Creating Shareholder Value
Dr. Ashok Banerjee
RIL’s Vision in 1980-81
 …..the Company a multi product and
well diversified Company resulting in
a complete change in the face of the
Company and imparting a future
improvement to the net worth of
equity.
RIL’s Vision in 1997-98
GOAL AND VISION
In the light of anticipated robust growth
in the Indian economy, and our
earnings growth forecast, we will
endeavour to double the value of
Reliance in the next five years. We
plan to achieve this goal through
focussed growth, capital efficiency and
a single minded emphasis on
shareholder value.
RIL’s Vision in 1997-98
We have set ourselves the
targets of achieving a 20%
compounded growth in
earnings per share and a
return of 20% on
shareholders’ funds over the
next 5 years.
Modi Xerox’s Corporate Goals
 To deliver maximum customer
satisfaction.
 To aim for enhanced Employee
motivation and satisfaction.
 To increase market share.
 To improve its Return on Assets.
ONGC’s Vision Statement
To be a world-class Oil and
Gas Company integrated in
energy business with
dominant Indian leadership
and global presence.
IOC’s Vision Statement
 A major diversified, transnational,
integrated energy company, with
national leadership and a strong
environment conscience, playing a
national role in oil security and public
distribution.
BP-AMOCO’s Vision
 To create long-term shareholder
value from a distinctive set of
investment opportunities, which
are:
 biased towards the upstream
 capable of producing returns which are
both secure and highly competitive
over the long-term
BP-AMOCO’s Mission
 We currently expect to pursue that objective by:
 maintaining proforma return on capital employed
(ROCE) at least broadly flat between 2003 – 2005
 disciplined long-term investment growth
 maintaining proforma gearing in the range of 25 35%
 the strategic management of costs:
 best-in-class operating costs (e.g. field or site specific
costs)
 value/benefit driven revenue investment (e.g.
advertising, technology costs)
 fit-for-purpose and efficient levels of overhead cost
BP-AMOCO’s Mission
 a balanced value delivery to shareholders
through:
 dividends - maintaining our track record over
the past twenty years where we have achieved
dividend payments above the rate of inflation
and above the rate of growth of demand for our
products
 share repurchase – intent to spend, subject to
conditions, $2bn on share repurchases
announced in February 2003, further could be
expected in future if surplus cash is generated
above the requirements of the financial
framework at standardised assumptions due to
divestments or the environment.
ExxonMobil: Vision
Long-term growth in shareholder value is our core and fundamental
objective
ExxonMobil: Long-term shareholder
value creation is achieved through
 Unparalleled execution of business
strategies.
 Unwavering capital discipline.
 Operational excellence and superior results.
 Ethics and business integrity.
Vision Statement of GAIL
 Be the Dominant Natural Gas
Company with significant Global
Presence, Integrated in Energy and
Petrochemicals.
 We meet the objectives of our
shareholders by providing them
superior returns and value through
their investments in us.
HPCL’s Mission Statement
 HPCL, along with its joint ventures, will
be a fully integrated company in the
hydrocarbons sector of exploration and
production, refining and marketing;
focusing on enhancement of
productivity, quality and profitability;
caring for customers and employees;
caring for environment protection and
cultural heritage. It will also attain scale
dimensions by diversifying into other
energy related fields and by taking up
transnational operations.
To creating sustainable value for shareholders, all other
stakeholders have to be satisfied first
Suppliers
Bankers
Employees
Government
Consumers
Shareholders
Community
Shareholders are the last stakeholder in the queue
What is the best measure of
shareholder value creation?
 Sales?
 Earnings?
 Market Value?
 Dividends?
 Return on Assets?
Evolution towards Shareholder
Value Management
 Returning free cash to shareholdersshare buyback and dividend policy.
 Shareholder value enhancement
through inorganic restructuring.
 Economic Value Added (EVA) and
shareholder value.
Why EVA
 A better Performance Measure?
 Easy to understand and implement.
 Links internal profit performance to
the expectations of capital market.
 Links compensation with ultimate
corporate objective.
 Less emphasis on subjective
factors!! Value based measure
replaces subjectively determined
goals and performance measures.
Illustrating EVA: The Pizzeria
Story...
You have Rs500,000 in savings that is currently invested
in an investment fund that invests exclusively in fast food joints
and generates a 20% post tax return every year.
