chetan project

8/10/2019 Chetan Project

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Economic Value Added Of Godrej Company

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PROJECT REPORT ON

ECONOMIC VALUE ADDED OF GODREJ COMPANY

SUBMITTED BY

CHETAN PATEKAR

T.Y. B.M.S.

2013-14

PROJECT GUIDE

PROF LOVEENA ATWAL

SUBMITTED TO

UNIVERSITY OF MUMBAI

BUNTS SANGHA MUMBAI

ANNA LEELA COLLEGE OF COMMERCE & ECONOMICS

SHOBHA JAYARAM SHETTY COLLEGE FOR B.M.S

Shashi Manmohan Shetty Higher Education Complex,

Buntara Bhavana Marg, Kurla (East), Mumbai 400 070


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BUNTS SANGHA MUMBAI

ANNA LEELA COLLEGE OF COMMERCE &ECONOMICS


Shashi Manmohan Shetty Higher Education Complex, Kurla (East), Mumbai

CERTIFICATE

This is to certify that Mr. Chetan Patekar of B.M.S Semester V has undertaken & completed

the project work titled Economic Value Added Of Godrej Company during the academic year

2013-14 under the guidance of Prof. Loveena Atwal submitted to this college in fulfillment of

the curriculum of Bachelor of Management Studies, University of Mumbai.

This is a bonafide project work & the information presented is true & original to the

best of our knowledge and belief.

PROJECT COURSE EXTERNAL PRINCIPAL

GUIDE CO-ORDINATOR EXAMINER


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BUNTS SANGHA MUMBAI

ANNA LEELA COLLEGE OF COMMERCE & ECONOMICS


Shashi Manmohan Shetty Higher Education Complex,

Buntara Bhavana Marg, Kurla (East), Mumbai 400 070

DECLARATION

I, chetan patekar of Anna Leela College of Commerce & Economics, Shobha Jayaram

Shetty College for B.M.S, T.Y.B.M.S Semester V hereby declare that I the project under

the title economic value added of Godrej Company is the record of my work under

the guidance of Prof. Loveena Atwal.

The information submitted is true and original to the best of my knowledge.

Signature of the Student,

Chetan Patekar


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ACKNOWLEDGMENT

First and the foremost I would like to thank the University Of Mumbai for giving me

the opportunity to make a project and conduct a thorough study on the topic.

I would like to thank my project guide Prof Loveena Atwal who helped me choose my

topic and helped me in every stage of my project right from the start till the end. Thank

you mam my project wouldnt have been complete without your guidance

encouragement and support.

I would like to thank our course coordinator Prof. Loveena Atwal for her assistance and

support.

Last but not the least I would also like to thank my parents for their encouragement

and support and God for his blessings, encouragement and support.


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EXECUTIVE SUMMARY

EVA produces a more economically meaningful version of residual income. Attempt toanalyze the EVA with that of market price to see whether, EVA is the main driver for

shareholder value or not. The project is conducted in order to exhibit the relationship

between stock return and economic value added (EVA) as compare to the relationship

with other variable such as net income(NI) and operating cash flow (OCF) with in BSE

stock market. It is evident from the study that the contribution of operating cash flow is

higher is compare to EVA and NI which is predication of the least contribution of the

EVA in stock return as shown by the individual regression analysis of those variables

with stock return. Finally EVA is negatively contributing to the stock return as

compare to the other variable shown both by regression. One of the major benefits of

using EVA as a decision tool is in the area of asset management, allocation of resources

and capital structure including the operating leverage. Furthermore, EVA is appealing

to developing companies that need to fund their projects through satisfying the value of

enhancement requirement of investor. The objective of this approach to capital

allocation is to ensure that the line of business is constantly contribution to the

improvement of the return on existing capital, seeking investment that create value to

shareholder and maintaining optimal capital structure levels.


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OBJECTIVES OF THE STUDY

To compare and contrast EVA with other measures of performance.

To measure the financial performance of Godrej company using EVA.

To suggest and recommend, if any, ways of improving EVA.


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LIMITATION OF STUDY

1) A major limitation is that in program pertaining attitudinal changes. The

response got very subjective.

2) Limited number of workers was used as sample figure to generalize the analysis.

3) During the interview the limitation of the worker understands the perception of

interviewer.

4) Workers were not able to express their views extensively as they had limited time

to spare.


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WINDS CHANGE OF GODREJ. 51

3.

SWOT ANALYSIS.

COMPANY OVERVIEW.

52

54

4.

GODREJ INDUSTRIES HAS DECIDED TO ADOPT EVA.

IMPLEMENTATION OF EVA IN GODREJ GROUP OF

COMPANIES.

TRAINING FOR EVA AT GODREJ COMPANY.

MOVING TOWARDS EVA OF GODREJ COMPANY.

BOOH FACTOR IN THE IMPLEMENTION OF EVA AT

GODREJ.

55

56

57

58

59

5.

DATA ANALISIS. 60

6.

SUGGESTIONS.

CONCLUSION.

64

65

7.

BIBLOGARPHY. 66


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CHAPTER 1

INTRODUCTION

EVA was developed by a NEW YORK consulting firm, stern steward & co. in

1982to promote value- maximisingbehavioursto corporate managers. Value-based measure

to evaluate business strategies, capital projects and to maximise long-term shareholders

wealth. EVA sets managerial performance target and links it to reward system. Unlike simple

traditional budgeting EVA focuses on ends and not means.

EVA is economic value added, a measure of economic profit. It is calculate as the

difference between the NET OPERATING PROFIT AFTER TAX and the opportunity

cost of invested capital. The opportunity cost is determined by the WEIGHTED AVERAGE

COST OF DEBT AND EQUITY CAPITAL (WACC) and the amount of capital

employed.

For years, public companies have been measuring their performance according to The

method of Generally Accepted Accounting Principles (GAAP) and indicators such as

Earnings per Share (EPS).From their long continued use, GAAP indicators have become

The trademark measurements in todays marketplace. On the surface, EPS looks like an

Accurate measure of performance; however, in reality the method used to calculate EPS

Ignores numerous important expenses that change performance results significantly. In Light

of this problem, two University of Chicago graduates pioneered a new method of Measuring

and creating value in a business. In 1982, Joel Stern and G. Bennett Stewart III founded Stern

Stewart & Co. and formally launched their revolutionary concept of Economic Value Added

(EVA).

Although certain aspects of this economic theory are very complex, the beauty of

EVA is its overall simplicity. This report seeks to provide a simple, but in-depth

Understanding of EVA concepts and their applications and assumes that the reader may Have

a limited knowledge of accounting and finance.

As such, the following discussion Economic Value Added, Focuses on the major

principles of EVA without the extreme detail on the metrics of EVA. It is also presented with

limited equations for even more simplicity. Topics to be Discussed include the necessity of

EVA, the four major applications of EVA Measurement, Management System, Motivation,


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and Mindsetas identified by the Stern Stewart & Company (n.d.), and Market Value Added

(MVA). Also included is a

Comparison study of companies that have adopted the EVA method. No matter how Good

EVA sounds in theory; it has no case for continued use without quantitative results. As willbe shown, EVA companies average much better performance than their non-EVA

Competitors and the foundational concepts in this report allow investors of all levels to

Better measure other companies performance.

