of companies included in the sample from this sector
constitutes seven. At a first glance, the figures of CFO are found to increase on an overall
basis by about 1.8 times after going up and down from 2-3 times, when compared to initial
year’s figure of Rs.280 cores while FCF increases by 3 times on an overall basis, while
showing an increase of 4 to 6 times in the intermediate years. The change in CFO figures
indicate that they increase gradually from 2005-06, peak to highest levels during 2009-10,
reduce gradually thereafter up to 2010-11, slightly increase in 2012-13, again taking a dip in
2013-14, overall it increases by 1.8 times. It is observed that the FCFs are moving in tandem
with the CFOs, FCFs are observed to comprise about 50-95% range of the CFOs which
indicates that the level of capital expenditures in this sector is somewhat low, but the

148
magnitude of the need and its frequency is relatively lesser when compared to other
industries.

When the MVA vs. CFO trend is observed, it quite interesting to note that the MVA change is
showing more or less the same trend as the CFO, it peaks till 2010-11, takes a very slight dip
in the years 2011-12, 2012-13 and rises reasonably higher in 2013-14. This change reveals
that the correlation between the CFO and the MVA is somewhat highly positive. In other
words, it vouches the regression results indicating CFO as one of the most important
determinant of MVA in this sector.

Table 26 – AVERAGE CFO AND FCF OF INDUSTRIAL MANUFACTURING

INDUSTRY FROM FY 2005-06 TO 2013-14

INDL MFG INDL MFG

Year INDUSTRY INDUSTRY
AVG CFO(Rs.Cr) AVG FCF(Rs.Cr)
2005-06 1431 809
2006-07 1469 468
2007-08 1610 384
2008-09 1908 74
2009-10 1658 -7
2010-11 1372 -1883
2011-12 1459 -924
2012-13 1022 -947
2013-14 1042 -4560

Chart 26 – AVERAGE CFO AND FCF OF INDUSTRIAL MANUFACTURING

INDUSTRY FROM FY 2005-06 TO 2013-14

149
INTERPRETATION: Seventeen companies from this sector are included in the sample. On
a cursory glance, the CFO is found to increase up to 1.4 times during the period; however, it
reduces to 0.8 times by the end of the period. Unfortunately, the FCF figures show a very
erratic trend. FCF figures go down by 0.5 times during the middle of the period, but later it
moves to nearly -1 to -3 times by the end of the period showing high negative figures during
the later years.

The trends in the CFO vs. FCF present somewhat interesting yet saddening facts. CFO
figures gradually and consistently rise from Rs. 1431 crores in the year 2005-06 to Rs.1908
crores in the year 2008-09, thereafter recedes to Rs.1372 crores gradually by the year 2010-
11. It again rises a little to Rs.1459 crores in 2011-12, again goes down to Rs. 1042 crores in
the year 2013-14. FCF figures on the other hand show a very inconsistent trend where it
reduces from Rs.809 crores in 2005-06 gradually to Rs. 74 crores in 2008-09; it goes to
negative figures in later years. Particularly during the years 2011-12 to 2013-14 there are
high negative figures. This speaks about the general recession in this sector along with some
serious flaws on the part a few companies dampening the image of the sector as a whole as
far as shareholder value is concerned. On close examination of the companies in this sector,
it is particularly found that some of the large and leading companies have had a very high
debt content having a debt equity ratio ranging from 1:1 to 4:1 during the years of the study.
With low profit margins, huge interest costs, huge capital expenditures by some of the
150
manufacturing companies, this sector has suffered a serious setback. Some companies’
capital expenditures were found to be as high as 2 to 6 times the cash from operations during
the period. This shows that some companies have resorted to huge capital expenditures and
huge debt unwarrantedly without looking into the capability of the debt and capital
expenditure fetching long term returns. This affected the FCFs, CFOs and most importantly
MVA very severely.

The trends in MVA vs. CFO too present an interesting yet a saddening development. The
MVA levels show very low levels in the initial years, increase slowly up to 2008-09,
gradually start reducing up to the year 2013-14, except in the year 2010-11, where they show
slight increase. The change in MVA is observed to be more or less in tandem with the change
in CFO, it shows that the regression results are sound, i.e., CFO is one of the primary
determinants of shareholders value.

The trend in CFO vs. FCF discloses again a disappointing state. As was stated before, this is
more so due to some companies resorting to huge debt content imposing high financial risk.
These companies have also had huge capital expenditures causing serious erosion of profits
and ultimately shareholder value. This speaks of volumes as to how this sector in general
was plagued with evils like low or negative profit margins, rise in input costs, huge debt
servicing costs comprising mainly interest costs, which ultimately resulted in shareholders’
value getting eroded or destroyed as can be noted from the trends and figures of MVA.

Table 27 – AVERAGE CFO AND FCF OF IT/ITES INDUSTRY FROM FY 2005-06 TO

2013-14

Year IT/ITES INDUSTRY IT/ITES INDUSTRY

AVG CFO(Rs.Cr) AVG FCF(Rs. Cr)
2005-06 1081 360
2006-07 1211 404
2007-08 1306 435
2008-09 1672 557
2009-10 2168 723
2010-11 1921 640
2011-12 1127 376
2012-13 3141 1047
2013-14 4421 1474

151
Chart 27 – AVERAGE CFO AND FCF OF IT/ITES INDUSTRY FROM FY 2005-06 TO
2013-14

INTERPRETATION: The number of companies from this sector that are included in the
sample are three. When glancing at the figures of CFOs and FCFs it is found that the CFOs
are increasing by about 4 times and the CFOs are increasing by about 3 times throughout the
period. An amazing development in this sector is that the firms are increasing very
consistently and highly in terms of the indicators of profits and shreholders value throughout
152
the period of the study. The CFOs are found to increase consistently upto 2009-10, reduce
slightly during the years 2010-11 and 2011-12, they are found to increase rapidly during the
last two years, i.e., 2012-13 and 2013-14. The FCFs on the other hand, move at a similar
trend, albeit at a lower level and lower pace, constituting about 30-40% of the CFOs
throughout the period of the study.

The comparative trend of the MVA vs CFO show a somewhat different trend. The levels of
MVA remain low from 2005-06 till the year 2009-10, the figures take almost a huge dip in
the year 2008-09 and 2009-10. This can be well understood as the revenues of the firms in
this sector depend a lot on the countries like USA, the impact of US recession has therefore
severely hit the market sentiments, reduced the demand for these companies shares’ And thus
the MV and MVA. This is despite the companies having inherent risk management and
resilience along with the reserves adequate enough to absorb and make a smart come back.
However, the CFO figures consistently move higher upto 2009-10, reduce during 2010-11
and 2011-12. This shows that CFOs seem to be a lagging indicator of the effect of the
external crisis like the US sub-prime crisis. However, on an overall basis, we observe that
there is a faily positive correlation between the CFO and the MVA. The CFO moves very
much in tandem with the MVA albeit at a lower level and at a slower pace. This speaks that
the regression results are supported through the above analysis. Truly, we can consider CFO
as the important determinant of shareholders value.

The composition of the FCFs among the CFOs are consistently ranging about 30-40%. This
speaks volumes about the ability of the companies to not only generate adequate cash from
operations but also to invest in capital expenditures consistently commensurate with the pace
of growth taking place. This also speaks about the firms having adequate FCFs to finance
their future operations smoothly. Another noteworthy feature that is oberved from the profit
and other capital structure figures of these firms is that the debt content in the IT companies
in general and the selected companies in particular is quite low or nil, this also speaks
volumes of the companies’ abililty and experience to manage their profits and cash flows in
such a way that the companies are debt free yet able to have an impressive growth rate, get a
positive impression from the shareholders and increase shareholders value on a long term
basis.

