MUDRA: Journal of Finance and Accounting Volume 4, Issue 1, January-June 2017, pp. 20-39 doi: 10.17492/mudra.v4i01.9781

Shareholders’ Value Creation and Market Price of Share: A Study in Indian Context

Radhagobinda Basak*

ABSTRACT

Shareholders’ value creation has become a matter of concern in the world of financial management in recent times. Shareholders’ value creation refers to the net value addition for the shareholders. In the present corporate scenario, financial managers do not concentrate only on profit generation but also on value creation for their shareholders, to ensure the survival of the business in the long run. It has been observed that shareholders’ value creation is related to market price of share. In this paper, an attempt has been taken to measure shareholders’ value creation by five different approaches selecting few sample companies. The approaches are- Market Value to Book Value Ratio approach, Economic Value Added (EVA) approach, Market Value Added (MVA) approach, Shareholders’ Value Added (SVA) approach and Shareholders’ View Point approach. Further, we quantify the degree of association that exists between shareholders’ value creation and market price of share. The data analysis reveals that shareholders’ value per share and market value per share are positively correlated to a considerable extent.

Keywords: Shareholders’ Value; Economic Value Added; Market Value Added; Shareholders’ Return; Cost of Capital.

1.0 Introduction

Investors invest in shares with the expectation of having sufficient return on their investment. A business can meet this expectation only when they can generate some value for their shareholders. Shareholders’ value creation refers to the net value addition to the shareholders’ fund. It is reflected through the market share price. If a business can create value for their shareholders, definitely the share price goes up in the market. By earning mere net profit, a firm can sustain in the short run but to sustain in the long run, a firm must create value for their shareholders. ______*Assistant Professor, Department of Commerce, Sidho-Kanho-Birsha University, Purulia, West Bengal, . (Email id: [email protected])

Shareholders’ Value Creation and Market Price of Share: A Study in Indian Context 21

Now, the question is how to measure shareholder value creation. Scholars in this field measure shareholder’ value creation in different methods. In this study, a modest attempt has been taken to measure it by five approaches (Chattopadhyay & Rakshit, 2010). They are- Market Value to Book Value Ratio Approach, Economic Value Added (EVA) Approach, Market Value Added (MVA) Approach, Shareholders’ Value Added (SVA) Approach and Shareholders’ View Point Approach. Besides, it has also been tried to show to what extent shareholders’ value creation and market price of share are correlated. The companies chosen for this purpose are Hindustan Limited (HUL), Limited (TSL) and Limited (RIL). The paper has been divided into ten sections. In section one, introduction to the problem under present study has been discussed. Section two provides review of related literature. Section three describes the research gap, contribution and objectives of the study respectively. The methodology of the study has been discussed in section four. The analysis of data and findings thereof have been presented in section five. The conclusion has been drawn in section six, along with the limitations of the study and scope for further research.

2.0 Literature Review

Stern (1990), in his research, showed that EVA measurement reflects the true economic profit of a firm. It was also demanded that EVA is directly linked with shareholders’ value creation. He suggested that the financial managers should be given incentive as a percentage of EVA so that they can motivate themselves to increase EVA which in turn will maximize the shareholders’ return. Stewart (1991) empirically showed a strong positive correlation between EVA and MVA in the context of American companies but Rakshit (2006) found no relationship between EVA and MVA in the context of Indian pharmaceutical companies. In this context, Chattopadhyay and Gupta (2001) examined the relationship between EVA and market capitalisation on the data of Hindustan Lever Ltd. and found no significant relationship between them. Stern et al. (1995) found a strong positive correlation between EVA and stock returns. Similar type of result was also observed by Palliam (2006), and Kyriazis and Anastassis (2007). Lee and Kim (2009) observed that refined EVA and MVA were significantly and positively associated with market adjusted return. In this context, Machuga et al. (2002) experienced mixed results concentrating on the relationship that exists between EVA and stock returns. Such type of findings was supported by Chattopadhyay and Das (2006), Issham et al. (2007); and Nappi-Choulet and Missonier- Piera (2007). Banerjee and Jain (1999) conducted an empirical research in this field.

22 MUDRA: Journal of Finance and Accounting, Volume 4, Issue 1, Jan-Jun 2017

They chose five indicators; earnings per share (EPS), average return on net worth (ARONW), capital productivity (KP), labor productivity (LP) and economic value added (EVA) and established their relationship with market value added (MVA). They took MVA as the base of shareholders’ wealth. Top 50 companies from Drug & Pharmaceutical industry in India were selected and data for 8 years from 1990-91 to 1997-98 were analysed. As per their observation, EVA was the most significant indicator of shareholders’ wealth. Chattopadhyay and Rakshit (2010) made a study to measure the shareholders’ value creation in FMCG industry in India. At first they took four traditional approaches to measure the shareholders’ value creation- the market value to book value approach, the EVA approach, the market value added approach and the shareholders’ value added approach. Secondly, they proposed another approach which measures it from the view point of shareholders. They suggested that shareholders’ value creation should be measured on the basis of present value of future cash inflows rather than earnings because earnings are not directly linked with value creation and measurement of earnings is subject to accounting principles.

3.0 Research Gap and Contribution of the Study

From the literature reviewed so far, it is obvious that no study has been carried out to examine the relationship between shareholders’ value creation calculated on the basis of five approaches as used by Chattopadhyay and Rakshit (2010) and market price of share in the context of Indian companies. This research gap has been tried to be addressed in the present study. To sustain in the long run, some value for the shareholders must be generated in every firm. In this study it has been tried to measure shareholders’ value creation under five different approaches. Thereafter, the relationship between shareholders’ value creation and market price of share has also been tried to be highlighted. It may be expected that the findings of the study may be useful for the financial managers of various firms to realize the importance of value creation for their shareholders. Moreover, the findings of the study may motivate the researchers in this research field for executing some more studies in broader aspect to verify and establish the relationship between shareholders’ value creation and market price of share.