Increasing EVA is always a good thing for its investors - certainly not the case with

EPS (see Enron) or Free Cash Flow. Many even argue that EVA is a better decision tool than

NPV because it captures the period-by-period value creation or destruction of a given firm or

investment, and makes it easy to audit performance against management projections.

Given the usefulness of the measure, many companies have adopted it as part of a

comprehensive management and incentive system that drives their decision processes. Such

focus on value creation has served the shareholders of these companies well. Between 1997

and 2007, Stern Stewart & Co.'s EVA adopters have beat broader market indices by a

significant margin:

EVA can be measured as = Net Operating Profit After Taxesmoney


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Many leading companies like General electric, coca cola, Siemens, Hindustan

Unilever, Reliance industries and Infosys Technologies have accorded Economic value

creation a central place in their corporate planning.


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WHAT IS EVA

A measure of a companys financial performance based on the residual wealthcalculated by deducting cost of capital from its operating profit.

(Adjusted for taxes on a cash basis also referred to as economic profit.)

The formula for calculating EVA is as = Net Operating Profit After Taxes-cost of

capital.

EVA is the idea that companies do not earn a true profit until all costs, including

Items such as opportunity costs and cost of capital have been covered. In other words,

Showing a profit on the income statement is not enough. The amount of earnings must Also

cover opportunity coststhe benefit foregone by using resources in a particular Manner. But

more importantly earnings must cover cost of capitalthe return demanded By shareholders

and cost of debt. Only the earnings left, if any, after subtracting the Firmsphysical costs and

intangible costs, can be considered profits. When a company Earns more than its total costs,

then it has made a true profit or economic profit. The Term economic profit was first

developed by British Economist Alfred Marshall and Includes the cost of capital as well as

other adjustments. However, its basic theme is that Firms must account for all costs, tangible

or intangible, to earn a real profit. If an Economic profit is not earned, then it does not matter

what the income statement shows. In reality, the company is merely breaking-even or

operating at a loss. Only economic Profits measure true performance and create real value for

a company and its Shareholders (Rutledge, 1993). The goal of all financial decisions is to

maximize shareholders value. No only share holders but also the value of stakeholders like

employees, Customers and creditors has also to be maximized. The maximization ofShareholders value will in turn lead to the increase in stakeholders value.

Shareholders wealth is measured by returns they receive on their Investment. Returns

are in two parts:

First in the form of dividends and the second in the form of capital appreciation reflected in

market value of shares. But the market value of shares is influenced by the management of a

firm. The market value which is reflected in share price are influenced by the extend to which


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management is able to meet the expectations of share holders.Various measures like Earning

per share (EPS), Return on equity(ROE) and Return on capital employed(ROCE or ROI)

have been used to evaluate the Performance of the business. The problem with these

measures is that they lack proper benchmark and have failed to capture the shareholder valuecreation / destruction as a result of management actions. With the drawbacks associated with

the above measures and to develop a technique, which measures the real shareholders

wealth, EVA comes closer than any of the above in capturing true economic profit. EVA has

gained increased acceptance during the last decade.


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WHY UNDERSTAND EVA

Because of EVAs practical and performance driving concepts, one would think EVA

should be the dominant measurement system in corporate America. However, one Only need

to read a newspaper to see that most of the business world still revolves around The

traditional accounting rules of Generally Accepted Accounting Principles (GAAP) And

conventional measurements such as Earnings per Share (EPS). GAAP accounting, Though, is

inconsistent at best and described by G. B. Stewartas a jumble of ad hoc rules Established

by the tugging and pulling of competing factions and diverse perspectives... [In which] the

measurement of earnings that accounts for and guides the creation of Shareholder value has

been lost in the shuffle (WSJ, June2.2003.p.4). Because GAAP Ignores many important

factors that determine the value of a company, shareholders are Often left in the dark on their

companys actual performance. To correct this situation, Shareholders need a basic

understanding of EVA principles to better evaluate their Investments. Likewise, executives

and managers need to understand EVA in order to Make better decisions for their

shareholders. Furthermore, it is not always necessary to Have an intimate knowledge of EVA

or use all of its methods. Even a basic Understanding can be applied effectively (Stewart,

WSJ, 2003).


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FEATURES OF EVA

1) EVA is the surplus generated by an entity after meeting an equitable charge

towards the providers of capital.

2) EVA is a management tool to help managers take decision which increase the

shareholders wealth.

3) EVA focuses on Firms ability to create surplus above shareholders expectations.

4) EVA reporting uses market information and estimates like cost of capital, Beta,

Risk Free Rate of Return etc.

5) It acts as performance measure which is linked to share holder value creation

in all directions.6) It is useful in providing business knowledge to everyone.

7) It is an efficient method for communicating to investors.

8) It transforms the accounting information into economic quality which can be

easily understood by non financial managers.

9) It is useful in evaluating Net Present Value (NPV) of projects in capital

budgeting which is contradictory to IRR.

10)Instead of writing the value of firm in terms of discounted cash flow, it can be

expressed in terms of EVA of projects.


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ADVANTAGES OF EVA

1) EVA provides for better assessment of decision that affect balance sheet and income

statement or tradeoffs between each through the use of the capital charge againstNOPAT.

2) EVA decouples bonus plans from budgetary targets.

3) EVA covers all aspects of the business cycle.

4) EVA aligns and speed decision making, and enhances communication and teamwork.

5) If a division is failing to earn a positive EVA, its management is likely to face some

pointed questions about whether the divisions assets could be better employed

elsewhere. EVA sends a message to managers: Invest if and only if the increase in

earnings is enough to cover the cost of capital. For managers who are used to tracking

earnings or growth in earnings, this is a relatively easy message to grasp.

6) Therefore EVA can be used down deep in the organization as an incentive

compensation system. It is a substitute for explicit monitoring by top management.

Instead of telling plant and divisional managers not to waste capital and then for

careful and thoughtful investment decisions. Of course, if the junior managers

compensation is tied to their economic value added, then they must also be given the

power over those decisions that affect EVA.

7) Introduction of residual income measures often leads to surprising reductions in assets

employed not from one or two big capital disinvestment decisions, but from many

small ones. EVA lets the business managers, realize that even assets have a cost and

hence stock wont be lying idle.


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DISADVANTAGES OF EVA

1) EVA does not control for size differences across plants or divisions.

2) EVA is based on financial accounting methods that can be manipulated by managers.

3)

EVA may focus on immediate results which diminishes innovation.

4) EVA provides information that is obvious but offers no solutions in much the same

Way as historical financial statement do.

5) EVA does not involve forecasts of future cash flows and does not measure present

value. Instead, EVA depends on the current level of earnings. It may, therefore,

reward managers who take on projects with quick paybacks and penalize those who

invest in projects with long gestation periods.

6)

Think of the difficulties in applying EVA to a pharmaceutical research program,

where it typically takes 10 to 12 years to bring a new drug from discovery to final

regulatory approval and the drugs first revenues. That means 10 to 12 years of

guaranteed losses, even if the managers in charge do everything right.

7) Similar problems occur in start-up ventures, where there may be heavy capital

outlays but low or negative earnings in the first years of operation.

8) This does not imply negative NPV, so long as operating earnings and cash flows are

sufficiently high later on. But EVA would be negative in start-up years, even if the

project were on track to a strong positive NPV.

