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International Journal of Management and Social Sciences Research (IJMSSR) ISSN: 2319-4421 Volume 2, No. 5, May 2013

i-Xplore International Research Journal Consortium www.irjcjournals.org

Economic Value Added in Infosys Limited

Dr. (Mrs.) Asha Sharma, Assistant Professor, Department of Commerce , Mahila P G Mahavidhalaya, Jai Narain Vyas

University, Jodhpur

ABSTRACT

To create value for shareholder is demand of today’s

scenario. It is focused in most of the Indian industries. For

measuring shareholder value economic value-based

models is adopted. It helps to align managerial decision-

making with the firm preferences. Economic Value- Added

is a technique to measure wealth created for share

holders. EVA is the surplus generated by an entity after

meeting an equitable charge towards providers of capital.

It is the post-tax return on capital employed (adjusted for

the tax-shield on debt) less than the capital employed.

Companies which earn higher returns than cost of capital

are creating shareholder’s value. This technique to

measure performance of a company is far better than that

of PAT, EPS, ROA. The present paper examines the value

creation strategy of Infosys by analyzing whether the EVA

better represents the market value of company in

comparison to conventional performance measures. In this

regards, EVA and the conventional measures of corporate

performance such as PAT, EPS, ROA and Operating profit

are analyzed.

Keywords Value Added, Economic value added, growth and

profitability, Conventional Performance Measures, Share

holder value creation

INTRODUCTION

Economic value Added is an after-tax profit that exceeds

the cost of capital or required minimum return on capital.

It is computed by deducting the cost of capital from the

after-tax profit. It is the best measure of the true

profitability of an enterprise. EVA is popularized by and

registered trademark of the US firm, Stern Stewart &

Company.

Prominent US corporations such as IBM, Coca- Cola,

Procter & Gamble, Johnson & Johnson, Microsoft,

General Electric, Eli Lilly, Monsanto, Bausch & Lomb,

AT & T and Indian companies such as Infosys, BPL, HLL,

NIIT, TCS, Godrej Soaps, Ranbaxy laboratories, Samtel

India Ltd have adopted EVA. Infosys Technologies is the

first Indian company to report its EVA.

The EVA framework developed by Stern Stewart &

Company is gradually replacing the traditional measures

of financial performance on account of its robustness and

its immunity from creative accounting. It is an estimate of

a firm's economic profit. It measures the value addition to

an organization. EVA is the profit earned by the firm less

the cost of financing the firm's capital. The idea is that

value is created when the return on the firm's economic

capital employed is greater than the cost of that capital.

Traditional performance measures such as NOPAT, EPS,

ROI, ROE etc. have been criticized due to their inability to

incorporate full cost of capital thereby accounting income

is not a consistent predictor of firm value and cannot be

used for measuring corporate performance. Value based

management system has gained popularity in academic

literature in last two decades. One such innovation in the

field of internal and external performance measurement is

EVA.

COMPANY PROFILE

INFOSYS TECHNOLOGIES (INFOSYS) Infosys Technologies (Infosys) became the first software

company to value its human resources in India. The

company used the Lev & Schwartz Model and valued its

human resources assets at Rs 1.86 billion. Infosys had

always given utmost importance to the role of employees

in contributing to the company's success. Analysts felt that

human resources accounting (HRA) was a step further in

Infosys' focus on its employees. Narayana Murthy

(Murthy), the then chairman and managing director of

Infosys, said: "Comparing this figure over the years will

tell us whether the value of our human resources is

appreciating or not. For a knowledge intensive company

like ours, that is vital information."

LITERATURE REVIEW

EVA is a important technique to measure performance. It

has become more popular in comparison to traditional

approach. Till now various papers has been published on

EVA. Last ten years research has been find to study

further. Worthington and West(2001) reviewed the

literature on EVA and provided a synoptic survey of

EVA’s conceptual underpinnings. They concluded that

empirical evidences concerning EVA have been mixed.

There is strong need for research over a longer time frame

to allow greater empirical certainty on the status of EVA

as a corporate performance measure.