3.1 Objectives of the study Based on the tune of the discussion made so far, we have two specific objectives in this present study. They are: (i) To measure shareholders’ value creation by five different well known approaches for the selected companies; and

Shareholders’ Value Creation and Market Price of Share: A Study in Indian Context 23

(ii) To correlate shareholders’ value creation and market share price for the sample companies.

4.0 Research Methodology

4.1 Time period The study is an empirical one and totally based on secondary data. Our research period is five years, i.e., from 2010-11 to 2014-15.

4.2 Sample The main objective of the study is to measure the strength of association between shareholders’ value and market price of share. We have selected three companies from three different industry sectors- HUL from fast moving consumer goods (FMCG) sector, TSL from steel sector and RIL from petroleum sector. Now, the first question is why we have selected different industry sectors. Share price movement is highly volatile and depends on so many complex socio-economic-political factors. Very often, it is observed that due to a certain factor, share price of all the companies belonging to a particular industry sector is affected for a certain time being. To avoid this situation, companies have been selected from different sectors. While selecting the company from a particular sector, we gave importance to three points: (a) whether the company has a significant market share in the industry, (b) whether it is a BSE listed company and (c) whether the company is committed to shareholders’ value creation principle. All the three companies selected in this study fulfill these three conditions. They are leaders in their respective industry, they are BSE listed companies and they emphasize on shareholders’ value creation.

4.3 Method of data collection Financial data of the companies have been collected from their published annual reports of respective years. The monthly Sensex and share price data of the companies have been collected from the official website of (www.bseindia.com). Data have been collected for 9 years from 2006-07 to 2014-15. Only closing indices and share prices of a day have been considered in the study being the true reflector of whole day’s sensation.

4.4 Financial and statistical tools used For analysing the collected data, financial data analysis tool like discounting technique and statistical tool like correlation have been used. Details of procedures have been discussed in the respective measurement approach.

24 MUDRA: Journal of Finance and Accounting, Volume 4, Issue 1, Jan-Jun 2017

5.0 Analysis of Data and Findings

We shall compute shareholders’ value creation by already mentioned five approaches one by one. Thereafter, we shall try to correlate shareholders’ value creation with market share price over the research period five years.

5.1 Market value to book value ratio approach Under this approach, it is admitted that a firm creates value for shareholders if its market value per share (MVPS or P) is greater than book value per share (BVPS). Here, shareholders’ value creation capacity is expressed by a ratio which is MVPS/BVPS. Shareholders’ value will be created if the ratio is more than one. As per Gordon’s model, MVPS is the present value of the future expected stream of dividend per share (DPS or D). Now, we know, DPS= Earnings per Share (EPS or E) ×Dividend Payout Ratio (DPR) If firm’s retention ratio is ‘b’, its DPR will be (1-b). Therefore, D= E (1-b) On the other hand, on retained earnings, the firm will again earn which will lead to the growth (g) of the firm. Let, return on equity is ‘r’ and there is no debt fund in the firm. Then g= br Therefore, in the next year E will not remain same. It will be increased by ‘E× g’ and therefore, in the second year, E= E+ (E× g) Or, E= E (1+g) Or, E= E (1+br). Consequently, in the second year, D= E (1+br) (1-b). Similarly, in the third year, E= E (1+br) 2 and D= E (1+br) 2 (1-b) and so on. As dividend is a kind of return to equity shareholders, it should be discounted at

cost of equity (Ke). As we are going to compute MVPS, Ke must be determined

considering market driven factors. So, Ke should be calculated as per Capital Asset Pricing Model (CAPM) which is as below.

Ke= Rf +β (Rm-Rf)

where, Ke= cost of equity, Rf = risk free rate of return, Rm= market rate of return and β= risk coefficient. Now, we can say, ( ) ( )( ) ( ) ( )

( ) ( ) ( )

Shareholders’ Value Creation and Market Price of Share: A Study in Indian Context 25

( ) ( ) Or, ( ) { } ( ) ( ) ( )

( ) ( ) st Now, { } is an infinite GP series whose 1 term is ( ) ( ) ( ) ( ) ( ) and common ratio is . Therefore, the sum of the GP series will be as follows: ( )

( )

( ) ( )

( ) ( ) So,

( ) Or,

( ) Or,

Or,

Or,

From the above equation, it can be said that shareholders’ value will be created if ‘return on equity’ is greater than ‘cost of equity’ (On the assumption that: ). Only in that case, increase in ‘g’ will increase shareholders’ value creation. When , shareholders’ value will be destroyed and in such a case, increase in ‘g’ will lead to decrease in shareholders’ value creation (On the assumption that: ). Now, we shall compute the ratio for the selected companies one by one.

5.1.1 Hindustan Unilever Limited The calculations for computing MV to BV ratio of HUL has been shown in Table 1.

5.1.2 Tata Steel Limited Two tables have been prepared here. In Table 2, the capital structure and NOPAT of TSL have been shown and in Table 3, MV to BV ratio has been computed.

5.1.3 Reliance Industries Limited Again, two tables have been prepared here. In Table 4, the capital structure and NOPAT of RIL have been consulted and in Table 5, MV to BV ratio has been worked out.