153
 Table 28 – AVERAGE CFO AND FCF OF PHARMACEUTICAL INDUSTRY FROM
FY 2005-06 TO 2013-14

Year PHARMA INDUSTRY PHARMA INDUSTRY

AVG CFO(Rs.Cr) AVG FCF(Rs.Cr)
2005-06 33 -21
2006-07 98 71
2007-08 88 24
2008-09 127 -4
2009-10 181 183
2010-11 83 -31
2011-12 93 115
2012-13 66 4
2013-14 253 87

Chart 28 – AVERAGE CFO AND FCF OF PHARMACEUTICAL INDUSTRY FROM

FY 2005-06 TO 2013-14

INTERPRETATION: The number of companies included in the sample from this industry is
eight. On a cursory view, the CFO is found to increase by about 1-2 times on an overall
basis, despite having an erratic trend of ups and downs during the period of the study. The
FCF figure shows a high degree of volatility with frequent ups and downs, even negative
figures two intermittent years. All in All, the FCF figures increase by 2-4 times.

154
The trends in CFO and FCF are as follows: The CFOs are continuously positive which is a
healthy indication. The figures of CFOs are seen to consistently increase from 2005-06 to
2009-10, take a dip in the years 2010-11 up to 2012-13, again takes a very high increase in
the year 2013-14. The FCF however is highly volatile. It is negative in the very first year. It
later increases in the second year, goes steeply down in the third and the fourth years, again
takes a dip in 2009-10, is negative in 2011-12, and thus it goes through a roller-coaster rise
and ends up at a relatively higher figure in 2013-14. It shows that the pharmaceutical
industry is plagued with issues like excessive capital expenditures which eat away a chunk of
the CFOs.

There is an interesting observation one sees on observing the plots of MVA vs. CFO. The
figure of MVA is not only seen to be relatively consistent in its movements but also indicating
a positive and increasing contribution to shareholders value except the years 2009-10, 2012-
13 and 2013-14. However, we notice that CFO figures while moving more or less in tandem
with or having a high positive correlation with MVA during the first 3 to 4 years, show a
different trend afterwards, they are negative in 2010-11, but back to a positive figure in 2011-
12, again go low in 2012-13, finally move to a relatively high figure in 2013-14. All in all,
this shows that the pharmaceutical industry was able to contribute to shareholders value, one
of the primary determinants being the CFO. The correlation between CFO and MVA is
reasonably positive. This vouches the regression results noted before.

The comparison of FCF and CFO reveals however, an ironical situation obviously indicating
that the companies in the pharmaceutical industry despite being blessed with Cash From
Operations, have huge investment s in capital expenditures like exploring new geographical
markets, devising and implementing innovative marketing strategies, excessive R & D
expenditures, which consume a major chunk of CFO so much so that the firms hardly have
any consistently good amount of FCFs.

155
Table 29 – AVERAGE CFO AND FCF OF BANKING & SERVICES INDUSTRY
FROM FY 2005-06 TO 2013-14

BANKING & SERVICES BANKING & SERVICES

Year INDUSTRY INDUSTRY
AVG CFO(Rs.Cr) AVG FCF(Rs.Cr)
2005-06 1139 877
2006-07 1432 1041
2007-08 589 109
2008-09 1280 708
2009-10 1626 1262
2010-11 1309 875
2011-12 144 -113
2012-13 2426 1962
2013-14 3495 3437

Chart 29 – AVERAGE CFO AND FCF OF BANKING & SERVICES INDUSTRY

FROM FY 2005-06 TO 2013-14

156
INTERPRETATION: The number of service organizations included in the above category of
industries is thirty four. On a peripheral look at the level of CFOs, we notice there is an
overall increase of its levels by about 3 times, though taking low figures in two intermittent
years. The FCFs on an overall basis also seem to rise by 4 times, though taking dips in two
intermittent years, one showing even a slightly negative figure.

The trends in CFO and FCFs during the period present an interesting picture. The CFOs are
seen to rise in the first two years, take a dip in 2008-09, again gradually rise for two years up
to 2009-10, take a slight dip in 2010-11, again take a severe low figure in 2011-12 and rise
rapidly later up to 2013-14. FCFs too show a similar trend except that in the year 2008-09,
it not only takes low figures, but also turns negative.

The trend in MVA vs. CFO presents an interesting yet an unfortunate scene. The MVA
figures have remained very low or negative throughout the period of the study except during
the years 2010-11 and 2011-12, wherein they show slightly positive figures. However, the
CFO figures indicate that they were intermittently rising on an overall basis, except during
the year 2011-12, wherein they show a low yet a negative figure. The CFO figure though
showing an overall trend that is somewhat akin to MVA does not move much in tandem with
or it does not bear a high positive correlation with the MVA. This shows how banking
157
industry which constitutes a bulk of the service companies in this sector was not in a position
to deliver shareholders’ value, despite having a veneer that it is generating reasonable levels
of CFOs, EBDITs and somewhat low levels of EATs during the period. The investors have
almost lost trust in banks’ stocks, more so, the public sector banks in India. The possible
reason could be the inefficient credit management and off take, relatively higher interest
rates, more importantly it speaks of the hollow that was created by huge levels of NPAs,
which have dug a big hole into the profits and the capability of banks to generate
shareholders’ value, particularly the Public Sector Banks.

The overall trend of CFO vs. FCFs shows that even if the difference between CFOs and FCFs
is relatively less, i.e., the FCFs constitute about 40-90% of the CFOs in all the years. This
shows that while generally the levels of CFOs are low when compared to EBDIT and EAT, it
speaks volumes about the need for banks to brace up their operations, tighten up credit off
take, discipline its general management, credit management and thus improve its liquidity
and profitability.

Table 30 – AVERAGE CFO AND FCF OF CONSUMER GOODS INDUSTRY FROM

FY 2005-06 TO 2013-14

CON GOODS CON GOODS

Year INDUSTRY INDUSTRY
AV CFO(Rs.Cr.) AV FCF(Rs.Cr.)
2005-06 451 182
2006-07 573 418
2007-08 636 334
2008-09 895 529
2009-10 995 689
2010-11 1143 917
2011-12 1361 1110
2012-13 1522 1036
2013-14 1541 1148

Chart 30 – AVERAGE CFO AND FCF OF CONSUMER GOODS INDUSTRY FROM

FY 2005-06 TO 2013-14

158
INTEPRETATION: The number of companies included in the sample from this industry is
ten. A peripheral look at the figures of CFO and FCF indicate that the CFOs increase by 3.5
times and the FCFs increase by about 5 times respectively. A closer look at the CFOs and
FCFs indicate that CFOs increase very consistently at least at the rate of about 20-40% per
annum every year except during the year 2013-14 where they increase marginally by about
1.5%. A study of the FCFs too indicate that they move almost perfectly in tandem with the
CFOs except during the year 2012-13 they show a slight decrease of about 0.6% and during
the year 2013-14, they show an increase of about 1%. This shows the in-built resilience and
risk management that exists in the leading FMCG companies which are the dominant
companies in this sector. Not only was this sector thus oblivious of the impact of the US
recession during the year 2008-09, but it withstood a number of other external shocks and is
showing an amazingly consistent increase in terms of the important constituents of profits
which lead to shareholder value maximization in the long-term. In fact, some of the FMCG
Company’s shares like HUL are very much in demand primarily because of their consistent
performance.