You decide to fulfill a life long ambition, and invested the entire
amount in opening a small Pizzeria. At the end of the year, your
pizzeria shows the following results:
Sales
Rs950,000
– Operating Expenses
825,000
= Profit
125,000
Taxes @ 35%
43,750
= Actual Profit
Rs81,250
Are you pleased with the performance of the
new business? Did you really make a profit?
The actual profit from the Pizzeria was less than
your minimum profit expectation
Your actual profit in the pizzeria (after paying taxes) is
Rs81,250.
Had you kept your money in the investment fund, you would
have expected to make Rs100,000 in profits.
Since you expected to earn Rs100,000 if you kept your money in
the investment fund, you should require at least Rs100,000 of
profit from the pizzeria...and hopefully a lot more than
Rs100,000!!!
This expectation is called your minimum profit.
Economic Value Added, or EVA, is what is left over
after recovering your minimum required profit ...
Economic
Profit / EVA
Your
Actual
Profit/ NOPAT
Rs81,250
Your Minimum
Profit/ Capital
Charge
Rs100,000
(Rs18,750)
The Components of EVA
1. NOPAT (Net Operating Profit After Tax)
 Actual profit
2. Capital
 Amount of money invested in the business
3. Required Return (C*)
 The return the investors require for the risk of
investing their money in your business
4. Capital Charge
 Minimum profit required
 Calculated as Capital multiplied by the required
return.
The goal of any Corporate Management is to
Maximize Market Value Added (MVA)
Market
Value Added
(MVA)
Shareholder
Value Added
Total
Market
Value
Debt
&
Equity
Capital
Shareholder
Debt holder
Investment
What do you think?
 Would it be good if ROCE went
from 40% to 35%?
The problem with measures such as RONA and ROI, is that
they ignore the cost of Capital
Existing
New
Business + Investment
300
400
Income
=
Results
After
Investment
700
Capital
1,000
1,000
2,000
ROCE
40%
30%
35%
Cost of Capital
20%
20%
20%
Capital Charge
200
200
400
EVA
200
100
300
An investment can decrease RONA but increase EVA
EVA vs. Other Measures
Correlation with MVA
Standardized EVA
0.50
0.35
Return on Equity
0.24
"Most Admired"*
0.22
Cash Flow Growth
0.18
EPS Growth
0.16
Dividend Growth
Sales Growth
0.09
Single industry studies
often exhibit a correlation
as high as 0.70-0.80 for
EVA
Source: Stern Stewart & Co.
*300-company sample versus 1000-company sample for other measures
The close relation is because EVA mirrors MVA
within the firm
Internal View
External View
EVA
Net
Operating
Profit
After
Taxes
(NOPAT)
Cost
of Capital
X
Capital
MVA
Market
Value
Invested
Capital
Investors have high expectations of future growth in value
from both IT and FMCG sectors…
Industry Comparison of Future Growth Value (FGV) & Current
Operating Value (COV)
% of Total MV
115%
95%
75%
55%
35%
15%
-5%
83%
75%
75%
69%
55%
47%
42%
36%
93%
Nondurables
IT
FMCG
Pharma Telecom Cement, Chemicals Auto Petroleum Durables
Capital
goods
Current Operating Value
Source: Stern Stewart's Year 2000 MVA Ranking
Future Growth Value
A Common Focus, Language & Mission
Setting
Goals
Paying
Communicating
Bonuses
Measuring
Evaluating
Performance
Strategies
Reviewing
Capital
Projects
Evaluating
Operational
Initiatives
Analysing
Acquisitions
Four Fundamental Strategies to improve
EVA
4.
EVA =
1.
[
Optimize - Reduce cost of capital
by optimizing capital structure
NOPAT
Capital
Cost of
Capital
]
X
Capital
Operate - Improve the return
earned on existing Capital
2.
Build - Invest as long as
returns exceed the cost of
capital
Harvest - Divest capital when returns
3.
fail to achieve the cost of capital
The Building Blocks of the EVA
Framework
“See the Value”
“Understand Value Creation”
“Manage for Value”
“Pay for Value Creation”
Evolution towards Shareholder
Value Management
 Shift in Corporate Vision and Mission.
 Shift in Corporate attitude towards
affiliates. Focus largely driven by
shareholder value consideration.
 Shareholder Value and Other
stakeholders’ value- Is there any
conflict?
 Free cash flow and excess capacityproblems of plenty.