Adi Godrej (Adi), the Chairman of the Godrej group,2 announced on August 29, 2001,

that the group had successfully implemented the Economic Value Added (EVA)
framework. It took ten months for Stern Stewart & Company,3 the originator of EVA, to
implement EVA in the Godrej group.

Although EVA was a very widely accepted

framework globally, it was a new concept in
India. Only a few companies like TCS and
NIIT had adopted EVA in the country by mid-
2001. While the Godrej group adopted EVA,
industry analysts were busy debating the pros
and cons of EVA in general and for the group
in particular. A few weeks after the EVA
announcement, Adi declared the half yearly
financial results of Godrej Consumer Products
Limited (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.
Announcing the results, Adi said, "Our strong
focus on EVA has delivered rising
profitability."

EVA was considered a complex concept in India at that time. Some analysts raised
doubts as to whether Adi would be able to efficiently use EVA to increase shareholders'
value in future. Reportedly, Adi's ability was being questioned because many joint
ventures and alliances had failed previously.

Allaying all doubts, Adi said, "'I met up with

the CEOs of both TCS and NIIT, and they
advised not to complicate the exercise in the
beginning."4 He indicated that the concept
would be simplified for easy implementation
in the company. However, financial analysts
were not satisfied with Adi's statement. They
commented that EVA was not an efficient
financial tool that can deliver improved
profitability in quick time. In their opinion,
EVA was an accounting measure that could be
easily manipulated by accounting juggleries.
Analysts felt that Adi had adopted the EVA
framework only to achieve better market
 valuation of the consumer product division of
the group represented by GCPL.

Ardeshir Godrej (Ardeshir), a lawyer, founded the Godrej group in 1897. He gave up law
and started a locks manufacturing venture.

Soon, he expanded his business by

manufacturing safes and security equipments
and also ventured into toilet soaps business.

After Ardeshir, his brother Pirojsha Godrej led

the venture towards becoming a vibrant,
multi-business company. The company was
incorporated with limited liability5 in 1932,
under the Indian Companies Act, 1913. By
2003, the Godrej group had emerged as one of
the largest privately held diversified industrial
corporations in India.

GCPL came into existence after the demerger6

of the consumer products division of the
erstwhile Godrej Soaps Limited (GSL) on
April 01, 2001.

GCPL was a major player in the Indian fast-moving consumer goods (FMCG) market
with a significant presence in personal care, household, and fabric care segments (Refer
Table I).

As on March 31, 2003, GCPL had a

workforce of 950 people and had three
manufacturing facilities at Malanpur (state of
Madhya Pradesh), Guwahati (state of Assam)
and Silvassa (Union Territory). Headed by
Adi, the company had a strong management
team.

However, GCPL lacked a good distribution

network. GCPL was more urban centric and
had weak presence in the fast growing rural
market as compared to its competitors.
Hoshedar K. Press (Press), Executive Director
and President of GCPL admitted in an
interview to indiainfoline.com (May 26, 2003)
that the company was comparatively more
urban...
Why EVA?

GCPL started facing problems with the liberalization of the Indian economy in 1991.
Several leading multinational companies (MNCs) started entering the Indian FMCG
market.

Apart from globally renowned products, they

had the financial and technical muscle to
dominate the Indian FMCG market. The
problem was aggravated when the joint
venture (JV) of GSL with Procter & Gamble
(P&G) came to an end in 1996. Remembering
the bad phase, Press said, "It hadn't been
always so rosy for Godrej. There was a time
when the company was struggling to keep
pace with the changes of liberalization and the
challenges of competition." GSL faced
problems on several fronts including HR and
marketing. After the dissolution of the JV,
many capable managers left the company.
Moreover, GSL was not able to attract new
talent because most of them preferred working
in MNCs...

The Main Reason

A few analysts argued that GSL's move to adopt EVA was a well-thought plan. GSL had
two divisions - GCPL and GIL.

The GCPL division was responsible for

managing the consumer products business
while GIL managed the chemicals and food
business. Analysts opined that the product
portfolio of GSL had become very large and
unrelated ranging from soaps to detergents to
food and chemicals. The growth in the product
segments was not same. For instance, the
consumer products business was performing
better than the chemicals and food business
(Refer Table II).

GSL hired Kotak Mahindra (Kotak), a leading

financial advisory services company in India,
to decide the fate of the GIL division, which
was affecting GSL's financial performance...
The Aftermath

One month before the demerger, the shares of GSL were trading at Rs 65 on the Bombay
Stock Exchange (BSE). Soon after the demerger, both the companies witnessed distinct
financial and stock market performances.

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 (Refer Exhibit I).
Analysts said that this vast difference in share
prices showed investors' perceived value of
the two companies.

GCPL was outperforming GIL not only on the

stock exchanges but also reporting better
financial performance (Refer Table IV). With
the significant rise in share prices of GCPL,
the shareholders of the company were
delighted. As GSL was a closely held
company, the biggest shareholders were the
promoters themselves...

How Effective is EVA?

EVA, an income measure, was calculated by subtracting the cost of capital from post tax
operating profit (NOPAT) generated by a company.

EVA measured whether the post tax operating

profit of a company was enough to cover its
cost of capital.

Unlike the traditional methods of accounting

profit, where only cost of debt was deducted,
EVA took into account the cost of equity also.
Therefore, EVA tried to capture the true
economic profit of an enterprise. EVA was
more directly linked to the creation of
shareholder wealth over time.

It could be calculated as net operating profit

minus an appropriate charge for the
opportunity cost of all capital invested in an
enterprise...
Exhibits

Exhibit I: GCPL and GSL - Stock Price Chart

Exhibit II: Profit & Loss Account of GCPL
Exhibit III: Profit & Loss Account of GIL
Exhibit IV: ICRA - SVG Rating
Exhibit V: Calculation of EVA in GCPL
Exhibit VI: The Capital Asset Pricing Model
Exhibit VII: Approaches to Calculate the Capital Employed