26 MUDRA: Journal of Finance and Accounting, Volume 4, Issue 1, Jan-Jun 2017

Table 1: MV to BV Ratio of HUL

Particulars 2009-10 2010-11 2011-12 2012-13 2013-14 2014-15 1.Shareholders’Fund / Capital Employed (Rs. million): Equity Share Capital 2181.7 2159.5 2161.5 2162.5 2162.7 2163.5 Reserve & Surplus 23653.5 24435.7 32967.8 24577.7 30607.8 35084.3 25835.2 26595.2 35129.3 26740.2 32770.5 37247.8 2.No. of Eq. Shares (million) 2159.5 2161.5 2162.5 2162.7 2163.5 3.BVPS [(1)/(2)] (Rs.) 12.32 16.25 12.37 15.15 17.22 4.Closing MVPS (Rs.) 284.6 409.9 466.1 603.65 872.9 5.MV to BV Ratio [(4)/(3)] 23.11 25.22 37.69 39.84 50.70 6. Cl. Market capitalisation (Rs. million) [2×4] 614593.7 885998.9 1007941.3 1305513.9 1888519.2 7. Value creation (Rs. ml) [6-1] 587998.5 850869.6 981201.1 1272743.4 1851271.4 Source: Author’s own calculations based on Annual Reports of HUL.

Table 2: Computation of Average Capital Employed and Profit Before Interest After Tax of TSL (Rs. in million) Particulars 2009-10 2010-11 2011-12 2012-13 2013-14 2014-15 1.Shareholders’ Fund: Equity Share Capital 8874.1 9594.1 9714.1 9714.1 9714.1 9714.1 Reserve & Surplus 360743.9 458070.2 512450.5 542382.7 601765.8 656924.8 369618 467664.3 522164.6 552096.8 611479.9 666638.9 2.Hybrid Perpetual Securities: 11.80 per cent Securities - 1500 1500 1500 1500 1500 11.50 per cent Securities - - 775 775 775 775 - 1500 2275 2275 2275 2275 3.Long Term Borrowings (Debentures & Others) 236350 244990.5 213532.0 235655.7 238080.9 239003.7 4.Capital Employed 605968 727654.8 758446.6 810502.5 872310.8 928392.6 (1+2+3) 5.Average Capital 666811.4 743050.7 784474.6 841406.7 900351.7 Employed 6.Profit After Tax 68656.9 66964.2 50629.7 64121.9 64391.2 Add: After Tax Interest 11985.4 13955.3 12922.0 13625.2 16279.1 (Taking Tax Rate 30 per cent) 7.Profit Before Interest 80642.3 80919.5 63551.7 77747.1 80670.3 After Tax (NOPAT) Source: Author’s own calculations based on Annual Reports of HUL.

Shareholders’ Value Creation and Market Price of Share: A Study in Indian Context 27

Table 3: MV to BV ratio of TSL

Particulars 2010-11 2011-12 2012-13 2013-14 2014-15 1.Shareholders’ Fund (Rs. ml) 467664 522165 552097 611480 666639 2.No. of Eq. Shares (ml) 959.215 971.215 971.215 971.215 971.215 3.BVPS [(1)/(2)] (Rs.) 487.55 537.64 568.46 629.60 686.40 4.Closing MVPS (Rs.) 620.5 470.4 312.3 393.85 316.85 5.MV to BV Ratio [(4)/(3)] 1.27 0.87 0.55 0.63 0.46 6. Cl. Market capitalisation (Rs.ml) [2×4] 595192.9 456859.5 303310.4 382513.0 307729.5 7. Value creation (Rs. ml) [6-1] 127528.6 -65305.1 -248786.4 -228966.9 -358909.4 Source: Author’s own calculations based on Annual Reports of HUL.

Table 4: Computation of Average Capital Employed and Profit Before Interest After Tax of RIL (Rs. in million) Particulars 2009-10 2010-11 2011-12 2012-13 2013-14 2014-15 1.Shareholders’ Fund: Equity Share Capital 32700 32730 32710 32290 32320 32360 Reserve & Surplus 1339010 1482670 1628250 1767660 1938420 2129230 1371710 1515400 1660960 1799950 1970740 2161590 2.Long Term Borrowings (Debentures & Others) 565260 550770 480340 430120 627080 762270 3.Capital Employed (1+2) 1936970 2066170 2141300 2230070 2597820 2923860

4.Average Capital Employed 2001570 2103740 2185690 2413950 2760840 5.Profit Before Interest &Tax 275700 284170 293200 310240 318350

6.Profit Before Interest 192990 198920 205240 217170 222850 After Tax (NOPAT) (Taking Tax Rate 30 per cent) Source: Author’s own calculations based on Annual Reports of HUL. Table 5: MV to BV ratio of RIL

Particulars 2010-11 2011-12 2012-13 2013-14 2014-15 1.Shareholders’ Fund (Rs. ml) 1515400 1660960 1799950 1970740 2161590 2.No. of Eq. Shares (ml) 3273 3271 3229 3232 3236 3.BVPS [(1)/(2)] (Rs.) 463.00 507.78 557.43 609.76 667.98 4.Closing MVPS (Rs.) 1047.8 748.25 773.7 929.5 824.7 5.MV to BV Ratio [(4)/(3)] 2.26 1.47 1.39 1.52 1.23 6. Cl. Market capitalisation (Rs.ml) [2×4] 3429449.4 2447525.8 2498277.3 3004144.0 2668729.2 7. Value creation (Rs. ml) [6-1] 1914049.4 786565.8 698327.3 1033404.0 507139.2 Source: Author’s own calculations based on Annual Reports of HUL.