A look at the trend of MVA vs. CFO indicates some startling developments. The MVAs are
found to be amazingly forward moving figures. The trend in their growth is truly worthwhile
to watch, if we take a closer look at the MVA plot previously seen in Table 9 and Graph 9, it
shows that the MVA figures were in thousands of core rupees and were moving gradually
higher till 2009-10 from 2005-06, however, thereafter from 2010-11 till 2012-13, we notice
that the MVAs have increased aggressively and slightly tapered off with a lesser growth rate
in 2013-14. The CFOs too are observed to increase very consistently from 2005-06 to 2013-
159
13 and only ended with up with a lesser growth rate in 2013-14. This speaks of the near
complete and positive correlation between the CFOs and the MVA in this sector. The
regression results are hence authenticated from this observation that one of the important
determinant of shareholders’ value for an industry like consumer goods where the listed
companies’ are consistently growing is the CFOs.

A look at the share of FCFs in the CFOs too presents a wonderful picture. In all the years,
the FCFs have moved very much in tandem with the CFOs and they constituted about 60-
80% of the CFOs. This indicates that the companies in the Consumer Goods Industry can
survive with lesser capital expenditures, R & D expenses unlike sectors like pharmaceuticals
wherein such expenditures are huge and eat away the wafer thin margins of the companies.
In other words, the FCFs also prove to be an important determinant of shareholders value in
this sector.

Table 31 – AVERAGE CFO AND FCF OF TEXTILE INDUSTRY FROM FY 2005-06

TO 2013-14

TEXTILE
Year TEXTILE INDUSTRY INDUSTRY
AV CFO(Rs.Cr.) AV FCF(Rs.Cr.)
2005-06 62 -213
2006-07 -145 -689
2007-08 -40 -722
2008-09 214 -740
2009-10 714 2863
2010-11 681 624
2011-12 745 393
2012-13 567 315
2013-14 687 292

Chart 31 – AVERAGE CFO AND FCF OF TEXTILE INDUSTRY FROM FY 2005-06

TO 2013-14

160
INTERPRETATION: The number of companies included in the sample from this sector is
six. On a cursory look at the above table and graph it is seen that the figures of CFO lie
stagnant and slightly negative for the first four years and take positive figures with a more or
less constant level during the last five years. The FCF figures indicate a rather erratic trend
with the first four years’ figures taking very negative values and the last five showing positive
values with a decreasing trend while a big leap is being observed in the year 2009-10.

On a closer look at the CFOs and FCFs, it is seen that the CFO figures were quite low or
negative in the initial years, later they have increased and remained more or less constant
during the last five years. This shows that the industry in a stage where there is a struggle to
maintain good profit margins and also obtain good cash profits from time to time. It is also
observed that the Free Cash Flows are much lower in all the years with negative figures in the
first four years followed by an aberrant high figure in the fifth year and relatively better
positive figures during the last four years. This shows that this industry is also beset with low
profit margins, excessive capital expenditures, greater operating and financial expenses which
are consuming a huge chunk of the profits.

A look at the trend of the MVA vs. CFO indicates that the CFO figures move in tandem with
the MVA levels particularly during the last five years. This shows that the industry is in a
stable or a late maturity stage, wherein the potential to grow has too many constraints. The
profit margins and absolute figures are also seen to be consistently remaining low without
much growth on a year on year basis. Hence, we can say that while the CFOs have a
reasonable positive correlation with the MVA, the degree of positive correlation or influence

161
on the MVA is relatively less when compared to other aggressive growing industries like the
Consumer Goods, IT and pharmaceuticals.

A look at the share of the FCFs in CFOs also reveals that the FCFs are much lower than the
CFOs. It shows that this sector too has huge capital expenditures and other long term
provisions which consume a good amount of CFOs. Hence, the volatility of FCFs and the
share of FCFs is a fair indication that the industry needs to even more effectively focus on
improving the profit margins, efficiency of operations, optimizing capital expenditures so that
ultimately shareholders value can be maximized.

IV) ANOVA SINGLE FACTOR TESTS TO ASSESS IF THERE IS A SIGNIFICANT

DIFFERENCE IN THE MEAN OF THE GROUPS OF SOME KEY DETERMINANTS
OF SHAREHOLDER VALUE (BETWEEN THE THREE CATEGORIES OF
COMPANIES BASED ON VERY HIGH TURNOVER, HIGH TURNOVER AND
MODERATELY HIGH TURNOVER).

ANOVA SINGLE FACTOR TESTS:

The following tests show the results of the profitability parameters, viz., Operating Profit
Ratio, Net Profit Ratio, Return on Investment (ROI) Ratio, Return on Net Worth Ratio
(RONW), while these are measured taking into consideration the average ratios of the
companies falling into three different sales brackets as noted below. The reason for taking the
four ratios as mentioned above was that there would be uniformity in the way the above ratios
are calculated, irrespective of the annual turnover and the net investment and net worth of
the companies, the proportion of the operating profit, net profit in relation to the sales and
investment made from the point of view of the overall funds employed(ROI) and the funds
belonging to the shareholders(RONW) indicate a common figure which is oblivious of the
size of the company in indicating the profitability of the company.

The classification of companies into three different sales brackets was one of the criterion
choosing the sample, i.e., the Ist Group of Companies categorized as having moderately high
turnover are falling in the range of average turnover from 1000 – 4000 crores per annum
(during the financial years 2005-06 to 2013-14), IInd Group categorized as having high
turnover are falling in the range of average turnover from 4001-10000 crores per annum
(during the financial years 2005-06 to 2013-14) and IIIrd Group categorized as having very
high turnover are falling in the range of average turnover above 10000 crores per
162
annum(during the financial years 2005-06 to 2013-14). 39 companies fall under the Ist
Group, 42 under the IInd Group and another 39 under the third group. The results of the
Anova single factor (average turnover) tests, the relevant interpretations and conclusions are
quite fascinating to note as presented below:

IX) ANOVA TEST RESULTS

ANOVA RESULTS OF OPERATING PROFIT RATIO

BETWEEN GROUPS:

Anova: Single Factor

SUMMARY
Averag
Groups Count Sum e Variance
Sales Group. I 39 815.5 20.9 207.1
Sales Group II 42 1104.2 26.3 659.7
Sales Group III 39 850.9 21.8 290.4
Total No. of
Companies 120

ANOVA
Source of P-
Variation SS Df MS F value F crit
Between Groups 678.806 2.000 339.403 0.864 0.424 3.074
Within Groups 45953.902 117.000 392.768

Total 46632.707 119.000

RESULT: F VALUE OF 0.864 <1 SHOWS THERE IS NO SIGNIFICANT

DIFFERENCE
IN BETWEEN THE GROUPS OPERATING PROFIT
RATIO
Note:
Sales Gr. I: (1000-4000 Cr- Av. Turnover-2005-06 to 2013-14)
Sales Gr II: (4001-10000 Cr- Av. Turnover-2005-06 to 2013-14)
Sales Gr III: (10000 Cr + Av. Turnover-2005-06 to 2013-14)

163
INTERPRETATION: It is quite interesting to note that the size of the company beyond a
minimum cut off Point (Average turnover of at least Rs.1000 Cr+) does not have any
significant bearing on the profitability rate as measured by the Operating Profit Ratio.
Companies which fall in the second Group seem to have a relatively higher Operating Profit
Ratio of 26.3%; Ist Group has an Operating Profit Ratio of 20.9% while the IIIrd Sales Group
has an average Operating Profit Ratio of 21.9%. All in all, the size of the business above the
minimum turnover as noted above has no significant bearing on the profitability,
subsequently and commensurately on the shareholders value.

