International Journal of Advanced Scientific Research and Management, Vol. 1 Issue 10, Oct 2016.

www.ijasrm.com
ISSN 2455-6378

Measuring Shareholders’ Value in Indian

Pharmaceutical Companies’: Economic Value
Added (EVA) Approach
Merugu Venugopal1 and Dr. M Ravindar Reddy2
1
School of Management, National Institute of Technology,
Warangal, India
2
School of Management, National Institute of Technology,
Warangal, India

Abstract severe competition, propelled innovation, changes in

For many years Shareholder value creation or the capital markets, and so on. These have made the
shareholder wealth maximization have turned into organizations to deliver superior performance and
the corporate objective. Measuring the performance shareholder wealth maximization as their top priority
and value creation is an essential part of any to be competitive enough in the current arena.
organization and this enables the organization in Thereby creating shareholder value or maximizing
forming strategies in achieving the corporate shareholder value turned into an extreme objective of
objective. The Economic Value added (EVA) the manager. Organizations which have adopted
developed by Stern Steward Co., has been broadly shareholder wealth maximization are had a tendency
acknowledged and used by all levels of corporates to outflank others. When an organization generates
across the globe for measuring and evaluating the income over and above costs incurred to generate
firm’s performance and shareholder value. The this income then one can say the firm has created a
present study examined the shareholder’s value value for its shareholders.
creation in Indian pharmaceutical companies as
measured by EVA. The Wealth creators and To measure the real value created by the firm various
destroyers have been identified in the Pharmaceutical value-based performance measures such as economic
sector during the study period 2007-15. The Highest value added (EVA), market value added (MVA),
Average EVA generated by the Piramal Enterprises cash flow return on investment (CFROI), cash value
Ltd during the study period is 1020.84 cr. The study added (CVA), economic profit (EP), Shareholder
shows that 39 firms out of 77 were wealth creators. value added (SVA), etc. have been developed over a
Finally, the conclusion is made that the companies period of time by various consulting (Bhasin &
with positive EVA will be able to attract investors in Shaikh, 2013). EVA is the measure of performance,
the future. Whereas negative EVA firms are not able enabling investors to identify investment
to earn a return that is at least sufficient to cover up opportunities and helps the managers in efficient
its overall cost of capital employed. EVA based decision making in the process of value creation.
performance framework not only provides the For many years, several academicians, research and
financial performance, it helps the management in consulting firms engaged in the field of accounting
strategic decision making in enhancing shareholder and finance have been giving careful consideration to
value. the advanced performance measures and conceding
Keywords: Shareholders value creation, EVA, the confinements of conventional accounting
Performance indicators measures of performance such as ROA, ROE, EPS,
ROCE, RONW and earnings growth . EVA is the
1. Introduction financial performance measure that comes closer
Since a decade, organizations in the emerging than any other measure in capturing the true
economies are confronting new difficulties like economic profits of an enterprise and EVA concept
as a legitimate tool of corporate financial
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 International Journal of Advanced Scientific Research and Management, Vol. 1 Issue 10, Oct 2016.
www.ijasrm.com
ISSN 2455-6378

performance measurement (Bhasin & Shaikh, 2013) has followed to implement EVA (Sangameshwaran,
(Weissenrieder, 1997). Estimation of shareholders 2002). Similarly, Hindustan Unilever limited
wealth is one of the difficult challenges faced by the incorporated EVA (Dhamija, 2008). Companies in
analysts and researchers (Bhanawat & Chundawat, automobile industry which have been adopted EVA
2012). have a positive trend to improve their firm values
It is evident that the researchers have given much (Selvi & Vijayakumar, 2015). EVA allows a firm to
significance to EVA while measuring performance, identify whether the income is exceeded the cost of
or value creation of any organization. Presently, the that capital for a given period. If the cost of capital
business world is moving towards greater exceeds the income, one can conclude that the firm
transparency and superior corporate governance goal is towards the creation of shareholder value or
mechanism. Thus, shareholder value creation aspect shareholder wealth maximization. As the value of
is of utmost importance in the present scenario of shareholder maximizes, investors buy more shares in
corporate performance and management. Therefore, order to have more claims on its increased value,
one cannot preclude the present necessity of an thereby the share price eventually maximizes
exclusive study in this field. (Bhasin & Shaikh, 2013). On the other side, most of
The present study aims to examine whether the the companies in India still not incorporated the
companies in Indian pharmaceutical industry has EVA as a financial performance due to the
been able to generate value for its shareholders over computational issues of EVA (Selvi & Vijayakumar,
a period of 2007 to 15. 2015).