9) If a proposal for a New business forecasts accounting losses during a startup period,

but the proposal nevertheless shows positive NPV, then the startup losses are really

an investment cash outlays made to generate larger cash inflows when the new

business hits its stride. In short, EVA and other measures of residual income depend

on accurate measures of economic income and investment. Applying EVA

effectively requires major changes in income statements and balance sheets.


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PROBLEMS IN USING EVA

EVA has gained immense popularity & currently is one of the hottest topics in

finance. It is considered to be a measure of performance compared to traditional measure like

earning per share & profit after tax. Now withstanding the above claims, there are certain

problems or pitfalls in using EVA.

1) Disincentive for Collaboration Relationship:Perhaps the most serious problems of

EVA is that while it helps firms in achieving higher business unit efficiency, it may

not encourage collaborative relationship among business unit managers.

Globalization, Liberalization & Technological advance make it imperative for firms

to enhance their efficiency & also to transform themselves by exploiting newer

opportunities that capitalize on their core competencies. For example, Eastman Kodak

is trying to exploit recent developments in electronics to shift its trust to digital

photography & Monsanto is seeking to transform itself from an old line chemical

manufacture into a genetic engineering & pharmaceutical company. As C.K. Prahalad

says: The more valuable is the collection of individual business when combined in

the same portfolio, the less effective are division measure in capturing that value &

creating incentives for future co-operation & growth opportunities.2) Imperfect Measure: A second limitation of EVA is that it is not perfect measure.

True, it is a better measure the conventional measure like EPS, PAT, & RONW. Still

it is far from being a perfect measure. As Micheal Jensen says: Thus , while EVA is

the best flow measure of performance currently known, it is not the universal answer

to the search for the perfect performance measure.

3) Underinvestment: Managers may be reluctant to propose investment that may have a

gestation period of few years. During this period, the investment does not produce anyreturn but has to bear a capital charges, thereby adversely affecting EVA. To alleviate

the problems of underinvestment the firm may use the following suspense accounts,

deferred compensation, stock option, & value drivers.

4) Difficulties in Divisional Performance Measurement: Divisional performance

measurement is difficult when division use shared facilities & transact between

themselves. A broad range of corporate resources such as R & D, product

development, marketing, IT, & HRM may be shared by various divisions. The cost of

shared resources has to be allocated to various business divisions, to ensure that their


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decisions are based on full cost, not partial cost. Allocation of common cost is rarely

easy & improper cost allocation can lead to bad decisions.

5) EVA could be misleading as a wealth metric because it reflects momentary swings in

the capital markets rather than inherent company performance. 6) EVA is shareholder centric & has little relevance to the rest of stakeholders.

7) EVA is identical to residual income, which has largely been abandoned by companys

years ago.


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SIGNIFICANCE OF EVA

1) The concept of Economic Value Added (EVA) that is gaining popularity

globally was found by the stern & steward company. EVA can be used by

corporates to measure the financial performance. Many companies globally

seems to have destroyed shareholders wealth over a period of time and only a

few have positively contributed to their wealth.

2) With the help of Economic Value Added which tells what the institution is

doing with investors hard earned money and it also finds out whether

companies have been able to create (or destroy) shareholders wealth. The

overriding message is that corporate must always strive to maximize

shareholders value without which their stocks can never be fancied by the

market.

3) The EVA analysis helps us to dig below the surface numbers to tell us more

about the underlying business and whether there is another case for using EVA

as one of the range of performance measurement tools. EVA is a mirror

reflection of an organization true performance.

4) EVA is the invention stern steward & co., a global consulting firm, which

launched EVA in 1989. EVA is a Economic Value Added, a measure of

economic profit. EVA is the most misunderstood term among the practitioners

of corporate finance.

5) EVA is nothing but a new version of the age-old residual income concept

recognized by economists since the 1770s. Both EVA and residual income

concepts are based on the principle that a firm creates wealth for its owners

only if it generates surplus over cost of the total invested capital.

6)

Perhaps EVA could bring back the lost focus on economic surplus from the

current emphasis on accounting profit.


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CALCULATION OF EVA

EVA is net operating profit after taxes (or NOPAT) less a capital charge, the latter being the

product of the cost of capital and the economic capital. The basic formula is:

Where:

, is the Return on Invested Capital (ROIC);

is the weighted average cost of capital (WACC);

is the economic capital employed;

NOPAT is the net operating profit after tax, with adjustments and translations,

generally for the amortization of goodwill, the capitalization of brand advertising and

others non-cash items.

EVA Calculation:

EVA = net operating profit after taxes a capital charge[the residual income method]

Therefore EVA = NOPAT (c capital), or EVA = (ROIC-WACC)* Invested capital or

alternatively

EVA = (r x capital)(c capital) so that

EVA = (r-c) capital [the spread method, or excess return method]

Where:

r = rate of return, and

c = cost of capital, or the weighted average cost of capital (WACC).


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NOPAT is profits derived from a companys operations after cash taxes but before financing

costs and non-cash bookkeeping entries. It is the total pool of profits available to provide a

cash return to those who provide capital to the firm.

Capital is the amount of cash invested in the business, net of depreciation. It can be calculated

as the sum of interest-bearing debt and equity or as the sum of net assets less non-interest-

bearing current liabilities (NIBCLs).

The capital charge is the cash flow required to compensate investors for the riskiness of the

business given the amount of economic capital invested.

The cost of capital is the minimum rate of return on capital required to compensate investors

(debt and equity) for bearing risk, their opportunity cost.

Another perspective on EVA can be gained by looking at a firms return on net assets

(RONA). RONA is a ratio that is calculated by dividing a firms NOPAT by the amount of

capital it employs (RONA = NOPAT/Capital) after making the necessary adjustments of the

data reported by a conventional financial accounting system.

EVA = (RONArequired minimum return) net investments

If RONA is above the threshold rate, EVA is positive.


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CALCULATING NET OPERATING PROFIT AFTER TAXES (NOPAT)

NOPAT is easy to calculate. From the income statement we take the operating

income and subtract taxes. Operating income is sales less cost of sales and less selling,

general and administrative expenses. The following example from XYZ Company illustrates

the NOPAT calculation.

XYZ Company

Sales $2,436,000

Cost of Goods Sold 1,700,000

Gross Profit 736,000

Selling, General & Admin Expenses 400,000

Operating Profit 336,000

Taxes 134,000

NOPAT 202,000


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CALCULATING COST OF CAPITAL

Many business dont know their true cost of capital, which means that they probably dont

know if their company is increasing in value each year. There are two types of capital,

borrowed and equity. The cost of borrowed capital is the interest rate charged by the

bondholders and the banks.

Equity capital is provided by the shareholders. An investors expected rate of return on an

investment is equal to the risk free rate plus the market price for the risk that is assumed with

the investment. The relationship between expected return and risk is measured by comparing

a company to the market.

The risk of a company can be decomposed into two parts. An investor can eliminate the first

component of risk by combining the investment with a diversified portfolio. The diversifiable

component of risk is referred to as non-systematic risk.