ANOVA RESULTS OF NET PROFIT RATIO BETWEEN GROUPS

Anova: Single Factor

SUMMARY
Count Sum Average Variance
Groups
39 387.68 9.94 43.28
Sales Group. I
42 470.00 11.19 202.50
Sales Group II
39 378.59 9.71 50.34
Sales Group III
120
Total No. of Companies

ANOVA
P- F
Source of Variation SS df MS F value crit
52.04 2.00 26.02 0.26 0.77 3.07
Between Groups
11860.27 117.00 101.37
Within Groups

11912.31 119.00
Total

ANOVA OF NET PROFIT RATIO BETWEEN GROUPS

RESULT: F VALUE OF 0.256 <1 SHOWS THERE IS NO

SIGNIFICANT DIFFERENCE IN BETWEEN THE GROUPS NET
PROFIT RATIO

Note:
164
 Sales Group I: (1000-4000 Cr- Av. Turnover-2005-06 to 2013-14)
Sales Group II: (4001-10000 Cr- Av. Turnover-2005-06 to 2013-14)
Sales Group III: (10000 Cr + Av. Turnover-2005-06 to 2013-14)

INTERPRETATION: It is also interesting to note that the size of the company beyond a
minimum cut off Point (Average turnover of at least Rs.1000 Cr+) does not have any
significant bearing on the profitability rate as measured by the Net Profit Ratio. Companies
which fall in the second Group seem to have a slightly higher Net Profit Ratio of 11.19%; Ist
Group has a Net Profit Ratio of 9.94% while the Bird Sales Group has an average Net Profit
Ratio of 9.71%. All in all, the size of the business above the minimum turnover as noted
above has no significant bearing on the profitability, subsequently and commensurately on
the shareholders value.

ANOVA RESULTS OF ROI RATIO BETWEEN GROUPS

Anova: Single
Factor
SUMMARY
Groups Count Sum Average Variance
Sales Group I 39 554.97 14.23 165.55
Sales Group II 42 620.06 14.76 119.23
Sales Group III 39 562.09 14.41 260.33
Total No. of
Companies 120

ANOVA
Source of Variation SS Df MS F P-value F crit
Between Groups 5.98 2.00 2.99 0.02 0.98 3.07
Within Groups 21072.31 117.00 180.11

Total 21078.30 119.00

ANOVA OF ROI BETWEEN GROUPS:

RESULT: F VALUE OF 0.0166 SHOWS THERE IS NO SIGNIFICANT DIFFERENCE
IN BETWEEN THE GROUPS ROI

Note:
Sales Gr. I: (1000-4000 Cr- Av. Turnover-2005-06 to 2013-14)
Sales Gr II: (4001-10000 Cr- Av. Turnover-2005-06 to 2013-14)
Sales Gr III: (10000 Cr + Av. Turnover-2005-06 to 2013-14)

165
INTERPRETATION: It is quite interesting to note that the size of the company beyond a
minimum cut off Point (Average turnover of at least Rs.1000 Cr+) does not have any
significant bearing on the profitability rate as measured by the ROI Ratio. Companies which
fall in the second Group seem to have a marginally higher ROI of 14.76% Ist Group has an
ROI Ratio of 14.23% while the IIIrd Sales Group has an average ROI Ratio of 14.41%. All
in all, the size of the business above the minimum turnover as noted above has no significant
bearing on the profitability, subsequently and commensurately on the shareholders value.

ANOVA RESULTS OF RONW RATIO BETWEEN

GROUPS

Anova: Single Factor

SUMMARY
Groups Count Sum Average Variance
Sales Group. I 39 661 16.95 137.63
Sales Group II 42 837 19.93 272.21
Sales Group III 39 792 20.31 263.80
Total No. of Companies 120

ANOVA
Source of Variation SS df MS F P-value F crit
Between Groups 266.18 2.00 133.09 0.59 0.56 3.07
Within Groups 26414.99 117.00 225.77

Total 26681.17 119.00

ANOVA OF RONW BETWEEN GROUPS:

RESULT: F VALUE OF 0.589 SHOWS THERE IS NO SIGNIFICANT DIFFERENCE
IN BETWEEN THE GROUPS RONW

Note:
Sales Gr. I: (1000-4000 Cr- Av. Turnover-2005-06 to 2013-14)
Sales Gr II: (4001-10000 Cr- Av. Turnover-2005-06 to 2013-14)
Sales Gr III: (10000 Cr + Av. Turnover-2005-06 to 2013-14)

INTERPRETATION: It is quite interesting to note that the size of the company beyond a
minimum cut off Point (Average turnover of at least Rs.1000 Cr+) does not have any
significant bearing on the profitability rate as measured by the RONW Ratio. Companies

166
which fall in the IIIrd Group seem to have a somewhat higher ratio of 20.31% Ist Group has
an RONW Ratio of 16.95% while the IInd Sales Group has an average RONW Ratio of
19.13%. All in all, the size of the business above the minimum turnover as noted above has
no significant bearing on the profitability, subsequently and commensurately on the
shareholders value.

CHAPTER VI

CONCLUSIONS AND SUGGESTIONS

167
 CONCLUSIONS

1) Out of the regression analysis done relating to the versatile and comprehensive sample
covering 120 companies, one can plausibly and safely conclude that while Market
Value Added (MVA, the Dependent Variable) is predictable with the help of the
following Independent Variables, i.e., profit variants, viz., FCF, CFO, EAT, EBDIT,
ROI, and RONW. These variants contribute about 0.31 or 31% to the shareholders
value as measured by the MVA.

2) The Independent Variables, i.e., Earnings After Taxes (EAT) and Cash From
Operations (CFO) with an acceptable ‘p’ value of 0.046 and 0.088 respectively
contribute significantly towards the determination of the MVA (Market Value Added).
This has been also observed clearly and empirically verified while studying the
industry-wise projections of growth of CFOs and FCFs during the period of the study.
The trend of change in the CFOs and FCFs vis-à-vis the trend in the change of MVA
was more or less akin in respect of most of the industries during the period of the
study except some aberrant industries like Industrial Manufacturing and Banking and
Services.

3) The overall regression equation with a multiple R value of 0.56 indicates that there is
a fairly positive correlation between the variants of profits (dependent variables) and
shareholders’ value (independent variable) as measured by MVA is reasonable. R
square value of 0.308 indicates that the different variants of profits(i.e., the dependent
variables, viz., Free Cash Flows(FCF), Cash From Operations(CFO), Earnings After
Taxes(EAT), Return on Investment(ROI), and Return on Net Worth(RONW) predict
the value of MVA, i.e., the Dependent Variable to the extent of 0.308 or 31% . This is
also a clear indication that there are many industry, company, and economy factors
which do have their pertinent impact on the MVA or the Shareholder Value metric
which roughly contribute to 69% while determining shareholder value.

168
4) As can be noted from the Anova single factor test results to identify if there is any
significant difference between the profitability ratios as measured by the Operating
Profit Ratio, Net Profit Ratio, Return on Investment(ROI) Ratio, Return on Net Worth
Ratio(RONW), we notice that there is found to be no significant difference between
the ratios of companies falling in different sales groups, viz., those ranging an average
turnover from 1000 – 4000 crores (during the financial years 2005-06 to 2013-14),
4001-10000 crores (during the financial years 2005-06 to 2013-14) and those ranging
above 10000 crores (during the financial years 2005-06 to 2013-14). Therefore, one
can safely and plausibly conclude that the size of the business beyond the minimum
cut-off average turnover of Rs. 1000 crores does not have any significant impact on
the profitability. But since profitability parameters as noted also have an important
bearing on the shareholders value as noted from the regression analysis, it can thus be
deduced that the size of the business beyond the minimum cut off point as noted
above is not a determinant of or has no correlation with shareholder value.