2. Literature review Various studies have examined the relationship

between EVA and market value in the Indian
In the present era of the the competitive world, the companies and whether EVA is a better measure
over the traditional accounting measures such as
organization goals have been changed from
EPS, ROA, ROE, ROCE, RONW, etc. various
profitability to shareholder value creation and studies showed that EVA is a better predictor of
companies are facing new challenges like volatility shareholder value over traditional accounting
in financial markets technological development and measures . And accounting measures are misleading
much more. These several changes have increased the shareholders over the performance of the firm
the burden on managers and redefined the role of (Irala, 2007; Misra & Kanwal, 2007). EVA has more
relevant and incremental information content than
managers to improve performance and deliver value
accounting measures (Selvi & Vijayakumar, 2015).
to their shareholders (Bhasin & Shaikh, 2013). To One recent advancement in the field of performance
meets the ultimate goal of the organization new and value creation measurement is a variation of
concept of value-based management is evolving and residual income known as economic value added
which better reflects investment opportunities. (EVA) (Burksaitiene, 2009). The empirical literature
Economic value added (EVA) is one of the concepts shows that earnings ought not to depended on when
of value-based management (Garvey & Milbourn, measuring the financial strength of a company and
value addition to its shareholders. Various studies
2000).
have examined the data substance of different
estimates as a result of the constraints in earnings
Economic Value added is developed by Stern figures. There are various issues in accepting the
Stewart & co. That emphasizes on the economic conventional accounting measures reflect the
profits and values being created or destroyed by a ultimate performance of the firm. One of the issues is
company over a period of time (Kaur & Narang, that cost of capital not taking into consideration.
2009). Till today various empirical studies have been From the review of the literature, it is evident that the
conducted to test EVA is a better performance academicians, researcher and consulting firms have
measure than traditional accounting measures. given much importance to EVA while measuring
However, the results are mixed. Some studies report performance, or value creation of any organization
that EVA adds value to shareholders when compared over traditional accounting measures. So this study
to traditional accounting (Lefkowitz, 1999; Lehn & aims to identify the trends in the shareholder value
Makhija, 1997; O’Byrne, 1996; Worthington & creation in the Indian pharmaceutical industry using
West, 2004; Maditinos & Row, 2006). the EVA.
Indian companies started following disclosure
practices of value based measures (EVA) in its Objectives of the study
reports(Kaur & Narang, 2010). India’s leading 1. To determine shareholder value creation as
software giant ‘Tata Consultancy Services’ (TCS), measured by EVA

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 International Journal of Advanced Scientific Research and Management, Vol. 1 Issue 10, Oct 2016.
www.ijasrm.com
ISSN 2455-6378

2. Identify the trends in the value creation and to being created or destroyed by the sample as a whole.
compare the company wise shareholder value Table 1 also shows Average EVA based ranking of
creation. sample companies over the study period. From the
table 1, on an average 39 out of the 77 companies
3. Methodology have reported a positive EVA. This shows 39
companies created value for its shareholders during
A sample of 77 companies in Indian pharmaceutical the entire study period. Whereas, the remaining 38
industry was selected, which are listed in the BSE - companies destroyed value of its shareholders. The
SENSEX. For the purpose of the present research, companies with negative EVA are not able to meet
secondary data and covers a period of 9 years, its cost of capital. More interestingly one company
ranging from 2007 to 2015 and all the financial has shown EVA value as zero. This shows the
information required for the study was collected company has earned a return that is at least sufficient
from the Capitaline Plus database. to cover up its overall cost of capital employed.