28 MUDRA: Journal of Finance and Accounting, Volume 4, Issue 1, Jan-Jun 2017

5.2 Economic Value Added (EVA) approach In fact, EVA is the registered trade mark of Stern Stewart & Co. of New York City, USA for calculating economic profit. Net profit, i.e. excess of revenue over expenses is not the actual surplus generated by a firm. Rather, excess of net profit after meeting the expectation of the shareholders may be considered as the true surplus generated by it. It is called EVA which is computed using the following formula. EVA= NOPAT-COC where, NOPAT= Net Operating Profit after Tax= EBIT× (1-tax rate) and COC= Total Cost of Capital= (WACC× Average Capital Employed). Profit or loss from exceptional items has not been considered in this study. The capital structure of HUL consists of equity shares only. Therefore, cost of equity will be the cost of capital/weighted average cost of capital in case of HUL. TSL has hybrid perpetual securities and long term borrowings along with equity shares in their capital structure. So, the costs of those two components of capital structure have been computed at first and then the WACC has been determined by due process. Similarly, in case of RIL, WACC has been computed after taking into consideration the cost of long term borrowings. In computing cost of equity, generally, Capital Asset Pricing Model (CAPM) is used in EVA approach. Already it has been mentioned that under (CAPM),

Ke= Rf +β (Rm-Rf)

where, Ke= cost of equity, Rf = risk free rate of return, Rm= market rate of return and β= 2 risk coefficient= Cov (Rm, Rc) /σ m= rmc × σc /σm

Here, Rc= share price return of the company, σm= standard deviation of monthly

market rate of return (i.e. Sensex return), σc= standard deviation of monthly share price

return of the company and rmc= correlation coefficient between monthly market rate of return (i.e. Sensex return) and monthly share price return of the company. Both market rate of return and company’s share price return are subject to risk which is dependent on so many socio-economic factors. So, it is quite expected that risk will vary year to year. As a result, market rate of return and β will also change year to year. To avoid day to day volatility in stock market, monthly Sensex and company’s share price data have been considered. To calculate annual market rate of return, first of all, monthly Sensex returns have been computed. Then, the deviations among the monthly returns have been worked out on month-to –month basis. Next, to eliminate short term volatilities, any deviations so calculated beyond ±10 per cent have been omitted from the study. Then, those accepted monthly returns have been annualized. Next, taking previous five years’ annualized returns, long term return has been formed. For instance, the average of annualized returns from 2010-11 to 2014-15 constitutes

Shareholders’ Value Creation and Market Price of Share: A Study in Indian Context 29 annual market rate of return for the year 2014-15 in our study. To maintain parity, company’s share price returns of the corresponding months (For which Sensex returns have been omitted) have also been omitted from the study. Interest rate of recently issued 10 years’ Government Stock 2024 has been taken as the risk free rate of return, which is 8.40 per cent p.a. for each of the five years in our study. On the basis of above discussion, now, we shall compute EVA of the companies one by one.

5.2.1 Hindustan Unilever Limited In Table 6, the EVA of HUL has been computed.

Table 6: Computation of EVA of HUL

Particulars 2010-11 2011-12 2012-13 2013-14 2014-15

1. Rm (per cent) 15.63 10.17 9.38 19.18 10.73

2. Rf (per cent) 8.4 8.4 8.4 8.4 8.4

3. σm 8.68 8.66 7.8 6.51 4.82

4. σc 6.35 5.94 5.91 6.65 6.23

5. rmc 0.1328 0.1173 0.1991 0.1744 0.2836 6. β 0.0971 0.0804 0.1508 0.1781 0.3665

7. Ke (per cent) 9.1022 8.5424 8.5478 10.3202 9.2540 8. Av. Cap Emp (Rs. ml) 26215.2 30862.3 30934.8 29755.4 35009.2 9. NOPAT taking 30 per cent tax (Rs. ml) 19111.4 23451.1 30446.4 33598 38661.8 10. Cost of capital (Rs. ml) [7*8] 2386.2 2636.4 2644.3 3070.8 3239.8 11. EVA (Rs. ml) [9-10] 16725.2 20814.7 27802.1 30527.2 35422.0 12. per cent of EVA on Av. Cap Emp 63.80 67.44 89.87 102.59 101.18 Source: Author’s own calculations based on Annual Reports of HUL.

5.2.2 Tata Steel Limited The EVA of TSL is shown in Table 7.

Cost of Hybrid Perpetual Securities (Ks): It is a fixed distribution bearing perpetual security and is not considered a debt. So, actual distribution rate may be taken as its cost which is 11.80 per cent p.a. and 11.50 per cent p.a. respectively. The volume of 11.50 per cent securities is Rs.775 crore only which is a very minor portion of total capital employed. So, for the sake of simplicity and on the principle of conservatism, we shall rather take 11.80 per cent distribution rate as the overall cost of Hybrid Perpetual Securities.

Cost of Long Term Borrowings (Kl): There are different kinds of debentures and term loans under this category. Due to unavailability of proper information and for the sake of

30 MUDRA: Journal of Finance and Accounting, Volume 4, Issue 1, Jan-Jun 2017

simplicity, average rate of interest on all these borrowings as a whole has been taken as overall cost of Long Term Borrowings. Being debt, cost should be calculated after tax. Computation of weighted average cost of capital (WACC): WACC is the overall cost of all the components in capital structure. WACC is the sum of the products obtained by multiplying the individual weight of a particular component with its cost. In our study, it has been calculated in the following way-

K0= Ke*We+Ks*Ws+Kl*Wl

where, K0= WACC, and We , Ws and Wl are the weights of the three components of capital structure respectively. Weight refers to the proportion in which the components are in capital structure. Weights may be calculated based on book values or market values. It is assumed that the book values and market values of Hybrid Perpetual Securities and Long Term Borrowings are same.