5) When we observe the industry-wise overall growth rate, it is a keen pointer as to

which industries are aggressively contributing to shareholder value, which are
normally contributing and which are showing little or negative contribution. The
following industries show high contribution to shareholders value, i.e., IT/ITES,
Consumer Goods, Pharmaceuticals and Automobiles/Automobile Components. The
industries which are found to normally contribute to shareholders value are Cement,
Energy and some non banking service companies. The companies which are found to
contribute little or sometimes even negative to shareholders value comprise textiles,
infrastructure, industrial manufacturing, banking and financial services.

6) When we closely observe the behavior of Cash From Operations (CFOs), Free Cash
Flows (FCFs), and also Market Value Added (MVA) in respect of different types of
industries, we notice that particularly in case of Industrial Manufacturing, generally, it
presents a grim picture as the industry as a whole has eroded or at least not at all able
to add value to shareholders in most of the cases. Thus, this is an illustration to
highlight the fact that one of the important determinant of shareholders’ value is
definitely the industry to which a company belongs to, we notice that the MVA levels
are quite low or negative in most of the years as far as Industrial Manufacturing
169
 Industry is concerned, particularly during the years 2009-10, 2012-13 and 2013-14.
Hence some industries should definitely be a no-no for investors.

7) In continuation of the previous conclusions, one can also strongly say reiterating that
it can be posited that apart from financial parameters, the industry to which a
company belongs to is also really an important determinant of shareholders value.
This has been amply demonstrated in this research as the industries which really
display promising long-term shareholders value are firstly, IT/ITES, then Consumer
Goods, followed in the next order of preference by Pharmaceuticals, Cement and
Automobiles.

8) Based on the Hypotheses made in this research, the following conclusions follow:

TABLE SHOWING RELEVANT CONCLUSIONS BASED

ON HYPOTHESES AND RELEVANT DATA ANALYSIS

Accepted Not Basis Degree of

Accepte
Hypotheses(Alternate-1-7) d Confidence
H1- MVA is positively related to page 55, p>
PBDIT √ 0.05 95%
page 55, p<
H2-MVA is positively related to PAT √ 0.05 95%
page 55, p>
H3-MVA is positively related to FCF √ 0.05 95%
page 55, p<
H4-MVA is positively related to CFO √ 0.10 90%
page 55, p>
H5-MVA is positively related to ROI √ 0.05 95%
H6-MVA is positively related to page 55, p>
RONW √ 0.05 95%
H7-MVA is positively related to page 57, p=
Dividends √ 0.058 90%

Outcome of Hypothesis 8 along with statistical results are stated in page 107.

170
 SUGGESTIONS

1) The investors need to watch out, particularly for the Market Value Added (MVA),
Cash From Operations (CFO), Profits After Taxes (PAT) and Free Cash Flows
(FCF) values if they are consistently increasing. The consistent increase in
shareholder value if accompanied by a more or less simultaneous and consistent
increase in Profits After Taxes (PAT), Cash From Operations (CFO) and Free Cash
Flows (FCF) on a long-term basis, at least for a period of 5 – 10 years, clearly
indicate that the companies’ which display such a behavior coupled with a proven
track record in the past are good buys. The investors can rest assured that their
wealth invested in such companies shall increase in the long-term.

2) After the study, it is strongly recommended that investors would be wise to

identify, scrutinize and pick up shares in some of the firms in the IT sector,
followed by firms in the Consumer Goods and Pharmaceuticals Sector. This is
because there are really some very good companies in these sectors which have
outperformed the market and proven themselves to be strong and consistent
deliverers of shareholder value. It is really worthwhile to utilize money in buying
such companies’ shares as there are promising long-term returns.

3) After the study, it also strongly recommended that the investors look into the track
record of consistent Dividends paid by the Company and carefully pick up those
companies whose dividends are consistent and showing an increasing trend over a
long-term along with the above factors.

REFERENCES:

171
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APPENDICES:

1) APPENDIX – I - LIST OF COMPANIES INCLUDED IN THE SAMPLE

ALONG WITH THE INDUSTRY CATEGORY AND AVERAGE TURNOVER:

S.No Name of the Company Industry Av.Turnover

(Rs.Cr)
1 Escorts Ltd Auto 2860
2 JK Tyre & Industries Ltd Auto 4797
3 TVS Motor Company Ltd Auto 5186
4 MRF Ltd Auto 8572
175
5 Mahindra & Mahindra Ltd Auto 22739
6 Maruti Suzuki Ltd Auto 28290
7 Tata Motors Ltd Auto 37210
8 Zuari Cement Ltd Cement 2734
9 India Cements Ltd Cement 3673
10 Kesoram Industries Ltd Cement 4454
11 Ambuja Cements Ltd Cement 6953
12 ACC Ltd Cement 8440
13 UltraTech Cement Ltd Cement 11392
14 Godrej Consumer Products Ltd CG 1970
15 Marico Industries Ltd CG 2263
16 Dabur India Ltd CG 2992
17 Britannia IndustriesLtd CG 3830
18 GSK Consumer Healthcare Ltd CG 5289
19 Future Retail Ltd CG 5289
20 Adita Birla Nuvo Ltd CG 5979
21 Ruchi Soya Industries Ltd CG 16220
22 Hindustan Unilever Ltd CG 20525
23 ITC Ltd CG 26210
24 Usha Martin Ltd Energy 2254
25 Cummins India Ltd Energy 3368
26 Thermax Ltd Energy 3588
27 Neyveli Lignite Corporation Ltd Energy 3904
28 Suzlon Energy Ltd Energy 4769
29 Crompton Greaves Ltd Energy 5431
30 Torrent Power Ltd Energy 6333
31 Bosch Ltd Energy 5864
32 ABB Ltd Energy 6418
33 PTC India Ltd Energy 6899
34 Siemens Ltd Energy 9655
35 Petronet Lng Ltd Energy 15565
36 Gas Authority India Ltd Energy 30825
37 Chennai Petro Corporation Ltd Energy 36130
38 Essar Oil Company Ltd Energy 42731
39 MRPL Ltd Energy 45759
40 NTPC Ltd Energy 48896
41 Oil & Natural Gas Corporation Ltd Energy 66973
176
42 Hindustan Petroleum Corporation Ltd Energy 137695
43 Bharat Petroleum Corporation Ltd Energy 161663
44 Reliance Industries Ltd Energy 224662
45 Indian Oil Corporation Ltd Energy 340436
46 Amara Raja Batteries Ltd Indl Mfg 1714
47 Kansai Nerolac Paints Ltd Indl Mfg 2155
48 Havell's India Ltd Indl Mfg 2896
49 Shree Renuka Sugars Ltd Indl Mfg 3844
50 Voltas Ltd Indl Mfg 4125
51 NMDC Ltd Indl Mfg 4952
52 Bharat Electronics Ltd Indl Mfg 4989
53 Titan Industries Ltd Indl Mfg 5748
54 National Aluminium Co Ltd Indl Mfg 6169
55 Bhushan Steel Ltd Indl Mfg 6523
56 Sesa Sterlite Ltd Indl Mfg 6940
57 Uunited Spirits Ltd Indl Mfg 7533
58 Jindal Steel & Power Ltd Indl Mfg 9074
59 Videocon Industries Ltd Indl Mfg 10899
60 JSW Ltd Indl Mfg 21635
61 Bharat Heavy Electricals Ltd Indl Mfg 31993
62 Steel Authority of India Ltd Indl Mfg 40888
63 Hindustan Construction Co., Ltd. Infra 3348
64 Container Corporation of India Ltd Infra 3691
65 Gammon India Ltd Infra 3731
66 IVRCL Ltd Infra 4213
67 NCC Ltd Infra 4364
68 Adani Enterprises Ltd. Infra 9490
69 Larsen & Toubro Ltd Infra 38253
70 Mindtree ltd IT 1426
71 Wipro Ltd IT 24030
72 TCS Ltd IT 30155
73 Jubiliant Life Sciences Ltd Pharma 2465
74 Sun Pharmaceutical Industries Ltd Pharma 2512
75 Prism Industries Ltd Pharma 2587
76 Aurobindo Pharma Ltd Pharma 3684
77 Lupin Laboratories Ltd Pharma 4343
78 Dr.Reddy's Laboratories Ltd Pharma 5353
177
79 Cipla Ltd Pharma 5877
80 Tata Chemicals Ltd Pharma 6325
81 Dewan Housing Finance Ltd Services 1750
82 Apollo Hospitals Enterprises Ltd. Services 2035
83 Karur Vysya Bank Ltd Services 2204
84 South Indian Bank Ltd Services 2330
85 Cadila Healthcare Ltd Services 2383
86 Karnataka Bank Ltd Services 2669
87 ING Vysya Bank Ltd Services 3249
88 Federal Bank Ltd Services 3627
89 Yes Bank Ltd Services 3689
90 IndusInd Bank Ltd Services 3797
91 Shipping Corporation of India Ltd Services 3825
92 Kotak Mahindra Bank Ltd Services 4206
93 State Bank of Mysore Services 4226
94 Shriram transport finance ltd Services 4268
95 LIC Housing Finance Ltd Services 4300
96 State Bank of Bikaner & Jaipur Services 4793
97 Vijaya Bank Ltd Services 5305
98 Bank of Maharashtra Services 5515
99 Andhra Bank Services 7593
100 Allahabad Bank Services 10451
101 Oriental Bank of Commerce Services 10970
102 Syndicate Bank Ltd Services 11110
103 Jet Airways Ltd Services 11748
104 Union Bank of India Ltd Services 13825
105 Axis Bank Services 16020
106 Bank of India Services 20315
107 Bank of Baroda Services 23344
108 HDFC Bank Services 23773
109 Canara Bank Ltd Services 24575
110 Punjab National Bank Ltd Services 25603
111 ICICI Bank Services 37483
112 SBI Services 90967
113 Bharti Airtel Ltd Services 33269
114 Zee Entertainment Enterprises Ltd Services 1693
115 Welspun India Ltd Textiles 1914
178
 116 Trident Industries Ltd Textiles 2031
117 Arvind Mills Ltd Textiles 2787
118 Vardhman Industries Ltd Textiles 3235
119 Century Enka Ltd Textiles 4631
120 Grasim Industries Ltd Textiles 7820