Calculation of EVA: 14000.00

12000.00
EVA is a measure of firm’s financial performance
based on the residual income concept. It is calculated 10000.00
as net operating profit after tax minus total cost of 8000.00
capital or capital charge (Kaur & Narang, 2009)
EVA (IN CR)

(Selvi & Vijayakumar, 2015). 6000.00

4000.00
EVA = NOPAT - (WACC*Capital Employed)
Where, EVA = Economic Value Added, NOPAT = 2000.00
Net Operating Profit after Tax (NOPAT = Operating 0.00
Profit – Tax), WACC = Weighted Average Cost of

10-Mar
11-Mar
12-Mar
13-Mar
14-Mar
15-Mar
7-Mar
8-Mar

-2000.00 9-Mar
Capital.
-4000.00
Calculation of Weighted Average Cost of Capital YEAR
(WACC)
Piramal Enterprises Ltd
WACC = +
= Cost of equity, = Cost of debt Lupin Ltd
Calculation of Cost of equity by the CAPM Dr Reddys Laboratories Ltd
(Capital Asset Pricing Model)
Cadila Healthcare Ltd
) Cipla Ltd
= Risk free rate, = Volatility of the stock with
Figure 1 : EVA of Top - Five Wealth Creators, 2007 – 15
respect to the market, = Market return
The EVA trends of top five wealth creators Piramal
4. Analysis and Interpretation Enterprises Ltd, Lupin Ltd, Dr. Reddy s laboratories
Ltd, Cadila healthcare Ltd and Cipla, Ltd for the 9
The EVA of a company has been computed by year period covering 2007 to 2015 are shown in
deducting the overall cost of capital employed from figure 1. Except Piramal enterprises Ltd all have
its NOPAT. If the profits are more than its overall shown positive EVA during the study period with
cost of capital employed, the company said to be fewer fluctuations. During the 2011 period Piramal
successful in creating shareholder wealth. On the enterprise Ltd shown highest EVA value 12,725.64
other side, if the profits are less than its overall cost Cr. The positive EVA value in the sample indicates
of capital employed, the company said to be that these companies are not only thinking about
unsuccessful in creating shareholder wealth or it can profit maximization but also focusing on the
be called as wealth destroyer i.e., the EVA values are objective of shareholder wealth maximization. And
in negative. the companies with positive EVA will attract more
investors in the near future.
The average EVA values by the sample as a whole
during the entire study period are shown in table 1.
Further, it also signals the years where EVA was

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 International Journal of Advanced Scientific Research and Management, Vol. 1 Issue 10, Oct 2016.
www.ijasrm.com
ISSN 2455-6378

Table 1: Average EVA Values

7- 8- 9- 10- 11- 12- 13- 14- 15- Avera Ran
Company Name
Mar Mar Mar Mar Mar Mar Mar Mar Mar ge k
Aarey Drugs & Pharmaceuticals Ltd 0.89 -0.18 0.03 -0.10 -0.59 -1.60 -3.62 -2.48 -3.61 -1.25 52

Aarti Drugs Ltd 6.59 2.50 6.75 16.67 7.96 15.70 34.31 46.35 51.06 20.88 17

Advik Laboratories Ltd -1.88 -1.37 -1.29 -1.17 -1.34 -0.61 -0.41 -0.82 -3.00 -1.32 53

AhlconParenterals (India) Ltd 4.96 3.21 -0.86 2.93 1.41 0.21 10.13 15.11 13.54 5.63 25

Albert David Ltd 8.34 3.82 2.52 4.04 -4.56 2.90 -2.76 6.40 -5.43 1.70 31
-
Alembic Ltd 41.79 72.14 -7.90 -90.90 -33.08 -20.13 2.23 -43.30 -10.43 67
14.68
- -
Ambalal Sarabhai Enterprises Ltd 1.43 -4.97 -1.34 -11.68 -21.92 -21.14 -7.91 -13.25 69
36.20 15.49
Amrutanjan Health Care Ltd 3.17 1.71 89.47 2.53 -2.93 -3.29 -1.35 0.45 -3.03 9.64 21