The second component of risk is non-diversifiable and is called the systematic risk. It stems

from general market fluctuations which reflects the relationship of the company to other

companies in the market. The non-diversifiable risk creates the risk premium required by the

investor. In the security markets the non-diversifiable risk is measured by a firms beta. The

higher a companys non-diversifiable risk, the larger their beta. As the beta increases the

investors expected rate of return also increases. (Levy, 1982)

Current estimates of beta for a wide variety of companies are available from Value Line and

Bloomberg.

Shareholders usually expect to earn about six percent more on stocks than government bonds.

With long term government bonds earning 7.5%, a good estimate for the cost of equity

capital would be about 13.5 %. The true cost of capital would be the weighted average cost of

debt and equity.


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HOW TO INCREASE ECONOMIC VALUE ADDED

Economic Value Added, or EVA, is a proprietary residual income model developed by Stern

Stewart & Company. In its basic formulation, EVA equals net operating profits after tax

(NOPAT) less the dollar weighted average cost of capital ($WACC).

Given this formulation, the ways a management team could increase the firms EVA would

be to:

increase revenue

minimize operating expenses needed to generate a given amount of revenue

produce the same goods and services using less capital invest additional capital in opportunities that will earn more than the associated

capital charge

reduce the cost of capital


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3 COMPONETS OF EVA

EVA is a function of net operating after tax (NOPAT), cost of capital, & capital employed in

the business.

A) Net Operating Profit After Tax (NOPAT):Profit before interest & taxes (1-tax rate)

This definition is based on two principles:

1)

Separate the investment & financing side of a firm. This implies that financing

charges (like interest & dividend) are not considered when we look at profits ( or cash

flows ) on the investment side. Financing charges will be reflected in the cost of

capital figure used for discounting the profits (or cash flows) on the investment side.

2) Do all analysis in post tax terms.

B) Cost of Capital: Provide of capital (shareholders & lenders) want to be suitably

compensated for investing for investing capital in the firm. The cost of capital reflects what

they expect. The cost of capital should have the following figure.

It represents a weighted average of the costs of all the sources of capital.

It is calculated in post tax-terms.

It reflects the risks borne by various providers of capital. The formula employed for

estimating the cost of capital is:

K0 =(cost of capital) (Proportion of preference in the capital employed + (cost of preference)

(Proportion of preference in the capital employed) + (pre-tax cost of debt) (1 tax rate)

(proportion of debt in the capital employed)

C) Capital Employed:To obtain the capital employed in the business we have to makeadjustment to the accounting balance sheet to derive the economic book value balance

sheet. These adjustments are meant to reflect the economic value assets in place rather than

the accounting values are determined by inherently conservative historical cost based

generally accepted accounting principles.


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4 PRINCIPLE OF EVA

1) Cost of Capital:

Reduce the overall cost of capital by 0.5% on Rs. 1,000 crore of capital,

saving Rs. 5 crore in capital costs. Add Rs. 5 crore to EVA with no change in operations,

NOPAT or capital.

2) Operate Efficiently:

Cut operating costs, after tax, Rs. 5 crore, and increase NOPAT andEVA by Rs. 5 crore.

3) Manager Assets:

Release Rs. 100 crore in after-tax proceeds from non-productive balance

sheet assets, and return the freed funds to investors so they may invest it and earn the 10%

cost of capital.

The Rs. 10 crore annual profit that investor earn outside the company

more than offsets a corresponding Rs. 5 crore NOPAT drop recorded inside the company,

leaving them Rs. 5 crore better off a year even though sales and book profit are lower.

4) Grow Profitably:

Raise Rs. 100 crore in fresh capital at a 10% cost, and invest in a project

that earns a 15% rate of return, adding Rs. 15 crore to NOPAT and leaving Rs. 5 crore in net

additional EVA profit for the shareholders. The shareholders are better off even though the

return on capital and profit margin end up lower.


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IMPORTANT CATEGORIES OF EVA

1) Reduce the Cost of Capital:

The first imperative is to manage financial capital like any

other input to the business, and reduce its purchase price. A finance manager must select and

put in place the financial policies, risk controls, and pension funding strategies that will

minimize the rate the market charges the firm to rent capital.

Financial officers also need to think about enhancing

transparency and management accountability, strengthening incentives for insiders to

maximize the wealth of the owners, and even adopting the EVA Focused Finance platform as

ways to increase investor confidence and their willingness to advance funds to the firm on

favorable terms.

2) Operate Efficiently:

The obvious opportunities to boost EVA in operations are from

cutting costs, and saving taxes, and raising NOPAT without using more capital. EVA

naturally rewards intelligent expense control, and transforms the tax department into a profit

center.

3) Manage Assets and Re-deploy Capital:

Management can also cut an EVA expense by

reducing the amount of physical and intangible capital it employs. To increase EVA,

managers will pare capital tied up in non-productive assets and activities and return the freed

cash to investors.

Even if operating profit shrinks, so long as the charge for using capital shrinks

more, EVA will expand. Managers can use supply chain techniques to step up working

capital turns, sell assets they know are worth more to others, or consolidate redundancies and

weed out marginal product lines and customer accounts. At a more strategic level, top


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managers can develop completely new business models that conserve capital by speeding

cycles times.

4) Grow Profitably:

Costs and capital can only be cut so far. Over the long haul, the only way

to increase EVA is to invest, to grow, and to take risks and innovate-but, managers must be

sure that they increase operating profit by more the cost of renting the new capital.

To maximize EVA they must take on as many positive net present value

projects as they possibly can. EVA also tells managers to avoid like the plague investing

capital for less than the cost of capital, no matter what other benefits there may appear to be.

Increasing market share, for example, while fundamentally decreasing

EVA, is a fools errand. The EVA message is to be profitable first develop a solid, distinctive

operating platform and value proposition and then step on the next.


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NATURE & CONCEPT OF EVA:

Various studies has provided that accounting earnings fail to measure reliably the changing

the value of the firm mainly because of

Alternative accounting methods followed.

Non-considerations of risk, dividend policy and time value of money.

Non-reporting of economic substance of transactions and

Non-consideration of cash flows cost of capital and forecast horizon- the drivers

of stock prices.

In this context, EVA serves as the best measure of identifying the wealth created to share

holders by the corporate. It recognizes the cost of capital and hence, risk ness of firmsoperations.

The capital charge is the most distinctive and important aspect of EVA. Under conventional

accounting most companies appear profitable may infact but are not. As Peter Drucker put

the matter in a Harvard business review article until a business returns a profit that is greater

than its cost of capital, it operates at a loss never mind that it pays taxes as if it had genuine

profit. The enterprise still returns less to the economy than it devours in resourcesuntil then

it does not create wealth, it destroys it.

EVA corrects this error by explicitly recognizing that when managers employ capital they

must pay for it, just if it was a wage.

Taking all capital costs into account, including the cost of equity, EVA Shows that rupee

amount of wealth a business has created or destroyed in reporting period. In other words,

EVA is the profit the way shareholders define it. If the shareholders expect, say, a 10% return

on their investments, they make money only to that extent that their share of after-tax

operating profits exceeds 10% of equity capital. Everything before that is just building up to

minimum acceptable compensation for investing in a risky enterprise. By EVA has been

developed to help managers to incorporate two basic principles of finance into their decision-

making they are: First, is that the primary financial objective of any company should be to

maximize the wealth of its shareholders. Second, is that the value of a company depends on

the extent to which investors expect future profits to exceed or fall short of the cost of capital.


