EVA Finance Management at

Godrej Consumer Product LTD

Presentation by,
Ms. Pramita A
Ms. Suvarna G
Ms. Kajal C
 Topics to be covered
 Company History of Godrej
 Winds of Change at Godrej
 Moving towards EVA
 Training for EVA at Godrej
 EVA Calculations and Adjustments
 EVA Incentive program
 Initial experience with EVA
 Conclusion
 Company History
 Started in 1897 as a locks manufacturing company, the Godrej Group is today
one of the most accomplished and diversified business houses in India.

 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 organization's history.

 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 agricultural products to name a few

 GCPL came into existence after the de-merger of the consumer products
division of the erstwhile Godrej Soaps Limited (GSL) on April 01, 2001.

 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.

 The group has more recently entered the real estate and information
technology sectors, and management views these as avenues for enormous
growth.
 Company History

2001-02 to
2008-09

Continuing
Strong
Domestic
Presence
 Company History
2005-06
Entry into
the UK
Key line
Brands
Limited

April 2008
Expanding presence in S
Africa
Acquisition of Kinky Group
(Proprietary) Ltd
 Operations…..
Manufacturing facilities both in India and abroad
• Malanpur (M.P.) – 45,000 tonnes of soap
• Guwahati (Assam) – hair colourants and toiletries
• Baddi (H.P.) – 30,000 tonnes of soap
• Katha (H.P.) – 45,000 tonnes of soap
• Sikkim – hair colourants and toiletries
• South Africa
– Rapidol – range of hair colour products
– Kinky – diversified hair products portfolio

Rs 110 crore investment towards capacity expansions over FY07 &

FY08
• New Katha plant operational from December 2006
• New Sikkim plant operational from March 2007
• Capacity expansion of the Malanpur plant. Operational from May 2008
 Winds of Change

 MNC’s entering in Indian FMCG Market

ncreased competition
 Managers walked out with JV partners
 Lack of talented people
 Needed to attract & retain good people
 Young people where Underutilized &
uninvolved in Strategic decisions
 A Clear Communication Gap between
Management & Employees
 Moving towards EVA
Announcing the implementation of the EVA
(economic value added)-based performance
management system in 2001, Mr. Adi Godrej,
chairman 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.”

"Our main objective behind implementing EVA is to

be driven, measured and rewarded by our ability to
create sustainable shareholder value."
 BOOH Factor in the implementation
of EVA at Godrej

Build Invest as long as returns exceed

the cost of capital

Optimise Reduce cost of capital by

optimizing capital structure

Operate Improve the return on existing

capital

Harvest Divest capital when the returns

fail to achieve the cost of capital
 TRAINING FOR EVA AT
GODREJ
Training programme for employees was conducted by
consultants from 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 Godrej as well as the business unit heads /
directors — to make key policy decisions.

• An implementation team — comprising Mr. C K Vaidya, executive

director (corporate personnel), Godrej Industries Limited, Mr. S S
Sapre, vice president (finance), Godrej Consumer Products Limited,
and Dr S S Sindhu, general manager (personnel), Godrej Agrovet
Limited — to monitor overall project progress, ensure organization-
wide coordination across the various business units and functions and
achieve full knowledge transfer.

• Cross-functional working teams — which were formed at each

SBU, to ensure that the outcome of the project was tailored to meet
specific business requirements.
 The project involved four overlapping
phases:

• Performance measurement: Tailoring the EVA

definition for each Godrej business to ensure a simple yet
robust financial performance measure.

• Management processes: Integrating value-

based thinking into the various management processes,
and developing the relevant tools and framework to
guide management in its strategic, operating and
financing decisions to improve business EVA.

• Motivation: ‘Performance-linked variable

remuneration' (PLVR) scheme has been designed to
reward management teams for improving their
businesses'

• Training and communication: An extensive

training programme has been undertaken for various
managerial and officer levels.
EVA Implementation Time Line
Diagram
Framework provided for value-based manageme
 What is EVA (Economic Value
Added)?
 EVA is a measure of financial performance based on
the context that all capital has a cost and that
earning more than the cost of capital creates value
for shareholders.

 Registered trademark of Stern Stewart & co. Of

New York city (USA)

 Concept was popular after stern stewart & co.

Marketed it.

 EVA is the Operating Profit after tax less charge for

the Capital used in the Business.