AnuhPharma Ltd 3.21 4.23 4.48 8.07 5.74 4.04 5.20 9.93 12.10 6.33 23
-
Arvind Remedies Ltd 2.96 1.15 3.38 10.78 15.55 25.37 59.66 67.63 -12.07 68
295.12
Auro Laboratories Ltd -0.24 -0.16 -0.12 0.02 0.32 0.33 0.86 0.45 0.59 0.23 38
162.4 132.3 295.4 -
AurobindoPharma Ltd -2.50 270.09 31.82 815.13 986.97 256.23 8
3 5 2 385.67
BalPharma Ltd -1.08 0.22 1.31 -1.23 0.65 2.37 1.76 5.13 -0.54 0.95 34

BDH Industries Ltd -1.86 -1.87 -1.44 -0.94 -1.90 -1.76 0.04 0.65 0.17 -0.99 51
Bharat Immunological & Biological -
-8.73 -7.89 -6.79 -7.97 10.62 1.30 1.68 -9.04 -4.40 60
Corporation Ltd 12.81
103.0 162.9 183.0 367.3
Cadila Healthcare Ltd 442.65 521.90 319.29 606.62 804.33 390.14 4
6 9 5 8
297.4 332.2 363.5 442.1 -
Cipla Ltd 267.75 243.19 614.31 279.89 291.95 5
1 8 4 3 212.93
Coral Laboratories Ltd 4.27 0.50 0.70 1.81 -1.52 1.69 3.11 5.10 3.55 2.13 28

DIL Ltd -6.02 -5.79 -4.58 -1.40 8.39 3.36 -7.90 -4.26 -11.03 -3.25 58
Dishman Pharmaceuticals and Chemicals
26.85 10.91 49.05 13.26 -18.13 -50.34 -37.77 -31.26 -44.18 -9.07 65
Ltd
122.5 241.0 290.1 168.4
Divis Laboratories Ltd 226.22 311.61 313.89 470.08 466.35 290.04 6
8 8 4 1
758.7 - 239.5
DrReddys Laboratories Ltd 29.74 237.44 135.51 613.15 958.87 621.56 394.49 3
1 44.16 7
105.2
FDC Ltd 20.69 25.76 35.20 73.69 71.90 82.93 45.06 37.34 55.32 11
9
Gennex Laboratories Ltd -1.24 -1.47 -2.12 -3.61 -2.84 -2.64 -2.33 -0.70 -1.81 -2.08 56
-
259.1 148.9
Glenmark Pharmaceuticals Ltd 92.96 101.1 19.60 -9.13 197.36 123.55 700.23 159.05 9
4 1
7
Godavari Drugs Ltd -0.48 -1.88 -1.09 -0.97 -1.19 -2.32 0.20 1.29 3.45 -0.33 43

GuficBioSciences Ltd -1.49 -1.06 -0.59 -0.10 -0.19 0.50 3.53 3.75 -0.61 0.42 37

Gujarat Terce Laboratories Ltd -0.09 -0.09 -0.29 -0.28 -0.18 -0.54 -0.73 -0.55 -0.79 -0.39 44
-
Gujarat Themis Biosyn Ltd -0.40 -2.23 -0.09 -3.29 3.20 -0.93 5.31 4.87 -0.56 46
11.46
Hikal Ltd 6.08 35.37 47.93 26.50 11.68 39.48 4.55 55.01 2.00 25.40 16
- - -
Ind-Swift Laboratories Ltd -6.20 -0.53 24.18 37.04 6.28 8.56 -70.65 75
182.68 212.49 310.03
- - -
Ind-Swift Ltd 11.32 21.31 20.32 25.49 16.94 -10.38 -28.91 71
111.38 105.57 128.26
104.4 126.0
Ipca Laboratories Ltd 83.27 48.34 162.12 171.76 207.21 327.60 76.86 145.29 10
3 5
Ishita Drugs & Industries Ltd -0.05 0.06 0.12 0.12 -0.13 -0.18 0.19 -0.17 -0.46 -0.05 41