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By definition, a sustained increase in EVA will bring an increase in the market value of a

firm. This approach has proved effective in virtually all types of organizations, from

emerging growth companies to turnarounds .It is the continuous improvement in EVA thatbrings continuous increase in shareholders wealth.

A financial measure that line managers understand that EVA has the advantage of

conceptually simple and easy to explain to non-financial managers, since it starts with

familiar operating profits and simply deducts a charge for the capital invested in the

company. EVA makes managers care about managing assets as well as income and helps

them to properly assess the trade Offs between the two.


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IMPLEMENTING THE EVA SYSTEM

Implementing the EVA system involves several steps which are briefly described

below:

1) Develop Top Management Commitment: A crucial requirement of the EVA

system in the top management commitment. To build this commitment, the top

management should be thoroughly grounded in the theory & practice of EVA.

2) Customize the definition of EVA: A cross functional team of executives should

arrive at a customized definition of EVA- in term of NOPAT, CAPITAL, & EVA

calculation-that is best suited to the firm considering its information need &

accounting system.3)

Identify EVA Centers: A firm may be divided into EVA centers-These are

responsibility centers for which individual EVAs will be calculated on a

continuing basis.

4) Analyse the Drivers of EVA:EVA must be linked to various financial & non-

financial variables which drive it. An understanding of these drivers helps

managers to appreciate how their in actions influence value.

5) Tailor an Incentive Compensation System:The Incentive compensation system

must align the interest of manager with shareholders. Ideally, it should make

managers think, act, & be compensated like owners.

6) Train All The Employees:The employees at all levels of the organization must

be trained in the basics of EVA. They must know how EVA is calculated, what

EVA means, & how their actions impact on EVA.


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CHAPTER 2

INTRODUCTION OF GODREJ COMPANY

Godrej Group is an Indian conglomerate headquartered in Mumbai, Maharashtra,

India.It was founded byArdeshir Godrej andPirojsha Godrej in 1897, Lalbaug,Mumbai.It

operates in diverse sectors such as real estate, consumer products, industrial engineering,

appliances, furniture, security and agricultural products,to name a few. It's turnover is in

excess of 3.3 billion dollars.

Godrej Industries is India's leading manufacturer of oleochemicals and makes more

than a hundred chemicals for use in over two dozen industries. It also manufactures edible

oils, vanaspati and bakery fats. Besides, it operates real estate. GIL is a member of the Godrej

Group, which was established in 1897 and has since grown into a US$1.875 billion

conglomerate. The company was called Godrej Soaps until March 31, 2001. Thereafter, the

consumer products division got de-merged into Godrej Consumer Products, and the residual

Godrej Soaps became Godrej Industries. This led to the formation of two separate corporate

entities: Godrej Consumer Products and Godrej Industries.

Besides its three businesses, Godrej Industries also runs four divisions Corporate Finance,

Corporate HR, Corporate Audit and Assurance and Research and Development which

operate on behalf of the entire Godrej Group.

GIL has built a strong manufacturing base capable of delivering international quality products

at competitive prices. It operates two plants, one at Valia in the Indian state of Gujarat and a

second at Vikhroli in suburban Mumbai. The company's products are exported to 40

countries in North and South America, Asia, Europe, Australia and Africa, and it leads the

Indian market in the production of fatty acids, fatty alcohols and AOS.
http://en.wikipedia.org/wiki/Conglomerate_(company)http://en.wikipedia.org/wiki/Mumbai,_Maharashtrahttp://en.wikipedia.org/wiki/Indiahttp://en.wikipedia.org/wiki/Ardeshir_Godrejhttp://en.wikipedia.org/wiki/Pirojsha_Godrejhttp://en.wikipedia.org/wiki/Mumbaihttp://en.wikipedia.org/wiki/Mumbaihttp://en.wikipedia.org/wiki/Pirojsha_Godrejhttp://en.wikipedia.org/wiki/Ardeshir_Godrejhttp://en.wikipedia.org/wiki/Indiahttp://en.wikipedia.org/wiki/Mumbai,_Maharashtrahttp://en.wikipedia.org/wiki/Conglomerate_(company)


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FOUNDERS OF GODREJ COMPANY

Adi Godrej; born 3 April 1942) is an Indian industrialist and Philanthropist. As of 2012, he

is one of the richest Indians with net worth of US$9 billion. He is also the second richest

person of Parsi descent in the world after Pallonji mistry.

Godrej received his undergraduate degree from MIT and his MBA from the MIT Sloan

school of management where he was a member of the Pi Lambda Phi fraternity and a member

of Tau Beta Pi After his return to India, he joined the family business. He modernized and

systematized management structures and implemented process improvements. Adi Godrej

took the Godrej Group to great height during controlled economy era.

Under Adi Godrej's leadership, the group is also involved in philanthropic activities. Godrej

is major supporter of the World Wildlife Fund in India, it has developed a green business

campus in the Vikhroli children of company township of Mumbai, which includes a 150-acre

(0.61 km2) mangrove forest and a school for the employees. He is the chairman of the Indian

school of business since April 2011.

He was elected as the president of Confederation of Indian Industry (CII) for the year 2012-

13.In April 2013 Godrej was awarded the Entrepreneur of the Year Award at the Asian

awards He was awarded the Padma Bhushan, India's third highest civilian award, in 2013. He

was awarded the prestigious Ernst & Young Entrepreneur of The Year India Award in

February 2013
http://en.wikipedia.org/wiki/File:Adi_Godrej_01.jpg


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GODREJ COMPANY PROFIL

Started in 1897 as a locks manufacturing company, the Godrej Group is today one of the

most accomplished and diversified business houses in India. Godrejs success has been

driven by the companys commitment to delivering innovation and excellence. Through the

consistent application of this commitment and a century of ethical business conduct, Godrej

has earned an unparalleled reputation for trust and reliability.

In 1930, Godrej became the first company in the world to develop the technology to

manufacture soap with vegetable oils; that spirit of innovation has continued throughout the

organizations history. Today Godrej is delivering consumers exciting innovations across a

spectrum of businesses. The companys pursuit of excellence is equally well established and

enduring. In the 1944 Mumbai docks blast, Godrej safes were the only security equipment

whose contents were unharmed; an equal level of product quality continues to be expected

from every product bearing the Godrej brand name. Godrej management understands that the

companys greatest asset is the trust and faith that consumers have reposed in it, and

recognizes that the company must continue to earn this trust. This translates to the

organization delivering outstanding quality and value in everything it does. Godrejs ethical

and visionary practices have allowed the company to successfully expand into a number of

businesses.

Today Godrej is a leading manufacturer of goods and provider of services in a multitude of

categories: home appliances, consumer durables, consumer products, industrial products, and

agri products to name a few. A recent estimate suggested that 350 million people across India

use Godrej products. The group has more recently entered the real estate and information

technology sectors, and management views these as avenues for enormous growth. The

Godrej Group stands in a strong position today. With annual sales in excess of $1 billion, a

workforce of approximately 18,000, and a strong diversified portfolio, Godrej has proven its

ability to deliver strong financial performance.