Note: CG - Consumer Goods, Indl Mfg - Industrial

Manufacturing, Infra – Infrastructure

APPENDIX - 2 - SUMMARIZED AVERAGE ANNUAL FIGURES OF SAMPLE COMPANIES(2005-

06 TO 2013-14)
OP NP
Ratio Ratio
(Rs. (Rs.C (Rs.C (Rs. (Rs. (Rs. (Rs.
Cr) r) r) Cr) (Rs.) ) (%) (%) Cr) Cr) (%) (%)
Av
S. AvS AvM AvEB AvE AvDi MP Av AvRO AvC AvF AvPB AvPA
No Name of the Co., ales VA DIT AT vds S ROI NW FO CF DIT T
3452. 35.2
1 Torrent Power Ltd 5593 83 1265 499 2.23 167 2 52 195 86 19.98 8.62
- -
VIDEOCON 1089 2531. 446
2 INDUSTRIES Ltd 9 80 2069 588 4.19 181 4.71 10 -77 4 18.98 5.39
BRITANNIA 246.0 14.2 24.7
3 INDUSTRIES Ltd 3830 9 300 186 5 383 7 30 226 159 7.83 4.86
2927. 118 12.6 18.7 167
4 ACC Ltd 8440 66 1975 2 2 402 4 20 0 975 23.40 14.00
-
1045 1225. 111
5 ALLAHABAD BANK Ltd 1 30 1918 0 4.05 114 0.98 19 447 350 18.35 10.62
11914 127 18.2 162
6 AMBUJA CEMENTS Ltd 6953 .58 2148 2 2.18 121 2 19 0 770 30.89 18.29
-
1602 9067. 241 10.6 478 461
7 AXIS BANK 0 95 4354 9 8 156 1.23 17 8 9 27.18 15.10
-
2334 341.1 300 10.2 15.6 124 122
8 BANK OF BARODA 4 6 5684 7 25 434 4 16 25 97 24.35 12.88
9 BHARTI AIRTEL 3326 6587 12116 606 1.16 333 16.4 22 113 159 36.42 18.24
179
 9 9.39 7 4 71 97
3199 1015 416 23.7 233 142
10 BHEL 3 7.54 6797 9 6.23 286 1 24 6 6 21.25 13.03
1289 46.2 520
11 BOSCH Ltd 5864 9.77 1234 727 5 5 19 20 684 372 21.04 12.40
-
BHARAT PETROLEUM 1616 1998. 172 322 -
12 CORPORATION Ltd 63 30 5049 4 8.7 247 5.18 12 2 189 3.12 1.07
CHENNAI PETROLEUM 3613 169.1
13 CORPORATION Ltd 0 3 792 98 8.78 207 2.3 -1 501 122 2.19 0.27
DR.REDDY'S 9426. 12.8
14 LABORATRIES Ltd 5353 69 1457 919 9.3 925 7 15 678 256 27.22 17.17
898.4 -
15 GAMMON INDIA Ltd 3731 1 266 -50 0.44 232 1.08 -7 -30 180 7.13 -1.34
2377 2763 373 17.3
16 HDFC Bank 3 0.38 6658 1 6.74 339 1 18 932 735 28.01 15.69
-
3748 3282 526 13.4 247 235
17 ICICI Bank 3 5.45 8760 0 5 154 9.07 11 9 7 23.37 14.03
2621 8206 466 441 302
18 ITC Limited 0 3.29 7519 0 4.47 150 28.1 29 3 4 28.69 17.78
1174 4304. - 108 -
19 JET AIRWAYS 8 61 8688 -669 5 562 8.42 51 3 162 73.95 -5.69
3825 2740 347 15.2 15.5 227 122
20 LARSEN & TURBO 3 3.48 29518 4 3 788 1 21 5 6 77.17 9.08
MAHINDRA & 2273 1689 206 10.3 18.2 224 140
21 MAHINDRA 9 7.79 3182 7 8 503 9 32 8 5 13.99 9.09
-
200.4
22 WELSPUN INDIA LTD 1914 5 327 54 2.2 63 2.38 7 387 164 17.08 2.82
449.4
23 AUROBINDO PHARMA 3684 3 700 385 1.75 131 8.37 18 245 1 19.00 10.45
4889 6643 877 112 300
24 NTPC Ltd 6 0.04 15571 2 2.65 158 8.63 14 11 4 31.85 17.94
6697 4218 185 18.7 281 208
25 ONGC 3 4.54 41070 26 13.2 248 7 21 10 95 61.32 27.66
-
1864.
26 ARVIND MILLS LTD 2787 78 518 153 1.4 64 3.89 7 322 105 18.59 5.49
6255. 16.4
27 CADILA HEALTHCARE 2383 61 621 449 6.03 445 6 20 368 219 26.06 18.84
472.1
28 IVRCL Ltd 4213 2 437 27 1.03 107 2.71 3 29 -23 10.37 0.64
-
JK TYRE & INDUSTRIES 587.7
29 LTD 4797 8 1731 72 2.85 22 4.39 13 265 -52 36.09 1.50
KESORAM INDUSTRIES -
30 Ltd 4454 0.77 431 -14 3.71 196 3.19 -10 297 182 9.68 -0.31
2403 4676 426 21.6 351 270
31 WIPRO LTD 0 1.52 5951 3 4.38 321 7 26 6 5 24.76 17.74
HINDUSTAN UNILEVER 2052 6670 262 98.9 259 237
32 LTD 5 4.04 3357 4 4.18 319 7 102 5 2 16.36 12.78
INDIAN OIL 3404 1588. 621 804
33 CORPORATION Ltd 36 56 15105 9 8.81 259 6.94 13 -61 6 4.44 1.83
-
JINDAL STEEL & 1342 139 189 274
34 POWER Ltd 9074 9.48 2903 9 4.16 267 7.59 18 0 4 31.99 15.42
35 ULTRATECH CEMENT 1139 1334 2698 141 5.45 969 15.3 24 203 - 23.68 12.43
180
 2 5.10 6 8 7 262
5146.
36 ADITYA BIRLA NUVO 5979 96 816 322 5.43 950 3.94 7 445 236 13.65 5.39
4988. 16.5 151 112
37 YES BANK 3689 90 861 517 4.4 218 6 21 8 7 23.34 14.01
1299
38 KOTAK 4206 7.94 987 582 0.8 356 7.29 13 310 208 23.47 13.84
-
BANK OF 3139 145 52.9
39 MAHARASHTRA 5515 9.45 4344 9 2.36 46 1 70 58 61 78.77 26.46
KARUR VYSYA BANK 168.9
40 LTD 2204 7 519 305 12.3 265 16.5 17 305 330 23.55 13.84
- -
2024. 18.9 765 766
41 LIC Housing Finance Ltd 4300 80 4138 699 6.79 144 6 20 8 8 96.23 16.26
8317.
42 LUPIN LTD 4343 59 1122 799 5.4 304 26.4 29 605 290 25.83 18.40
455.9 20.1 613 12.3
43 MRF LTD 8572 2 6132 942 1 2 4 19 697 113 71.54 10.99
7580. -
44 UNITED SPIRITS LTD 7533 27 221 -282 2 981 1.03 -4 410 258 2.93 -3.74
NEYVELI LIGNITE 2100 111
45 CORPRN LTD 3904 8.65 2097 8 2.64 188 8.07 10 995 509 53.71 28.64
-
4526 436 32.7 319 302 119.4
46 NMDC LTD 4952 9.71 5917 8 8.18 96 2 33 3 9 9 88.21
393.7 120 12.1 151
47 NALCO 6169 4 2242 1 3.16 68 5 12 3 114 36.34 19.47
4575 4868. 10.1 222 161
48 MRPL 9 74 1740 711 1.04 57 3 16 7 7 3.80 1.55
-
814.7 12.2
49 State Bank of Mysore 4226 9 777 327 9.1 521 8 15 198 195 18.39 7.74
-
537.3
50 NCC Ltd 4364 9 488 118 0.93 62 4.09 7 82 -27 11.18 2.70
1556 3883. 11.9
51 PETRONET LNG LTD 5 33 1202 604 1.89 87 2 26 873 366 7.72 3.88
179.0
52 PTC INDIA LTD 6899 8 154 105 1.2 73 7.79 8 -45 -50 2.23 1.52
SHREE RENUKA Sugars 901.7
53 Ltd 3844 8 338 53 1.57 48 3.83 8 285 -112 8.79 1.38
RUCHI SOYA Industries 1622 239.8
54 Ltd 0 1 560 132 0.74 76 3.09 9 408 58 3.45 0.81
-
1234. 10.1 16.9
55 SBBJ 4793 31 922 444 9 164 9 17 636 654 19.24 9.26
3015 9892 790 32.6 585 477
56 TCS 5 8.67 10027 0 6.21 716 6 33 6 1 33.25 26.20
SUN
PHARMACEUTICAL Inds 9816. 12.8
57 ltd 2512 16 677 560 7.11 157 1 15 396 247 26.95 22.29
1818. 16.4
58 KANSAI NEROLAC 2155 18 294 172 11.4 593 3 22 140 24 13.64 7.98
-
ORIENTAL BANK OF 1097 1452. 11.5 128 129
59 COMMERCE 0 56 1837 937 5.7 239 9 12 2 6 16.75 8.54
60 FEDERAL BANK 3627 - 823 459 5.5 56 13.3 14 432 412 22.69 12.66