EVA = NOPAT – (WACC * Net

Assets)
COMPONENTS OF EVA:
UNDERSTANDING EVA AND ITS
COMPONENTS
 NOPAT
• (Profit after Tax + Non-Recurring Expenses + Revenue Expenditure on
R&D + Interest Expenses + Provision for Taxes) – (Non Recurring
Income + R&D Amortization + cash operating Taxes)
• Cash operating Taxes (Provision for Taxes + Tax benefit of non
recurring expenses + Tax benefit of interest expenses - Tax on non-
recurring Income)

 Capital Employed
• Net Fixed Assets + Investment +Current Assets – (NIBCLs +
Miscellaneous Expenditure not written off + Intangible Assets +
Cumulative Non-Recurring Losses + Capital Expenditure on R&D) –
Revaluation reserve – Cumulative Non-Recurring Gains.

 WACC
• (weight of equity Capital+ free reserve) + (weight of long-term Debt)
 Technical Adjustments to ROI & EVA
A survey made by Dodd & Johns identified significant
inconsistencies in the measurement of EVA. Although a
consistent philosophy has been applied, none of the
companies measure EVA the same way.

 Many adjustments have to be made in order to calculate EVA.

Alone NOPAT requires as many as 120 to 164 adjustments to
financial statements compiled in accordance with GAAP.

 According to Stern Stewart adjustment should be based on the

following criteria:
 Materiality: Adjustment should make a material
difference in EVA
 Manageability: Adjustment should impact future decision

 Definitiveness: Adjustment should be definitive &

objectively determined
 Simplicity: adjustment should not be too complex

 Due to the measurement differences, EVA is a limited tool that

cannot be used for competitive analysis.
 What Does EVA Show?

 +Ve The Company has Managed to

create Shareholder Value

 Zero This should be treated as the

Shareholders have earned a
return that compensates the risk

 -Ve The Company has destroyed

the Shareholder Value.
 Usage of EVA
 Bonus to employee
 Extra remuneration to management
 Incentive dividend to preference shareholders
 Bonus shares to equity shareholders
 Setting organization goal
 Performance measurement
 Motivation of manager
 Corporate valuation
 Communication with shareholder & Investor
 Initial experience with EVA
 A few weeks after the EVA announcement, Adi declared the half yearly
financial results of 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.

 On June 18, 2001, GCPL was listed on the BSE quoting at Rs 48.50 while
GIL traded at Rs 16. By August 2002, the share price of GCPL rose to
Rs. 120 while that of GIL remained stagnant at Rs. 20
 EVA Incentive program
Features :
 Bonuses are linked to changes in EVA and not to
absolute EVA or Profit Before Tax (PBT).  
 Bonuses paid out are budgeted for before EVA
targets are met.  
 No caps and no floors in pay-off profile.    
 Multi-year targets, de-linked from annual budgets.  
 Bonus “bank”.  
 EVA drivers and individual performance factored in
bonus distribution to the team.
Bonuses for meeting EVA expectations

 Unlimited upside
potential, but with
corresponding
downside risk

 • Bonuses are
“decoupled” from
budgets

 • Bonus banking
system
BENEFITS :

 Reinforces continuous improvement focus.  

 Greater focus on tax and balance sheet impact.   
 Cost of the scheme is funded through business
performance, therefore very shareholder friendly.
 Avoids the kinks in the pay-off profile that can
encourage undesirable behavior.
 More productive budgeting process and more
stretch thinking.
 Encourages longer-term focus.
 Smoothens impact of business cycles.
 Helps retain top performers.
 Mix of team and individual rewards.
Present Situation
 CRITICISM
 EVA is based on past accounting performance derived from
financial statements. Accounting based measures like EVA may
not be able to measure value creation. Overemphasis on EVA
may leads to its manipulation

 On the basis of survey made by Chen and others, it is found that

market may place higher reliance on audited accounting
earnings than the unaudited EVA metric.

 EVA can be biased against low return start-up investments and

can favour business with heavily depreciated assets as a result
of the adjustments made to compute EVA. EVA approach can
penalize companies that invest in assets with long term returns.

 EVA overemphasized the need to generate immediate results,

therefore it creates a disincentive for the managers to invest in
innovative product or process technologies.
 CONCLUSION
So to conclude on this case study,

 Co was able to enhance shareholder value & thereby rise in

Profitability of the co.

 EVA is a accounting based measure of Operating performance which is

the difference between accounting earnings and suitable adjustment
and the cost of capital used to generate these earnings.

 The objective of co to make all employees think like owners by an

open-ended variable remuneration scheme.

 EVA implementation helped Godrej group in segregating the entire

business into several units to see them creating EVA or not.

 EVA was the main financial parameter to measure co performance.

Used in all capital expenditure decisions including acquisitions.
Thank You !!!!