J B Chemicals & Pharmaceuticals Ltd 36.58 -6.34 9.96 25.67 -11.35 559.42 -37.64 -55.66 -39.27 53.49 12

Jagsonpal Pharmaceuticals Ltd -3.32 -3.45 -1.06 0.64 -3.56 -4.33 -8.06 -3.85 -15.54 -4.72 62
160.8 254.8 271.8 - - -
Jubilant Life Sciences Ltd 55.68 78.66 -39.92 14.94 20
9 1 3 292.98 188.99 165.48

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 International Journal of Advanced Scientific Research and Management, Vol. 1 Issue 10, Oct 2016.
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ISSN 2455-6378

Kilitch Drugs (India) Ltd 0.61 12.22 4.94 3.20 -0.72 61.47 -12.75 -12.18 -21.21 3.95 26
- - -
Kopran Ltd -1.49 -11.84 -11.24 -9.04 6.30 -29.72 -18.08 70
67.06 13.13 25.51
Lincoln Pharmaceuticals Ltd -1.50 1.44 1.05 3.85 -0.84 -0.75 2.98 2.52 2.14 1.21 33
190.4 323.3 261.9 486.9 1683.6 1516.8
Lupin Ltd 448.29 451.59 859.30 691.38 2
3 3 6 4 8 7
Mangalam Drugs and Organics Ltd -2.42 -2.91 -0.17 -0.60 -1.01 0.37 -10.80 -1.92 5.16 -1.59 55
- - - -
MarksansPharma Ltd -2.44 -342.48 60.35 43.43 21.70 -44.08 73
11.48 15.91 17.31 132.63
Medi Caps Ltd 3.64 8.70 -3.13 -3.80 -5.91 -5.12 -2.94 -5.13 -10.23 -2.66 57

Medicamen Biotech Ltd 0.98 0.70 0.13 3.47 0.84 -2.43 -5.79 0.33 -0.17 -0.21 42
- -
- -
Morepen Laboratories Ltd 221.7 106.3 -103.96 -78.43 -68.47 -42.23 -61.02 -92.84 76
88.31 65.14
4 0
NatcoPharma Ltd 13.09 16.44 20.50 9.44 12.95 26.88 30.13 46.27 69.02 27.19 15

Natural Capsules Ltd 0.91 0.84 2.56 2.40 1.63 1.93 3.64 0.90 1.74 1.84 29
-
Nectar Lifescience Ltd 46.36 56.25 43.00 22.81 37.11 16.89 4.91 -50.18 5.83 24
124.70
Neuland Laboratories Ltd 5.17 10.13 12.87 -4.79 2.60 1.88 12.28 16.47 1.99 6.51 22

NGL Fine Chem Ltd 0.73 -1.00 1.30 1.71 0.48 0.01 1.53 3.24 5.49 1.50 32

Novartis India Ltd 45.74 50.18 60.44 68.18 88.67 67.23 25.61 -20.11 -71.78 34.91 14
- - -
Parabolic Drugs Ltd 15.31 34.75 34.99 47.74 32.85 27.86 -48.01 74
167.32 126.27 332.01
-
Parenteral Drugs (India) Ltd 3.29 15.78 -1.21 -7.59 -35.11 -91.36 -64.78 -53.63 -39.68 72
122.46
- - -
200.2 280.4 306.6 12725. - 1020.8
Piramal Enterprises Ltd 60.72 1136.4 1118.7 1382.4 1
1 1 8 64 748.46 4
4 3 7
Roopa Industries Ltd -0.82 -0.38 -0.33 -0.20 -0.08 0.19 -0.45 -2.18 -0.01 -0.47 45