Table 7: Computation of EVA of TSL

Particulars 2010-11 2011-12 2012-13 2013-14 2014-15

1. Rm (per cent) 15.63 10.17 9.38 19.18 10.73

2. Rf (per cent) 8.4 8.4 8.4 8.4 8.4

3. σm 8.68 8.66 7.8 6.51 4.82

4. σc 10.38 11.31 10.56 11.67 11.08

5. rmc 0.6423 0.7727 0.7948 0.6802 0.6544 6. β 0.7681 1.0091 1.0760 1.2193 1.5043

7. Ke (per cent) 13.9533 10.1862 9.4545 21.5445 11.9050

8. Ks (per cent) 11.80 11.80 11.80 11.80 11.80

9. Kl (per cent) 4.89 6.54 5.48 5.72 6.81 10.NOPAT (Rs. million) 80642.3 80919.5 63551.7 77747.1 80670.3 11.AV Cap Emp (Rs. million) 666811 743051 784475 841407 900352 12.WACC (per cent) (book value as weight) 10.83 9.22 8.37 16.98 10.58 13.Total Cost of capital (Rs. million) 72215.6 68509.3 65660.6 142870.9 95257.2 14.EVA (Rs. million) 8426.7 12410.2 -2108.9 -65123.8 -14586.9 15.EVA as per cent on Av Cap Emp 1.26 1.67 -0.27 -7.74 -1.62 16.WACC (per cent) (market value as weight) 11.37 9.11 7.88 15.3 9.76 17.Total Cost of capital (Rs. million) 75816.4 67691.9 61816.6 128735.3 87874.4 18.EVA (Rs. million) 4825.9 13227.6 1735.1 -50988.2 -7204.1 19.EVA as per cent on Av Cap Emp 0.72 1.78 0.22 -6.06 -0.80 Source: Author’s own calculations based on Annual Reports of HUL.

5.2.3 Reliance Industries Limited The EVA of RIL has been computed in Table 8.

Cost of Long Term Borrowings (Kl): Just like TSL, the cost of long term borrowings of RIL has been calculated in the same way.

Shareholders’ Value Creation and Market Price of Share: A Study in Indian Context 31

Computation of weighted average cost of capital (WACC): Firstly, the weights are to be determined and to do this either book values or market values may be considered. It is assumed that the book values and market values of Long Term Borrowings are same.

5.3 Market Value Added (MVA) approach MVA means net addition in the market capitalisation in a year. Symbolically, we can say, MVA= Market capitalisation at the year ending- Market capitalisation at the beginning Where, market capitalisation= MVPS× No. of Eq. shares. If number of Eq. shares at the beginning of the year does not remain same with that of at the end due to issue or buy back of shares, MVA calculated as per the formula mentioned above will mislead us. To avoid this, the formula should be adjusted in the following way. MVA= Market capitalisation at the year ending- Market capitalisation at the beginning of the year for the number of shares held at the end of the year.

Table 8: Computation of EVA of RIL

Particulars 2010-11 2011-12 2012-13 2013-14 2014-15

1. Rm (per cent) 15.63 10.17 9.38 19.18 10.73

2. Rf (per cent) 8.4 8.4 8.4 8.4 8.4

3. σm 8.68 8.66 7.8 6.51 4.82

4. σc 7.87 8.32 6.77 6.91 6.4

5. rmc 0.7006 0.7342 0.6847 0.6939 0.649 6. β 0.6352 0.7054 0.5943 0.7365 0.8617

7. Ke (per cent) 12.9927 9.6485 8.9824 16.3399 10.4079

8. Kl (per cent) 3.53 4.6 5.7 4.53 3.1 9.NOPAT (Rs. million) 192990 198920 205240 217170 222850 10.AV Cap Emp (Rs. million) 2001570 2103740 2185690 2413950 2760840 11.WACC (per cent) (book value as weight) 10.44 8.54 8.36 13.51 8.51 12.Total Cost of capital (Rs. ml) 208963.9 179659.4 182723.7 326124.6 234947.5 13.EVA (Rs. ml) -15973.9 19260.6 22516.3 -108954.6 -12097.5 14.EVA as per cent on Av Cap Emp -0.80 0.92 1.03 -4.51 -0.44 15.WACC (per cent) (market value as weight) 11.67 8.84 8.49 14.33 8.8 16.Total Cost of capital (Rs. ml) 233583.2 185970.6 185565.1 345919.0 242953.9 17.EVA (Rs. ml) -40593.2 12949.4 19674.9 -128749.0 -20103.9 18.EVA as per cent on Av Cap Emp -2.03 0.62 0.90 -5.33 -0.73 Source: Author’s own calculations based on Annual Reports of HUL.

32 MUDRA: Journal of Finance and Accounting, Volume 4, Issue 1, Jan-Jun 2017

5.4 Shareholders’ Value Added (SVA) approach SVA is the total value added for the shareholders during a year. Value may be added to the shareholders by market value addition or by dividend addition. Therefore, SVA= MVA during a year+ Eq. Dividend during that year. On the basis of the above discussion, both MVA and SVA will now be shown in the following three tables for the three companies one by one. The Table 9 is for HUL, Table 10 is for TSL and Table 11 is for RIL.

Table 9: Computation of MVA and SVA of HUL

Particulars 2010-11 2011-12 2012-13 2013-14 2014-15 1. No. of Eq. Sh at year ending (ml) 2159.5 2161.5 2162.5 2162.7 2163.5 2. Op. MVPS (Rs.) 238.7 284.6 409.9 466.1 603.65 3. Cl. MVPS (Rs.) 284.6 409.9 466.1 603.65 872.9 4. Cl. Market capitalization (Rs. ml) 614593.7 885998.9 1007941.3 1305513.9 1888519.2 5.Op. Market capitalization (Rs. ml) 515472.7 615162.9 886408.8 1008034.5 1305996.8 6. MVA (Rs. ml) 99121.1 270836.0 121532.5 297479.4 582522.4 7. Dividend (Rs. ml) 14106.0 16209.4 39999.9 28114.3 32453.2 8. SVA (Rs. ml) 113227.1 287045.4 161532.4 325593.7 614975.6 Source: Author’s own calculations based on Annual Reports of HUL.