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HISTORY OF GODREJ COMPANY

The Godrej Group was founded in 1897, and has since evolved into one of the largest and the

oldest conglomerates based inMumbai,India,with a presence in varied industries, including

appliances, precision equipment, machine tools, furniture, healthcare, interior solutions,

office equipment, food-processing, security, materials handling and industrial storage

solutions, construction andinformation technology.The Group is headed byAdi Godrejand

his brother and cousin,Nadir Godrej andJamshyd Godrej.

Traditionally,Vikhroli, a suburb to the Northeast ofMumbai has been Godrej's

manufacturing base, but increasingly the group has moved significant production facilities

away fromMumbai.The Godrej group also owns vast land in Vikhroli, occupying 3500 acres

(14 km2) of land on both sides of the Vikhroli section of the LBS marg. That makes the

Godrej group the biggest private land owner in Mumbai by far[. Such vast land can, in theory,

be used to create at least 1,500 acres (6.1 km2) of residential floor space, which, at very

modest rates (Rs.10000/sq ft), can be sold for USD 16 billion. Thus, the Godrej group is

sitting on an invisible cashpile that is an envy of other Indian conglomerates
http://en.wikipedia.org/wiki/Mumbaihttp://en.wikipedia.org/wiki/Indiahttp://en.wikipedia.org/wiki/Godrej_Infotech_Ltdhttp://en.wikipedia.org/wiki/Adi_Godrejhttp://en.wikipedia.org/wiki/Nadir_Godrejhttp://en.wikipedia.org/wiki/Jamshyd_Godrejhttp://en.wikipedia.org/wiki/Vikhrolihttp://en.wikipedia.org/wiki/Mumbaihttp://en.wikipedia.org/wiki/Mumbaihttp://en.wikipedia.org/wiki/Mumbaihttp://en.wikipedia.org/wiki/Mumbaihttp://en.wikipedia.org/wiki/Vikhrolihttp://en.wikipedia.org/wiki/Jamshyd_Godrejhttp://en.wikipedia.org/wiki/Nadir_Godrejhttp://en.wikipedia.org/wiki/Adi_Godrejhttp://en.wikipedia.org/wiki/Godrej_Infotech_Ltdhttp://en.wikipedia.org/wiki/Indiahttp://en.wikipedia.org/wiki/Mumbai


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CODE OF CONDUCT

Code of Conduct for the Board of Directors and Senior Management -

Applicability of the Code of Conduct :

This Code of Conduct (Code) applies to Directors of Godrej Industries Ltd.(GIL). It also

applies to the senior management of the company. i.e. one level below the executive

directors, and functional heads.

Code of Conduct:

The Board of Directors and Senior Management of Godrej Industries Ltd.(GIL) should:

Demonstrate the highest standards of integrity, business ethics, and corporate

governance.

Perform their roles with competence, diligence, in good faith and in the best

interests of the Company.

Provide expertise and experience in their areas of specialization and share

learnings at Board meetings with best interests of the Company and its

stakeholders in mind. They should point the company's management in the

'right' direction based on their experience and judgement.

Give careful and independent consideration to the affairs of the company and

all documents placed before them to satisfy themselves with the soundness of

key decisions taken by the Management. They should call for additional

information, where necessary, for making such judgements.

Not engage in any business, relationship or any activity which detrimentally

conflicts with the interest of the Company / Godrej Group or bring discredit to

it. Any situation that creates a conflict of interest between personal interests

and the Company and it's stakeholders' interests must be avoided at all costs.


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Follow all the guidelines put forth in the Prevention of Insider Trading Policy

Code of Conduct.

Not disclose any confidential / privileged information of the Company and

should direct any media queries or approaches to the appropriate spokespersonwithin the Company.


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GODREJ COMPANY OF GOOD & GREEN

In conjunction with our vision for brighter living for all our stakeholders, we have

developed a long-term vision for playing our part in creating a more inclusive and greener

India. We have named this the Good & Green vision. By 2020 we aspire to do the following:

1) ENSURING EMPLOYABILITY:

India has 600 million people below the age of 25 out of which only 80 million (13%) are

employable. The effort is going to be on skilling these people such that they become

employable.

Our Goal: Training 1 million rural and urban youth in skilled employment.

2) CREATING A GREENER INDIA:

In order for our businesses to truly become sustainable, efforts will be focused on creating

carbon neutral, zero waste, water positive and energy efficient businesses.

Our Goal: Achieving zero waste, carbon neutrality, positive water balance and a 30%

renewable energy source.

The Godrej Group has already been working on these goals as we are signatories to the CII

code for Mission of Sustainable Growth (MSG) which is a 10-point program for ecologically

sustainable business growth.

3) INNOVATING FOR GOOD & GREEN PRODUCTS:

A good product/ service is that which addresses a critical issue for people living below the

poverty line. The issue could be related to health, hygiene, water, sanitation, housing,

education or livelihoods.

A green product / service is that which reduces energy, water or material consumption by

20%, GHG emissions by 20%, eliminates toxic materials or uses 100% recyclable, renewable

and /or natural material.


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Our Goal: Having a third of our portfolio revenues comprising good and/or green products

and servicesdefined as products that are environmentally superior or addresses a critical

social issue (e.g., health, sanitation, disease prevention) for consumers at the bottom of the

income pyramid.


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BRAND AMBASSADOR OF GODREJ COMPANY

MUMBAI: Godrej Group today said it has roped in Bollywood star Aamir Khan as the

brand ambassadorfor various verticals of the diversified business house and also launched

an integrated product marketing campaign.

The company has initiated an integrated campaign, 'Ideas that make life brighter', which is

focused on enhancing the brand's emotive appeal by showcasing fresh ideas from within the

Group to consumers, Godrej Group Executive Director and Chief Brand Officer Tanya

Dubash told reporters here.
http://economictimes.indiatimes.com/photo/19194096.cms


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SOAP STORY

The first washing bar was produced in 1918 and first toilet in 1920. In 1952 Godrej produced

the genuine deodorant soap CINTHOL GSL, Malanpur plant no. of brand have been

manufactured.

Cinthol Lime

Cinthol Fresh

Cinthol International

Cinthol Deodorant

New Ganga

Godrej Shikakai

Godrej No.1

Nimin etc.GSL Malanpur plant also renders its production facilities for the production of the

other companies .

Rexona H.L.L

Jai H.L.L

Breeze H.L.L

Dettol H.L.LGSL Malanpur Soap Ltd. Through the Alpha Olejin Sulphate (AOS),

which his biodegradable makes soap at GSL, a shade apart from others.