181
 3019.
17 7
-
1376 594.4 111 266 -
61 HPCL 95 4 4043 9 8.23 329 3.58 10 2 659 2.94 0.81
759.9 10.1 -
62 ING VYSYA BANK LTD 3249 3 499 258 2.74 277 2 10 -396 456 15.36 7.94
CONTAINER CORPRN 7188. 63.3
63 OF INDIA LTD 3691 77 1157 804 9.75 618 3 20 740 416 31.35 21.78
8798. 13.1
64 ABB LTD 6418 44 520 279 4.24 682 9 13 220 52 8.10 4.35
8694.
65 SUZLON ENERGY LTD 4769 51 301 -354 2.75 120 0.67 -11 477 343 6.31 -7.42
5482. 27.5
66 CUMMINS INDIA LTD 3368 84 672 458 4.38 299 9 27 342 233 19.95 13.60
1059 42.4
67 DABUR INDIA LTD 2992 4.65 570 418 1.23 81 7 47 424 346 19.05 13.97
TRIDENT INDUSTRIES -
68 LTD 2031 82.94 337 46 0.7 17 2.37 8 320 26 16.59 2.26
JUBILIANT LIFE 2079.
69 SCIENCES LTD 2465 91 399 171 0.38 241 5.52 12 381 122 16.19 6.94
MARICO INDUSTRIES 6499. 22.7
70 LTD 2263 91 379 266 9.38 119 8 38 269 198 16.75 11.75
RELIANCE INDUSTRIES 2246 9749 172 10.6 243 106
71 LTD 62 7.72 31415 19 9.67 821 3 15 04 09 13.98 7.66
3721 2069 137 288
72 TATA MOTORS LTD 0 3.34 3692 8 9.61 292 8.04 14 0 714 9.92 3.70
3082 1727 301 11.3 342 147
73 GAIL India Ltd 5 9.48 5252 6 4.72 296 7 18 3 1 17.04 9.78
1455 23.2
74 SIEMENS LTD 9655 6.96 1019 601 4.75 550 2 23 330 85 10.55 6.22
- -
75 Usha Martin Ltd 2254 47.37 431 66 1.58 45 3.5 7 477 126 19.12 2.93
-
2031 966.0 213 16.1 572 523
76 BANK OF INDIA 5 3 4327 6 5.05 252 9 17 0 3 21.30 10.51
ADANI ENTERPRISES 11764
77 LTD. 9490 .78 622 237 1 280 3.98 11 55 -59 6.55 2.50
APOLLO HOSPITALS 3812.
78 ENTERPRSES LTD. 2035 50 354 176 4.28 395 7.91 10 168 -77 17.40 8.65
350.7 16.0
79 Mindtree ltd 1426 1 275 180 3.67 303 5 24 159 88 19.28 12.62
-
1889. -
80 Shipping corporation 3825 07 1402 438 5.06 106 6.56 8 707 508 36.65 11.45
- -
Shriram transport finance 4594. 289 290
81 ltd 4268 59 3260 813 3.17 390 3.56 20 5 0 76.38 19.05
GSK Consumer Healthcare 5799. 21.4 160 16.4
82 Ltd 5289 93 474 287 4 7 2 16 341 336 8.96 5.43
1323 140 223
83 Grasim Industries Ltd 7820 8.84 2270 7 24 9 14.4 18 -243 -39 29.03 17.99
ESSAR OIL COMPANY 4273 3329. - -
84 LTD 1 06 1511 -267 0 87 1.49 -4 398 973 3.54 -0.62
-
2457 178.1 244 15.1 415 418
85 CANARA BANK LTD 5 0 4284 9 8.41 325 6 18 7 9 17.43 9.97
86 CENTURY ENKA LTD 4631 1479. 623 171 4.47 324 19.7 35 101 59 13.45 3.69