Table 10: Computation of MVA and SVA of TSL

Particulars 2010-11 2011-12 2012-13 2013-14 2014-15 1. No. of Eq. Sh at year ending (ml) 959.215 971.215 971.215 971.215 971.215 2. Op. MVPS (Rs.) 632.65 620.5 470.4 312.3 393.85 3. Cl. MVPS (Rs.) 620.5 470.4 312.3 393.85 316.85 4. Cl. Market capitalization (Rs. ml) 595192.9 456859.5 303310.4 382513.0 307729.5 5.Op. Market capitalization (Rs. ml) 606847.4 602638.9 456859.5 303310.4 382513.0 6. MVA (Rs. ml) -11654.5 -145779.0 -153549.1 79202.6 -74783.6 7. Dividend (Rs. ml) 13077.7 13470.3 9057.0 10374.0 9299.9 8. SVA (Rs. ml) 1423.2 -132309.0 -144492.1 89576.6 -65483.7 Source: Author’s own calculations based on Annual Reports of HUL.

5.5 Shareholders’ View Point Approach (SVPA) All the previous four approaches are based on the view point of the company. But, shareholders’ value creation should be measured from the shareholders’ view point because ultimately it is meant for them. Such an approach was proposed by Chattopadhyay and Rakshit (2010) in their study titled ‘Measures of Shareholders’ Value Creation: An Assessment’. As per their view, shareholders’ value is created if shareholders’ return is more than cost of equity. Symbolically,

Shareholders’ Value Creation and Market Price of Share: A Study in Indian Context 33

Shareholders’ Value Creation= Market Value of Equity× (Shareholders’ Return Ke).

Table 11: Computation of MVA and SVA of RIL

Particulars 2010-11 2011-12 2012-13 2013-14 2014-15 1. No. of Eq. Sh at year ending (ml) 3273 3271 3229 3232 3236 2. Op. MVPS (Rs.) 1074.65 1047.8 748.25 773.7 929.5 3. Cl. MVPS (Rs.) 1047.8 748.25 773.7 929.5 824.7 4. Cl. Market capitalization (Rs. ml) 3429449 2447526 2498277 3004144 2668729 5.Op. Market capitalization (Rs. ml) 3517329 3427354 2416099 2500598 3007862 6. MVA (Rs. ml) -87880 -979828 82178 503546 -339133 7. Dividend (Rs. ml) 23850 25310 26430 27930 29440 8. SVA (Rs. ml) -64030 -954518 108608 531476 -309693 Source: Author’s own calculations based on Annual Reports of HUL.

Shareholders’ return refers to the long term return to the equity shareholders’ fund on discounted cash flow basis. In this present study, five years’ return on equity on discounted cash flow basis has been considered as long term return. For instance, to calculate long term return on equity for the year 2014-15, DPS from 2010-11 to 2014-15 will be considered. So, we can write, ( )

( ) ( ) ( ) ( ) ( )

where, ( )

( )

Now, by solving the above equation, we can find out long term shareholders’ return for the year 2014-15. Similarly, for other years of the study period, shareholders return may also be calculated. In the following three tables, the calculations are presented for the three companies one by one. The Table 12 is for HUL, Table 13 is for TSL and Table 14 is for RIL.

34 MUDRA: Journal of Finance and Accounting, Volume 4, Issue 1, Jan-Jun 2017

Table 12: Market based shareholders’ value creation of HUL

Particulars 2010-11 2011-12 2012-13 2013-14 2014-15 272.3 205.25 228.07 238.2 238.7 Op. MVPS (Rs.) (31/3/06) (31/3/07) (31/3/08) (31/3/09) (31/3/10) 1st year DPS (Rs.) 6 9 7.5 6.5 6.5 2nd year DPS (Rs.) 9 7.5 6.5 6.5 7.5 3rd year DPS (Rs.) 7.5 6.5 6.5 7.5 18.5 4th year DPS (Rs.) 6.5 6.5 7.5 18.5 13 5th year DPS (Rs.) 6.5 7.5 18.5 13 15 Cl. MVPS (Rs.) 284.6 409.9 466.1 603.65 872.9 5th DPS +Cl. MVPS (Rs.) 291.1 417.4 484.6 616.65 887.9 Shareholders' Return (per cent) 3.45 17.70 18.28 23.27 32.51 Cost of equity (per cent) 9.1022 8.5424 8.5478 10.3202 9.2540 Cl. total MV of equity (Rs. ml) 614593.7 885998.9 1007941.3 1305513.9 1888519.2 Sh. holders' value creation (Rs.ml) -34737.9 81136.3 98094.5 169061.9 439193.1 Source: Author’s own calculations based on Annual Reports of HUL.

Table 13: Market Based Shareholders’ Value Creation of TSL

Particulars 2010-11 2011-12 2012-13 2013-14 2014-15 536.4 449.6 693.15 206 632.65 Op. MVPS (Rs.) (31/3/06) (31/3/07) (31/3/08) (31/3/09) (31/3/10) 1st year DPS (Rs.) 15.5 16 16 8 12 2nd year DPS (Rs.) 16 16 8 12 12 3rd year DPS (Rs.) 16 8 12 12 8 4th year DPS (Rs.) 8 12 12 8 10 5th year DPS (Rs.) 12 12 8 10 8 Cl. MVPS (Rs.) 620.5 470.4 312.3 393.85 316.85 5th DPS +Cl. MVPS (Rs.) 632.5 482.4 320.3 403.85 324.85 Shareholders' Return (per cent) 5.36 3.73 -12.54 17.67 -10.85 Cost of equity (per cent) 13.9533 10.1862 9.4545 21.5445 11.9050 Cl. total MV of equity (Rs. ml) 595193 456859 303311 382513 307730 Sh. holders' value creation (Rs.ml) -51146.9 -29495.7 -66711.7 -14820.6 -70024.0 Source: Author’s own calculations based on Annual Reports of HUL.