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PRODUCTS OF GODREJ COMPANY

A. GODREJ AND BOYCE MFG. CO. LTD

Locks 1887

Security Equipments (safes) 1902

Soaps and Toiletries 1918

Furniture & office system 1923

Safe Deposit Vaults 1935

Tool Room 1935

Machine Tools 1942

Manual Typewriters 1955

Multiplex Storage System 1956

Refrigerators 1958

Forklifts Trucks 1931

Steel Foundry 1965

Process Equipments 1976

Electronic Typewriter 1985

Dot Matrix Printers & (AD/CAM Systems) 1989

Fax Machines 1992

B. GODREJ SOAPS LTD.

Chive Bar 1918

No.2 1919

No.1 1922

Turkish Bath 1926

Shaving Stick 1932

Shaving Round 1938


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Cinthol 1952

Liquid Soap 1953

Dip Washing Powder 1958

Cinthol Talcum Powder 1960

Shaving Cream (R) Rich 1968

Shaving Cream (M) Menthol 1969

BIZ Sc. Scrub powder 1970

Liquid hair dye 1974

Key detergent powder 1977

Trilo 1977

Hair dye- 20ml 1979

Key bar 1980

Hair removal 1881

Powder hair dye 1981

Deep washing powder 1983

EZEE liquid detergent 1984

Lime fresh shaving cream 1985

Crowning glory 1985

Besto detergent powder 1985

Cinthol (new) 1986

Marvel 1986

Fresca 1986

Vigil 1986

Meg 1987

Great shake 1987

Fay 1987

Fresca150 1987

Dip detergent powder 1987

Vigil new 1987

Velvette shampoo 1988

Shikakai 1988

Cinthol lime 1989


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Liquid cleaner 1989

Velvette tale 1990

Marvel 1990

Tomato puree 1990

DEEP (new) 1990

Limelight 1990

Nivaran 1990

Anoop 1990

fresco cream/cool 1991


Brown (BR/POL) 1991

EZEE200grms. 1991

Marvel lilac/gold 1991

Cinthol cologne 1991

Vigilpink 1991

Jumping fruit juices 1991

Verve hair dye 1992

Cintholsandal 1992

Evita 1992

Saxonrange 1992

Ganga toilet soap 1992

Cinthol talcsatin 1994

Camayclassic/natural 1994



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BOARD OF DIRECTORS

1) ADI GODREJ:

ADI GODREJ is the chairman of Godrej Group and severalentities that are part of Indias lending conglomerates. These include Indian

companies like Godrej industries, Godrej consumer products, Godrej properties as

well as international companies such as Keyline Brands U.K and Rapidol south

Africa.

2) JAMSHYD GODREJ:

JAMSHYD GODREJ is the chairman of the Board of

Godrej and Boyce. He graduated in mechanical engineering from Illinois

Institute of Technology, USA. He is the chairman of Aspen Institute-India.

3) NADIR GODREJ:

NADIR GODREJ is the managing director of Godrej

Industries and chairman Godrej Agrovet. He is also Director of Numerous

firms including Godrej &Boyce, Godrej foods, Godrej consumer Products and

Godrej Sara Lee.

4) RAMA BIJAPURKAR:

RAMA BIJAPURKAR is a recognized thought

leader on marketing strategy and consumer related issue in India, and describes

her mission as Providing market focus in business strategy development. She

has her own strategic marketing consulting practice.

5) BHARAT DOSHI:

BHARAT DOSHI is presently Executive Director &

Group Chief Financial Officer (Group CFO), of Godrej Company Limited (M &

M), Flagship company of the US $6 Billion Mahindra Group, which is among the

top 10 industrial houses in India.


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6) OMKAR GOSWAMI:

OMKAR GOSWAMI is the founder and chairman of

CERG Advisory private Limited. CERG is the acronym for the corporate and

Economic Research Group. Its objective are to use Indian as well as international

resources to provide best in class.

7) A MAHENDRAN:

A MAHENDRAN is Managing Director, Godrej Sara Lee.

He is also a Director of numerous firms including Godrej consumer products and

Godrej Hershey. In addition to his current profile, he has assumed the role of

Director, FMCG Portfolio cell (FPC).

8) DALIP SEHGAL:

DALIP SEHGAL is Managing Director, Godrej consumer

Products; Indias premier FMCG Company. DALIP joined Godrej Hershey as

Managing Director and CEO in February 2008. He was responsible for running

multi-category foods and beverages business comprising juices, Soya drinks, Oil,

Tea, and Confectionery.

COMPANY SECRETERY

1) S.K. BHATT.


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FACTORIES

1) PIROJSHANAGAR

EASTERN EXPRESS HIGHWAY VIKHROLI, MUMBAI 400079

2)

U-30 , INDUSTRIAL AREA

MALANPUR, DIST. BHIND MADHYA PRADESH 477116

3) BIRJORJINAGAR

PLOT NO.3, VILLAGE KANERAO TALUKA-VALLA,

DIST, BHARUCH GUJARAT 393135.

BRANCHES

1) LAXMI INSURANCE BUILDING

ASAF ALI ROAD, NEW DELHI 110002.

2) CHATTERJEE INTERNATION CENTRE

16THFIOOR CHOWRINGHEE ROAD, CALCUTTA 70071.

3) KASI ARCADE

6

TH

FLOOR 116, SIR THYAGARAYA ROAD T. NAGAR,MADRAS 600017.

4) 284 A, CHASE ROAD, SOUTHGATE LONDON

N14-6HF.

BANKERS

1)

BANK OF INDIA.

2) CENTRAL BANK OF INDIA.

3) CANARA BANK.

4) AMERICAN EXPRESS BANK LTD.

5) THE HONGKONG.

6) PANJAB NATIONAL BANK.

7) CITI BANK N.A.

8)

HDFC BANK LTD.


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REGISTRARS

1) COMPUTECH SERVICES.

147, MAHATMA GANDHI ROAD FORT,

MUMBAI 400023.


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WINDS CHANGE OF GODREJ

1) MNCs entering in Indian FMCG Market increased competition

2) Managers walked out with JV partners

3) Lack of talented people

4) Needed to attract & retain good people

5)

Young people where Underutilized &uninvolved in Strategic decisions

6) A Clear Communication Gap between Management & Employees


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CHAPTER 3

SWOT ANALYSIS

STRENGTH:

1) The company has got wide range of branches within the country.

2) The company has got wide range of product line.

3) Godrej is having better sales after service.

4) The company has there respectable and believable brand name.

5) Company is having large number of customer with higher

satisfaction.

6) The management is trained and efficient & the network of service

canters is good in all states.

WEAKNESS:

1) The company does not go for advertising, which is one of the

biggest disadvantages of Godrej.


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2) Its emphasis more of the advertising of office automation & prime

division.

3) The company is focusing many security products at a same time.

4)

Manpower is less at sale officer level so that it affecting directlyon the way of sale.

5) The effective selling schemes are not available like payment on

installments.

OPPORTUNITIES:

1) Godrej has more opportunities to grow as it has earned good name

in security sector.

2) Technical up gradation time to time also one of the opportunities.

3) Godrej can focus on big project like construction where there is a

great demand of security equipments.

THREATS:

1) The growing competition in the security sector is threat for all the

manufacturing companies so it is also threat for Godrej to stand in

the with the higher position.


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COMPANY OVERVIEW

Part of Godrej Group

Established in 1897

US $ 3.9 billion in revenues

25,000 employees

Among Indias most trusted conglomerates

Diversified business model

Leveraging the India growth story through presencein multiple high growth industries

Portfolio Portfolio of high quality quality products products that successfully successfully

cater to growing growing aspirations aspirations of all consumers consumers

- Urban & Rural, Domestic & Global

Diversifiedbusinesses provides a hedge against adverse developments in particular industry

Experienced management team

Sound qualifications along with strong entrepreneurial orientation

Tremendous results track record


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CHAPTER 4

GODREJ INDUSTRIES HAS DECIDED TO ADOPT ECONOMIC

VALUE ADDED (EVA)

Godrej Industries has decided to adopt the economic value added (EVA) Implementing the

EVA framework is a key business performance initiative in support of our efforts to evolve as

a world class organization and enhance shareholder value. Our main objective behind

implementing EVA is to be driven, measured and rewarded by our ability to create

sustainable shareholder value." Adi Godrej, Chairman of Godrej Group. A few weeks after

the EVA announcement, Adi declared the half yearly financial results of Godrej Consumer

Products Limited (GCPL) for the period ended September 30, 2001. The revenues had grown

by 19% to Rs 2.529 bn as against the growth of 15% in the corresponding period in 2000.