SamratPharmachem Ltd -0.19 0.55 -0.90 0.71 0.21 3.31 -0.99 -0.58 -1.23 0.10 39

Sandu Pharmaceuticals Ltd -0.27 -0.39 -0.47 -0.64 -1.15 -1.10 -0.24 -0.83 -1.61 -0.74 50

SanjivaniParanteral Ltd 0.42 1.69 2.37 2.21 -0.29 2.15 1.21 0.29 -5.90 0.46 36
-
Sequent Scientific Ltd 3.98 -0.25 0.66 30.38 4.29 1.84 -62.87 44.64 -9.62 66
109.22
Shilpa Medicare Ltd 3.52 8.16 3.22 32.39 27.70 4.43 16.49 37.82 27.30 17.89 18
Source Natural Foods & Herbal
-2.64 -0.16 -0.13 -1.00 -1.60 -0.85 0.17 -0.19 -0.25 -0.74 49
Supplements Ltd
- -
300.4 605.3 826.3 325.2 - -
Sun Pharmaceuticals Industries Ltd 618.99 823.49 3509.3 2123.5 77
6 7 1 8 458.50 287.95
9 8
Sunil Healthcare Ltd 1.87 1.26 0.16 0.18 0.41 1.83 1.52 -1.25 2.25 0.91 35

Syncom Formulations (India) Ltd -1.25 -0.73 -1.85 -1.45 -7.57 -6.94 -3.11 -4.11 -6.97 -3.77 59
-
Themis Medicare Ltd -1.42 6.91 14.75 2.02 -37.09 -8.77 0.37 -3.58 -4.47 61
13.42
100.6 130.4 137.2
Torrent Pharmaceuticals Ltd 57.56 206.33 211.50 439.52 636.66 493.29 268.13 7
4 6 4
Transchem Ltd -3.35 -1.75 -6.31 -7.45 -8.05 -5.26 -5.61 -3.28 -3.77 -4.98 63

TTK Healthcare Ltd -1.04 7.67 3.02 5.76 6.70 4.95 2.35 0.33 2.98 3.64 27

Unichem Laboratories Ltd 52.15 35.11 73.25 68.22 32.43 15.02 22.94 80.01 -51.47 36.41 13

Unjha Formulations Ltd -0.55 -0.18 0.22 -0.03 0.13 0.01 0.09 0.11 0.17 0.00 40

Veerhealth Care Ltd -0.61 -0.55 -0.56 -0.19 -1.56 -0.16 -0.21 -1.33 -1.05 -0.69 48

Venus Remedies Ltd 26.03 31.83 36.88 27.24 30.68 18.75 32.72 -5.23 -42.70 17.36 19

Vikram Thermo (India) Ltd 0.47 1.11 0.74 1.09 1.50 4.18 3.05 3.30 -0.11 1.70 30

Vista Pharmaceuticals Ltd -1.76 -1.66 -1.87 -2.18 -1.24 -3.20 -0.97 -0.06 1.06 -1.32 54

Wintac Ltd -2.07 -3.16 -3.00 0.40 -0.53 -7.47 -19.11 -9.79 -9.51 -6.03 64

Zenith Health Care Ltd -0.67 -0.40 -0.54 -0.34 -0.70 -1.03 -0.60 -0.89 -0.96 -0.68 47

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 International Journal of Advanced Scientific Research and Management, Vol. 1 Issue 10, Oct 2016.
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ISSN 2455-6378

1500.00
be able to attract investors in the future. Whereas
negative EVA firms are not able to earn a return that
1000.00 is at least sufficient to cover up its overall cost of
500.00 capital employed. EVA based performance
framework not only provides the financial
0.00
performance, it helps the management in strategic
7-Mar
8-Mar
9-Mar
10-Mar
11-Mar
12-Mar
13-Mar
14-Mar
15-Mar
-500.00 decision making and enhancing shareholder value.
EVA (IN CR)

-1000.00
-1500.00
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 International Journal of Advanced Scientific Research and Management, Vol. 1 Issue 10, Oct 2016.
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ISSN 2455-6378

Business School Technological Educational

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