ECONOMIC VALUE ADDED
ADDITIONAL INFORMATION : ECONOMIC VALUE ADDED (EVA)
What is EVA ?
Traditional approaches to measuring Shareholder’s Value
Creation’ have used parameters such as earnings capitalisation,
market capitalisation and present value of estimated future cash
flows. Extensive equity research has established that it is not
earnings per se, but VALUE that is important. A measure called
‘Economic Value Added’ (EVA) is increasingly being applied to
understand and evaluate financial performance
*EVA = Net Operating Profit after Taxes (NOPAT) - Cost of
Capital Employed (COCE), where,
NOPAT = Profits after depreciation and taxes but before interest
costs. NOPAT thus represents the total pool of profits available
on an ungeared basis to provide a return to lenders and
shareholders, and
COCE = Weighted Average Cost of Capital (WACC) x Average
Capital Employed
*Cost of debt is taken at the effective rate of interest applicable
to an “AAA” rated Company like HUL for a short term debt, net
of taxes. We have considered a pre tax rate of 8.42% for 2014-15
(9.63% for 2013-14)
*Cost of Equity is the return expected by the investors to
compensate them for the variability in returns caused by
fluctuating earnings and share prices.
88 Standalone
Cost of Equity = Risk free return equivalent to yield on long term
Government Bonds (taken at 7.74% for 2014-15)
+
Market risk premium (taken at 4.42%) (x) Beta variant for the
Company, (taken at 0.719) where Beta is a relative measure of
risk associated with the Company’s shares as against the market
as a whole.
Thus HUL’s cost of equity = 7.74% + 4.42% (x) 0.719 = 10.91%
What does EVA show?
EVA is residual income after charging the Company for the cost
of capital provided by lenders and shareholders.It represents the
value added to the shareholders by generating operating profits
in excess of the cost of capital employed in the business.
When will EVA increase?
EVA will increase if:
a. Operating profits can be made to grow without employing
more capital, i.e. greater efficiency.
b. Additional capital’s invested in projects that return more
than the cost of obtaining new capital, I.e. profitable growth.
c. Capital is curtailed in activities that do not cover the cost of
capital, i.e liquidate unproductive capital
EVA in practice at Hindustan Unilever Limited.
In Hindustan Unilever Limited, the goal of sustainable long term
value creation for our shareholders is well understood by all the
business groups. Measures to evaluate business performance
and to set targets take into account this concept of value creation.
Hindustan Unilever Limited
 Overview Reports Financial Statements Shareholder Information

ECONOMIC VALUE ADDED (Contd.)

EVA Trends:2005-2015 (Unaudited) (Rs. crores)

Particulars 2005 2006 2007 2008-09 2009-10 2010-11 2011-12 2012-13 2013-14 2014-15
(15 months)
Cost of Capital Employed (COCE)  
1 Average Debt 360 163 382 342 119 2 0 0 0 0
2 Average Equity 2,200 2,515 2,402 1,928 2,497 3,118 3,462 4,018 3,715 4,338
3 Average Capital Employed : (1) + (2) 2,560 2,678 2,784 2,270 2,616 3,120 3,462 4,018 3,715 4,338
4 Cost of Debt, post-tax % 3.38 5.90 6.24 3.91 3.95 5.36 6.20 6.02 6.36 5.56
5 Cost of Equity % 15.50 16.38 17.59 14.47 12.51 12.93 10.10 10.07 11.62 10.91
6 Weighted Average Cost of Capital % (WACC) 13.80 15.74 16.03 12.88 12.12 12.92 10.10 10.07 11.62 10.91
7 COCE : (3) x (6) 353 421 446 365 317 403 350 405 432 474
Economic Value Added (EVA)
8 Profit after tax, before exceptional items 1,355 1,540 1,743 2,501 2,103 2,153 2,599 3,314 3,555 3,843
9 Add : Interest, after taxes 12 7 17 17 5 0 1 17 24 11
10 Net Operating Profits After Taxes (NOPAT) 1,367 1,547 1,760 2,518 2,108 2,153 2,600 3,331 3,579 3,854
11 COCE, as per (7) above 353 421 446 365 317 403 350 405 432 474
12 EVA : (10) - (11) 1,014 1,126 1,314 2,154 1,791 1,750 2,250 2,926 3,147 3,380

Economic Value Added (EVA) (Rs. crores)

3600

3200

2800

2400

2000

1600

1200

800

400

0
2005

2006

2007

2008-09

2009-10

2010-11

2011-12

2012-13

2013-14

2014-15

Annual Report 2014-15 Standalone 89