Indian Corporates Falter In Value Test

In 1996-97, a third of the leading 100 Indian companies destroyed shareholder value. In others words, these companies had a rate of return that was lower than the cost of the capital invested in their business.

The Oil and Natural Gas Commission, Hindustan Lever and Bajaj Auto were the front-runners in creating value for shareholders in 1996-97. In the same year, Steel Authority of India Ltd, Tata Steel, and Larsen and Toubro trailed the field in failing to make good returns for investors on the capital entrusted to them.

These are some of the findings of a two-month-long research project, jointly conducted by global management consultants KPMG and the Business Standard Research Bureau. The project forms an integral part of The Strategist Quarterly, Business Standards magazine on management issued with todays edition.

 

The project, which took an unprecedented look at the degree to which top Indian companies have created or destroyed shareholder value, offers several interesting insights on corporate Indias scorecard on value creation.

Using published annual reports as the basis for all calculations, the research team devised a common methodology that was applied to compute the twin measures of value creation, economic profit (EP) and market value added (MVA).

EP and MVA have emerged as an important part of the cult of shareholder value that is rapidly acquiring converts in Indian corporate circles. Already, leading corporations like Hindustan Lever and Infosys Technologies have begun reporting their EVA in their annual reports. A month back, Business Standard had reported that the Aditya Birla group had also started adopting economic value as its new performance measure. Interestingly, three of the top five value creators ONGC, VSNL and Bharat Petroleum have virtual monopolies. Bajaj Auto, too, was in a monopoly position not so long ago. The second-ranked Hindustan Lever is the only company that earned its spurs in the intensely competitive marketplace of fast moving consumer goods.

Broadly, companies were classified into four categories on the basis of their performance. The first group includes firms that have destroyed value in the past, but improved their performance in 1996-97, like SRF, BPL, Chambal Fertilisers and Madras Refineries. These firms have huge positive EP but negative MVA.

Then are the bunch of stable performers, which have reported positive EP and MVA. This list includes ONGC, HLL, Reliance, Telco, ITC, Mahindra & Mahindra, Castrol, Ranbaxy and BPCL.

The third list includes firm which have created value historically (and thus have a positive MVA), but fared badly in 1996-97, eroding shareholder value. IOCL, SAIL, Bhel, L&T, Gujarat Ambuja, ACC and Grasim figure in this list.

Finally, the fourth category consists of those firms that have been guilty of eroding shareholder value in the past as well as in the present, as evidenced by negative scores of both EP and MVA. Crompton Greaves, Essar Steel, Finolex Cables, Ashok Leyland, Escorts, SPIC, Videocon International, Lloyds, NEPC, and RCF fall into this cluster.

It has often been suggested that traditional financial accounting hides more than it shows. The findings of the BS-KPMG report demonstrates this amply by comparing the profit after tax figures published in annual reports with the EP figures arrived at through research.

SAIL, which emerges as the worst destroyer of value, reported a profit after tax of Rs 490.10 crore, while its EP is a miserable negative Rs 1016.72 crore. Similarly, Tisco, which had a net of Rs 469.21 crore, has a negative EP of Rs 478.38 crore.