GCPL reported an EVA of Rs. 0.137 bn for the six months ended September 30, 2001.

Announcing the results, Adi said, "Our strong focus on EVA has delivered rising

profitability."


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IMPLEMENTATION OF EVA IN GODREJ GROUP OF COMPANIES

EVA will be the main financial parameter by which we measure our performance. It willalso be used in all capital expenditure decisions including acquisitions. We have just

completed an exhaustive modular training on EVA and its application for all employees. The

objective is to make all employees think like owners. This should be supported by an open-

ended variable remuneration scheme.


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TRAINING FOR EVA AT GODREJ COMPANY

Training Programme for employees was conducted by consultants from Stern Stewart &Company. Stern Stewart & Company. Stern Stewart worked closely with three key teams

at Godrej:

A STEERING COMMITTEE: comprising the top management, including MR. A B

GODREJ AND MR. N B GODREJas well as the business unit heads / directorsto make

key policy decisions.

AN IMPLEMENTATION TEAM: comprising MR. C K VAIDYA, executive director

(corporate personnel),Godrej Industries Limited, MR. S SAPRE, vice president

(finance),Godrej Consumer Products Limited, and DR S SINDHU, general manager

(personnel), Godrej Agrovetand Godrej Agrovet Limited to monitor overall project

progress, ensure organization-wide coordination across the various business units and

functions andwide coordination across the various business units and functions andachieve

full knowledge transfer.

CROSS-FUNCTIONAL WORKING TEAMS:which were formed at each which were

formed at each SBU, to ensure that the outcome of the project was tailored to meet specific

business requirements.


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MOVING TOWARDS EVA OF GODREJ COMPANY.

Announcing the implementation of the EVA (economic value added)-based

performance(management system in 2001, Mr. Adi Godrej chairman of the Godrej Group,

said, of the Godrej Group, said,

Implementing the EVA framework is a key business performance initiative in support of

our efforts to evolve as a world-class organization and enhance shareholder value.en

"Our main objective behind implementing EVA is to be driven, measured and rewarded by

our ability to create sustainable shareholder value.


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BOOH FACTOR IN THE IMPLEMENTATION OF EVA AT GODREJ

Build --- Invest as long as returns exceed the cost of capital.

Optimize---Reduce cost of capital optimizing capital structure.

Operate---Improve the return on existing capital.

Harvest---Divest capital when the returns fail to achieve the cost of capital.


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CHAPTER 5

DATA ANALYSIS

CALCULATE THE NOPAT OF GODREJ COMPANY

NOPAT = Net operating profit after taxes

WACC = Weighted average cost of capital

CE = Total capital employed

NOPAT is equal to Profit Before Tax (PBT) plus interest

payments minus cash operating tax.

detailed calculations of NOPAT for GCPL.

2012-13 2011-12

Profit before tax (PBT) 299.1 185.5

Interest (incl. forexfluctuation)

(32.9) (24.8)

Net operating Profit before tax 266.2 161.1

Cash operating tax on PBT (48.9) (21.1)

Cash operating tax on interest 3.7 8.7

Tax Adjustments _ 0.6

Net operating Profit after tax

(NOPAT)

221.0 149.3


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CALCULATING THE COST OF CAPITAL OF GODREJ COMPANY

To calculate the WACC for a company, we need to calculate the cost of equity and the cost of

debt. Market, as a whole, would demand an extra income to invest in risky, non-contractual

residual claims to corporate cash flow. This is the market premium (p). Company specific

risks over and above the market risk premium, measuring the volatility of the Companys

stock relative to the market average, is captured by the leveraged beta (), which is the ratio

of the coefficient of variation of a companys stock prices compared to the market as a whole.

The cost of equity, which is the risk free return (r) plus a company premium (p x ) is

weighted by the ratio of equity to market value (e) to get the weighted cost of

Equity.

Multiplying the pretax cost of borrowing (I) with the retention rate (1-tax rate) gives tax-

adjusted cost of debt. This is then weighted by the ratio of debt to market value (d) to arrive

at the weighted cost of debt. By adding the weighted cost of equity and the weighted cost of

debt, we get WACC. the WACC for 2009-10was set of the beginning of the year.

2012-13 2011-12

Leverage beta () 0.75 0.75

Market Risk Premium (P) 7.00% 7.00%

Equity Risk Premium (Px) 5.24% 5.24%

Risk Free Return (r) 7.86% 7.95%

Cost of Equity (r+(Px)) 13.10% 13.20%

Equity/market value (e) 0.97% 0.97%

Wt. Cost of Equity

[{r+(P)}e

12.92% 12.80%

Pretax cost of borrowing (I) 9.10% 9.00%

Retention rate (1-tax rate) 6.01% 5.94%

Debt/market value (d) 0.01 0.03

Wt. Cost of Debt {I(1-T)d} 0.08% 0.18%

WACC 13% 13%


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GCPLs average capital employed for 2009-10 is Rs.150.69 crore (Rs.149.76 crore for 2008-

09). Given a WACC of 13% (13% for 2008.09) this translate into a capital charge of Rs.

19.85 core (Rs.19.47 for 2008-09).


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CHAPTER 6

CONCLUSIONS

SUGGESTIONS

On the basis of the study undertaken by me in Godrej Company, I would like to make the

following suggestions regarding the improvements of financial performance of Godrej

Company.

Godrej Company should me made competent enough to increase its net operating

profit after taxes for the same amount of capital employed.

Steps must be taken by Godrej Company discard its non-performing assets that is it

should reduce its overall capital employed.

Investment should be made in those projects, which earn more than its cost of capital

employed on that particular project.


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CONCLUSION

From the analysis of the data, which is collected from various sources, the following is

briefly summarized as far as the financial performance of Godrej Company.

The NOPAT by Godrej Company showed increased in 2009-10.

Economic value added as a measure of performance in contrast to WACC is a

performance of Godrej Company the financial level is a same.

Traditional measure of performance viz., WACC showed a favorable picture of

Godrej Company from 2007-08 and 2009-10.

Economic profit-otherwise known as Economic Value Added (EVA) is based on

classic financial theory, and, for this reason, is not entirely different from traditional

free cash flow measures. Three conceptual pillars support economic profit: firstly,

cash flows are more reliable the accruals. Second is that some period expenses are- in

economic reality- actually long- term investments. Lastly, the company does not

create value until a threshold level of return is generated for shareholders.


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CHAPTER 7

BIBLOGRAPHY

BOOKS

Special study in finance

ARVIND.A.DHOND.

WEBSITE

www.sternsteward.com

www.Godrej.com

www.financial Education.com

www.bms.co.in

www.crfonline.com

www.investopedia.com

chetan project

Documents