182
 70 7
1449 16.7
87 CIPLA LTD 5877 3.67 1454 979 2.21 265 1 59 327 224 24.74 16.66
6114. 24.1
88 Crompton Greaves Ltd 5431 60 692 427 0.67 148 6 58 567 407 12.74 7.86
Dewan Housing Finance -
89 Ltd 1750 81.17 1574 218 2.39 134 1.54 16 211 190 89.94 12.46
90 Escorts Ltd 2860 -9.35 229 80 1.28 114 4.24 6 97 -58 8.01 2.80
2858. -
91 Future Retail Ltd 5289 96 555 113 0.69 315 3.79 11 156 362 10.49 2.14
Hindustan Construction 8738.
92 Co., Ltd. 3348 11 474 34 0.69 202 1.57 4 110 -44 14.16 1.02
406.0
93 India Cements Ltd 3673 7 743 256 1.64 119 5.62 11 560 33 20.23 6.97
- -
2163 1694. 145 126 594
94 JSW Ltd 5 88 4344 9 8.86 685 7.39 14 9 8 20.08 6.74
2829 1696 192 15.9 260
95 Maruti Suzuki Ltd 0 4.75 3689 2 5.28 992 4 17 1 670 13.04 6.79
- -
424.7 371
96 Bhushan Steel Ltd 6523 2 1710 573 0.48 238 4.26 16 908 9 26.21 8.78
1382 1364. 159 19.1 268 248
97 Union Bank of India Ltd 5 87 3073 2 4.52 194 1 21 2 3 22.23 11.52
-
186.2 12.6
98 Karnataka Bank Ltd 2669 1 439 237 3.78 119 6 14 94 142 16.45 8.88
6123. 12.7 132 19.6
99 Bharat Electronics Ltd 4989 56 1183 789 9 0 7 20 424 304 23.71 15.81
10 266.7 18.5
0 Andhra Bank Ltd 7593 6 1700 908 3.81 98 2 18 756 246 22.39 11.96
-
10 2560 1329 326 18.8 373 188
1 Punjab National Bank Ltd 3 8.98 6622 1 14 133 7 20 2 8 25.86 12.74
10 891.7 13.7
2 Prism Industries Ltd 2587 2 299 85 0.94 40 5 15 840 525 11.56 3.29
10 4088 1936 489 14.9 448 161
3 SAIL Ltd 8 6.98 8588 4 1.32 120 9 20 5 5 21.00 11.97
-
10 9096 5577 867 21.4 731 518
4 SBI Ltd 7 0.39 20865 1 6 164 13.6 14 9 8 22.94 9.53
-
10 449.6 15.8
5 South Indian Bank Ltd 2330 3 439 241 0.45 13 3 15 957 946 18.84 10.34
-
10 5110. 144 26.8 150 169
6 Sesa Sterlite Ltd 6940 64 2630 5 2.04 138 1 29 7 0 37.90 20.82
-
10 1111 1092. 102 18.9 133 160
7 Syndicate Bank Ltd 0 65 1684 4 2.68 85 1 21 6 4 15.16 9.22
10 4574. 24.5
8 Thermax Ltd 3588 28 465 267 5.35 482 5 25 367 282 12.96 7.44
10 6023. 27.2
9 Titan Industries Ltd 5748 58 588 358 3.67 118 9 34 215 142 10.23 6.23
-
11 180.7 12.1
0 Vijaya Bank Ltd 5305 8 759 393 1.5 55 2 15 706 373 14.31 7.41
11 VOLTAS LTD 4125 2615. 327 225 1.9 118 26.6 30 102 94 7.93 5.45
183
1 09 2
-
11 1484. 143 110
2 Vardhman Industries Ltd 3235 58 653 266 4.32 29 6.48 15 8 1 20.19 8.22
11 -
3 Zuari Cement Ltd 2734 58.55 162 112 2.63 285 7.64 13 -272 170 5.93 4.10
11 391.5 18.7
4 Amara Raja Batteries Ltd 1714 4 274 159 2.31 82 1 24 155 63 15.99 9.28
11 Godrej Consumer Products 9114. 43.7
5 Ltd 1970 28 429 324 4.57 334 6 58 952 824 21.78 16.45
-
11 475.8 20.1
6 Havell's India Ltd 2896 8 337 231 3.94 62 3 23 298 185 11.64 7.98
11 3218. 11.3
7 IndusInd Bank Ltd 3797 42 715 390 1.86 170 8 14 416 375 18.83 10.27
11 2508.
8 Tata Chemicals Ltd 6325 64 1007 523 8.85 271 8.6 14 526 340 15.92 8.27
11 Zee Entertainment 7584. 14.3
9 Enterprises Ltd 1693 96 572 430 1.73 139 9 15 276 249 33.79 25.40
12 398.5
0 TVS Motor Company Ltd 5186 5 319 128 0.64 37 7.54 12 257 128 6.15 2.47

GLOSSARY:

DIVIDEND POLICY: It is the strategic decision related to the amount of dividend that a

company wishes to pay as dividend every year.

SHAREHOLDERS’ VALUE: The amount of market capitalization a company enjoys in

the share market. This would also mean the change in the value that is delivered to
shareholders in terms of the increase in the share price in the share market. This also does
infer the value that is delivered to the shareholders in a financial year. In this research,
shareholders’ value is taken as the MVA, i.e., Market Value Added (the difference the market
value of a a company’s shares(aggregate) and the book value of a company’s
shares(aggregate). (James H. McTaggart, Peter W. Kontes, and Michael C. Mankind (1994),
Marakon & Associates, 1978, Stewart, 1991, p.153).

LINTNER MODEL: A model stating that dividend policy has two parameters: (1) the target
payout ratio and (2) the speed at which current dividends adjust to the target.
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AGENCY COST: The Management of the company is assumed to be an agent of the
shareholders. Shareholders are considered as the principals on behalf of whom the
management (agents) performs. Since there is always a possibility of divergence of interest
between the shareholders and the managers, there exists an agency cost.

PECKING ORDER HYPOTHESIS: It states that companies which prefer to finance their
capital expenditures from internal sources pay lesser dividends when compared to companies
which may prefer external sources to fund their capital expenditures.

DIVIDEND SIGNALING: It states that a company having bright future prospects is more
likely to signal the same by announcing them when compared to another company which may
not have bright future prospects.

FREE CASH FLOWS: These are the cash flows obtained after deducting Capital
Expenditures during a year from the Cash From Operations obtained through the Cash Flow
Statement pertinent to the year.

CASH FROM OPERATIONS: These are the cash generated from operations during a
Financial Year (calculated after due adjustments from the Income Statement) disclosed as an
important disclosure in the Cash Flow Statement.

ROI: IT is the Return on Net Investment made in a business. It is calculated by obtaining

the Proportion of Net Profits to the Net Investment in a business during a year.

RONW: It is the return on Shareholders’ funds comprising share capital and reserves. It is
obtained by the proportion of Net Profits to the Shareholders Funds/Net Worth employed as
indicated in the balance sheet during a year.

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IMPORTANT ABBREVIATIONS:

1) MVA: Market Value Added.

2) FCF: Free Cash Flow.

3) CFO: Cash From Operations.

4) ROI: Return on Investment.

5) RONW: Return on Net Worth.

6) PBDIT: Profits Before Depreciation, Interest and Taxes.

7) GDP: Gross Domestic Product

8) MV: Market Value/Market Capitalization of a Company.

9) EVA: Economic Value Added.

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