Shareholder Value Creation in Steel Industry ( an Emperical Study)
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Shareholder Value Creation in Steel Industry (An empirical Study) Submitted in partial fulfillment of the requirements for Master in Management Studies(MMS)
AFTAB SHAIKH (MMS) Roll No. 06. Batch: Year 2008 2010H K Institute of Management Studies and Research, Jogeshwari, Mumbai 400102MAY 2009 - JUNE 20091
I hereby declare that this report submitted in partial fulfillment of the requirement of the award for the Master in Management Studies to H K Institute of Management Studies and Research is my original work and not submitted for award of any degree or diploma fellowship or for similar titles or prizes.
I further certify that I have no objection and grant the rights to H K Institute of Management Studies and Research to publish any chapter/ project if they deem fit in Journals/Magazines and newspapers etc. without my permission.
: (MMS Sem. IV) : 20th Feb 2010
Name : Aftab Shaikh Place : Mumbai Roll No. : 06
This is to certify that the dissertation submitted in partial fulfillment for the award of Master of Management Studies of H K Institute of Management Studies and Research is a result of the bonafide research work carried out by Mr. Aftab Mehboob Shaikh under my supervision and guidance, no part of this report has been submitted for award of any other degree, diploma, fellowship or other similar titles or prizes. The work has also not been published in any Journals/Magazines.
Project guide :
Dr. P.K Bandgar Core Faculty HKIMSR
Place: Mumbai Prof. Krishna C. Pandey Director
It is difficult to acknowledge precious a debt as that of learning as it is the only debt that is difficult to repay except through gratitude. First and foremost I wish to express my profound gratitude to the almighty Allah and his prophet Mohummed Sallah ale wa salam, (Allah) the merciful & compassionate with those grace & blessings. I have been able to complete this work. It is my profound privilege to express my sincere thanks to K C Pandey, Director HKIMSR, for giving me an opportunity to work on the project and giving me full support in completing this project. I am very thankful to my guide P.K Bandkar for his full support. Last but not least, I would like to thank my parents & my friends for their full cooperation & continuous support during the course of this assignment.
Table of ContentsPage No. CHAPTER 1 : 1.1 Executive Summary 01
: 2.1.1 Introduction to Shareholder Value Creation (EVA & MVA) : 2.1.2 Introduction to the Indian Steel Industry : 2.1.3 Literature Review : 2.1.4 Defining the problem
18 34 35
: 2.2 2.2 : 2.3
Objectives Methodology Limitations of the Report
36 34 37
Analysis & Findings
: 4.1 : 4.2
1.1 EXECUTIVE SUMMARYMeasures using common bases are Net Profit Margin, Operating Profit Margin, (EPS) etc. Among these, again ROI is recognized as the most popular yardstick of overall performance. But it is often argued that, in general, these traditional measures fail to identify the true surplus. Economic Value Added (EVA) is advocated as a new traditionally used profit based indicators. Traditional measures of corporate performance are many in number.
Return on Investment (ROI), Return on Net Worth (RONW), Earning Per Share
measure of corporate performance that focuses on clear surplus in contrast to the For evaluation of the efficiency of any decision, value creation or value
addition aspect is of utmost importance in the present backdrop of corporate governance. Although adopting a holistic approach safeguarding the interests of all stakeholders is being emphasized and rightly so, it should be kept in mind that value corporate policy guidelines. If that is not satisfied, wrong signals will be emitted from
creation or value addition aspect is of prime consideration in the assessment of the securities market and the continuance of the operations of the entity will be at stake. In view of the above considerations, in the present paper an attempt has been made to analyze the financial performance of ten India steel companies by using E VA and MVA. The Study is based on secondary data and covers the period of 5 years ranging from 2005-2009. A sample of 10 steel and allied companies selected on random basis among the top steel companies. To analyze the data EVA and MVA linkages between EVA and MVA From the analysis it is seen out of five years MVA technique has been used. Further regression Analysis has been used to study and EVA were negative maximum wealth was destroyed in year 2009 which was due recession all over the world which crashed the market more than 50%.6
to decrease in price and demand of steel globally as well as there was deep
CHAPTER: 2 2.1 Introduction 2.1.1 INTRODUCTION TO SHARE HOLDERS VALUE CREATION
SHAREHOLDER VALUE CREATION: AN OVERVIEWCreating shareholder value is the key to success in today's marketplace. There is increasing pressure on corporate executives to measure, manage and report the creation of shareholder value on a regular basis. In the emerging field of shareholder value analysis, various measures have been developed that claim to quantify the creation of shareholder value and wealth. More than ever, corporate executives are under increasing pressure to demonstrate on a regular basis that they are creating shareholder value. This pressure has led to an emergence of a variety of measures that claim to quantify value-creating performance. Creating value for shareholders is now a widely accepted corporate objective. The interest in value creation has been stimulated by several developments. * Capital markets are becoming increasingly global. Investors can readily shift investments to higher yielding, often foreign, opportunities. * Institutional investors, which traditionally were passive investors, have begun exerting influence on corporate managements to create value for shareholders. * Corporate governance is shifting, with owners now demanding7
accountability from corporate executives. Manifestations of the increased assertiveness of shareholders include the necessity for executives to justify their compensation levels, and well-publicized lists of under performing companies and overpaid executives. * Business press is emphasizing shareholder value creation in performance rating exercises. * Greater attention is being paid to link top management compensation to shareholder returns. Defining Shareholder Value, and Wealth Creation From the economist's viewpoint, value is created when management generates revenues over and above the economic costs to generate these revenues. Costs come from four sources: employee wages and benefits; material, supplies, and economic depreciation of physical assets; taxes; and the opportunity cost of using the capital. Under this value-based view, value is only created when revenues exceed all costs including a capital charge. This value accrues mostly to shareholders because they are the residual owners of the firm. Shareholders expect management to generate value over and above the costs of resources consumed, including the cost of using capital. If suppliers of capital do not receive a fair return to compensate them for the risk they are taking, they will withdraw their capital in search of better returns, since value will be lost. A company that is destroying value will always struggle to attract further capital to finance expansion since it will be hamstrung by a share price that stands at a discount to the underlying value of its assets and by higher interest rates on debt or bank loans demanded by creditors. Wealth creation refers to changes in the wealth of shareholders on a periodic (annual) basis. Applicable to exchange-listed firms, changes in shareholder wealth are inferred mostly from changes in stock prices, dividends paid, and equity raised during the period. Since stock prices reflect investor expectations about future cash flows, creating wealth for shareholders requires that the firm undertake investment decisions that have a positive net present value (NPV).8
Although used interchangeably, there is a subtle difference between value creation and wealth creation. The value perspective is based on measuring value directly from accounting-based information with some adjustments, while the wealth perspective relies mainly on stock market information. For a publicly traded firm these two concepts are identical when (i) management provides all pertinent information to capital markets, and (ii) the markets believe and have confidence in management.
Approaches for measuring shareholder value: 1. Marakon Approach:Marakan Associates, an international management-consulting firm founded in1978, has done pioneering work in the area of value-based management. This measure considers the difference between the ROE and required return on equity (cost of equity) as the source of value creation. This measure is a variation of the EV measures. Instead of using capital as the entire base and the cost of capital for calculating the capital charge, this measure uses equity capital and the cost of equity to calculate the capital (equity) charge. Correspondingly, it uses economic value to equity holders (net of interest charges) rather than total firm value. According to Marakan model shareholder wealth creation is measured as the difference between the market value3 and the book value of a firm's equity. Thee book value