5.6 Correlation between shareholders’ value creation and market price of share So far, we have tried to measure shareholders’ value creation by different approaches. Now, we shall try to estimate the degree of association between these two. We have measured shareholders’ value creation by five different approaches.

Shareholders’ Value Creation and Market Price of Share: A Study in Indian Context 35

Table 14: Market Based Shareholders’ Value Creation of RIL

Particulars 2010-11 2011-12 2012-13 2013-14 2014-15 796.25 1368.35 2264.5 1523.2 1074.65 Op. MVPS (Rs.) (31/3/06) (31/3/07) (31/3/08) (31/3/09) (31/3/10) 1st year DPS (Rs.) 11 13 13 7 8 2nd year DPS (Rs.) 13 13 7 8 8.5 3rd year DPS (Rs.) 13 7 8 8.5 9 4th year DPS (Rs.) 7 8 8.5 9 9.5 5th year DPS (Rs.) 8 8.5 9 9.5 10 Cl. MVPS (Rs.) 1047.8 748.25 773.7 929.5 824.7 5th DPS +Cl. MVPS (Rs.) 1055.8 756.75 782.7 939 834.7 Shareholders' Return (per cent) 6.84 -10.47 -18.70 -8.72 -4.22 Cost of equity (per cent) 12.9927 9.6485 8.9824 16.3399 10.4079 Cl. total MV of equity (Rs. ml) 3429450 2447530 2498280 3004140 2668730 Sh. holders' value creation (Rs.ml) -211002.1 -492406.6 -691583.8 -752833.2 -390378.1 Source: Author’s own calculations based on Annual Reports of HUL.

To estimate Pearson’s correlation coefficient, we have not used gross shareholders’ value creation; rather, shareholders’ value per share (SVPS) has been considered. Therefore, five correlation coefficients will be there between shareholders’ value per share and market price per share. They have been presented in the following three tables for the three companies one by one. The Table 15 is for HUL, Table 16 is for TSL and the Table 17 is for RIL.

Table 15: Correlation between Shareholders’ Value Per Share and Cl. MVPS of HUL

Shareholders’ Value Per Share & Cl. MVPS (Rs.) Correlation Particulars between SVPS 2010-11 2011-12 2012-13 2013-14 2014-15 and MVPS MV/BV Approach 272.28 393.65 453.73 588.50 855.68 1.00** EVA Approach 7.74 9.63 12.86 14.12 16.37 0.94* MVA Approach 45.90 125.30 56.20 137.55 269.25 0.92* SVA Approach 52.43 132.80 74.70 150.55 284.25 0.94* SVP Approach -16.09 37.54 45.36 78.17 203.00 0.99** Cl. MVPS 284.6 409.9 466.1 603.65 872.9 - Source: Author’s own calculations based on Annual Reports of HUL. Note: ** and * indicate significance at 0.01 level and 0.05 level respectively

36 MUDRA: Journal of Finance and Accounting, Volume 4, Issue 1, Jan-Jun 2017

Table 16: Correlation between Shareholders’ Value Creation and Cl. MVPS of TSL

Shareholders’ Value Per Share & Cl. MVPS (Rs.) Correlation Particulars between SVPS 2010-11 2011-12 2012-13 2013-14 2014-15 and MVPS MV/BV Approach 132.95 -67.24 -256.16 -235.75 -369.55 0.97** EVA (BV) Approach 8.78 12.78 -2.17 -67.05 -15.02 0.37 EVA (MV) Approach 5.03 13.62 1.79 -52.50 -7.42 0.28 MVA Approach -12.15 -150.10 -158.10 81.55 -77.00 0.27 SVA Approach 1.48 -136.23 -148.77 92.23 -67.42 0.29 SVP Approach -53.31 -30.37 -68.69 -15.26 -72.10 0.29 Cl. MVPS 620.5 470.4 312.3 393.85 316.85 - Source: Author’s own calculations based on Annual Reports of HUL. Note: ** indicate significance at 0.01 level

Table 17: Correlation between Shareholders’ Value Creation and Cl. MVPS of RIL

Shareholders’ Value Per Share & Cl. MVPS (Rs.) Correlation Particulars between SVPS 2010- 2011-12 2012-13 2013-14 2014-15 and MVPS 11 MV/BV Approach 584.80 240.47 216.27 319.74 156.72 0.89* EVA (BV) Approach -4.88 5.89 6.97 -33.71 -3.74 -0.52 EVA (MV) Approach -12.40 3.96 6.09 -39.84 -6.21 -0.62 MVA Approach -26.85 -299.55 25.45 155.80 -104.80 0.50 SVA Approach -19.56 -291.81 33.64 164.44 -95.70 0.50 SVP Approach -64.47 -150.54 -214.18 -232.93 -120.64 0.44 Cl. MVPS 1047.8 748.25 773.7 929.5 824.7 - Source: Author’s own calculations based on Annual Reports of HUL. Note: * indicate significance at 0.05 level

6.0 Conclusion

We have calculated shareholders’ value creation by five different approaches. Results obtained by different approaches are not same. They vary significantly from one another. It is so because each method has its own merits, demerits and assumptions and the measurement procedures of different approaches are highly subjective. In the case of HUL, one similarity is followed among the results of different approaches. All the approaches give the same evidence that HUL has been creating value

Shareholders’ Value Creation and Market Price of Share: A Study in Indian Context 37 for its shareholders continuously over the reporting period and that there is an upward trend in value creation during the study period. At the same time, the market value per share of HUL was also going up. That is why; the correlation coefficient between SVPS and MVPS was almost unity according to all the five approaches. The correlation coefficient between SVPS and MVPS was found to be statistically significant at 1 per cent level according to market value to book value ratio approach and shareholders’ view point approach and at 5 per cent level according to the other three approaches respectively. In the case of TSL, we observed that in most of the years, TSL destroyed value. Simultaneously, during the reporting period, the MVPS of TSL has been decreased. Though the correlation coefficient between SVPS and MVPS was positive in all the approaches, they were not statistically significant except in the result as per MV/BV approach (at 1 per cent level). For RIL, we found a negative correlation between SVPS and MVPS according to economic value added approach. It was so because the cost of capital (per cent) of RIL in 2013-14 went up excessively but in the same year share price did not go up so much. However, according to the other four approaches, the positive correlation was either very strong or moderate. The correlation coefficient between SVPS and MVPS was statistically significant at 5 per cent level according to market value to book value ratio approach. However, correlation coefficients as calculated by other approaches were not found to be statistically significant. Therefore, we achieve a mixed experience regarding the relationship between shareholders’ value creation and market price of shares in this present study (Machuga et al., 2002; Chattopadhyay & Das, 2006; Issham et al., 2007; Nappi-Choulet & Missonier- Piera, 2007). As an overall conclusion, it may be said that though the results of the different approaches deviate significantly from one another; still it can be demanded that the SVPS and MVPS are positively correlated to a considerable extent as it is evidenced by most of the approaches. Thus, the financial managers, indeed, should concentrate on the shareholders’ value creation for boosting the share price in the long run.

6.1 Limitations of the study The present study is subject to the following limitations: (i) Only three industry sectors have been chosen in the study. Moreover, only one company has been selected from each industry. So many other industries have been totally left untouched in the study. To get better result, more companies from varied industries may be selected for analysis.

38 MUDRA: Journal of Finance and Accounting, Volume 4, Issue 1, Jan-Jun 2017

(ii) Our study period is of five years. More intensive analysis of data can be done with an extended study period. (iii) The selected approaches themselves are based on different assumptions and amenable to subjectivity. (iv) The methods used in the study to compute market rate of return and risk coefficient are based on some logics which are also subjective.

6.2 Scope for further research (i) The type and degree of association between shareholders’ value creation and market price of share may be tested taking into consideration varied number of industries. From each industry, a number of companies may be chosen in the sample. This kind of study will be more fruitful if sample size is sufficiently large. (ii) A cross-country comparative analysis may also be done in this respect to experience the effect of different socio-cultural and economic factors of different countries over the relationship between shareholders’ value creation and market price of share.

References

Banerjee, A. & Jain, S. C. (1999). Economic value added and shareholders’ wealth: An empirical study of relationship. Paradigm, 3(1), 99-135.

Chattopadhyay, A. & Rakshit, D. (2010). Measures of shareholders’ value creation: An assessment. Vidyasagar University Journal of Commerce, 15(3), 5-21.

Chattopadhyay, A. & Das, A. (2006). Economic Value Added (EVA) and traditional financial measure of business performance: A comparative analysis. Research Bulletin, XXVIII, 9-21.

Chattopadhyay, A. & Gupta, A. (2001). Linkage between market capitalisation and economic value added- A study with reference to Hindustan Lever Limited. Indian Journal of Accounting, 32, 1-7.

Hindustan Unilever Limited. Annual reports from 2006-07 to 2014-15. Retrieved from www.hul.co.in

Issham, I., Samad, A., Hwa, S. Y., Kamil, A. & Ayub, A. (2007). Economic value added (EVA) as a performance measurement for GLCs vs. non-GLCs- evidence from Bursa Malaysia. Prague Economic Papers, 3,168-179.

Shareholders’ Value Creation and Market Price of Share: A Study in Indian Context 39

Kyriazis, D. & Anastassis, C. (2007). The validity of the economic value added approach: An empirical application. European Financial Management, 13 (1), 71-100.

Lee, S. & Kim, W. G. (2009). EVA, refined EVA, MVA, or traditional performance measures for the hospitality industry. International Journal of Hospitality Management, 28 (3), 439-445.

Machuga, S., Peiffer, J. & Verma, K. (2002). Economic value added, future accounting earnings and financial analysts’ earnings per share forecasts. Review of Quantitative Finance and Accounting, 18(1), 59-73.

Nappi-Choulet, I. & Missonier-Piera, F. (October, 2007). Value creation and the impact of corporate real estate assets: An empirical investigation with French listed companies. Paper presented at Dauphine Real Estate Workshop, Paris-Dauphine University, France. Retrieved from https://www.scribd.com/document/91631752/ Value-Creation-and- the- Impact-of-Corporate-Real-Estate

Palliam, R. (2006). Further evidence on the information content of economic value added. Review of Accounting and Finance, 5(3), 204-215.

Rakshit, D. (2006). Linkage between EVA and MVA: A Study of some Pharmaceutical Companies in India. IMM- Marketology, October- December, 60-70.

Reliance Industries Limited. Annual reports from 2006-07 to 2014-15. Retrieved from www.ril.com

Stern, J. (1990). One way to build value in your firm: Executive compensation. Financial Executive, Nov/Dec, 51-54.

Stern, J. M., Stewart, G. B. & Chew, D. (1995). The EVA financial management system. Journal of Applied Corporate Finance, 8(2), 32-46.

Stewart, G. B. (1991). The quest for value. New York, NY: Harper Collins Publishers.

Tata Steel Limited. Annual reports from 2006-07 to 2014-15. Retrieved from www.tatasteel.com