Pal and Sura (2007) reviewed 25 empirical studies

published in various journals related to relationship of

International Journal of Management and Social Sciences Research (IJMSSR) ISSN: 2319-4421 Volume 2, No. 5, May 2013

i-Xplore International Research Journal Consortium www.irjcjournals.org

EVA and stock returns. They have only reviewed the

results of the studies and have not considered other issues

prevalent in EVA research such as EVA-MVA

relationship, EVA and discounting techniques, other

residual income (Note 3) based techniques, EVA

implementation and EVA and managerial performance

and control. Till date no other study has been conducted to

cover the issues involved in research about EVA. In the

present paper various issues on EVA by reviewing 112

studies on the concept, is taken. Apart from this, the

studies have been categorized on the basis of

methodologies used by various researchers, country and

year-wise publication and breakup of literature reviewed

on research related to EVA.

Dr. Anil Sharma ,Indian Institute of Technology Roorkee

has reviewed 112 papers published on the EVA from 1994

to 2008in hid paper on Economic Value Added (EVA) -

Literature Review and Relevant Issues. Classification

scheme, identifies the gaps in existing literature and

suggests the direction for future Research has been

included in the paper. The paper presents a comprehensive

literature review and a critical analysis to move towards

the advances in EVA. It may be a very useful source of

information to the researchers and managers who wish to

understand and implement EVA and carry out further

research on the diverse issues of this interesting and value

adding performance metric.

OBJECTIVES OF STUDY

The objectives of the study are as under:

1. To know the value addition statement in Infosys to understand sources of generation and application of

value addition

2. To determine Economic value added 3. To determine the financial performance by

traditional method in Infosys

4. To compare EVA and conventional methods i.e., PAT, EPS, ROA in Infosys

HYPOTHESIS

In order to realize the above objectives, the following

hypothesis has been formulated.

Hypothesis 1

H01: There is significant relationship between EVA and

operating profit, PAT and EVS.

H11: There is no significant difference between mean

values of EVA and operating profit

Hypothesis 2

H01: There is consistency in EVA in comparison to

traditional method.

H11: There is no consistency in EVA in comparison to

traditional method.

RESEARCH METHODOLOGY

Research methodology comprises the research design,

sample design, sources of data, selection of data, various

designs and techniques used for analyzing the data. The

methodology used for the study at hand is as under:

Research Design: The research design used for the

research problem in hand is causal research as the

objective is to determine which variable might be causing

certain behavior, i.e. whether there is a cause and effect

relationship between variables. In order to determine cause

and effect, it is important to hold the variable that is

assumed to cause the change in the other variable(s),

constant, and then measure the changes in the other

variable(s). This type of research is very complex and the

researcher can never be completely certain that there are

not other factors influencing the causal relationship,

especially when dealing with people’s attitudes and

motivations.

Independent Variables: earning capacity, evaluating

operating performance, rate of return, cost of capital,

capital employed

Dependent Variables: Economic value added

METHODS OF DATA COLLECTION

For the study in hand, both the primary and secondary data

was collected. The sources of collecting both the data is as

follows:

Sources of Primary Data: The primary data for the study

was collected directly from target respondents through

structured questionnaire. This questionnaire includes the

personal information about the respondents. The questions

asked to respondents were about the impact of HRA on the

growth of the company.

Sources of Secondary Data: present study is mainly

based on secondary data which were collected from the

corporate annual audited reports, company database,

published research reports by various industries, related

websites, and annual report of different companies of

different industry and research organizations.

TOOLS FOR ANALYSIS OF DATA

Along with the usual statistical tools such as tables,

percentages, mean, standard deviation, was used for

analyzing the data which helps in arriving at sound

conclusions.

International Journal of Management and Social Sciences Research (IJMSSR) ISSN: 2319-4421 Volume 2, No. 5, May 2013

i-Xplore International Research Journal Consortium www.irjcjournals.org

SELECTION OF COMPANY AND PERIOD The present study is mainly intended to examine the

comparative financial performance of Software industry

particularly for Infosys Limited for five years in the period

from 2007 to 2012.

RESULT & DISCUSSIONS

VALUE ADDITION STATEMENT IN INFOSYS

(Rs in Crores)

Description 2010-11 2009-10 2008-09 2007-08 2006-07

A. Generation of Value Addition

Value of Production 41527 33598 27351 20090 17324

(less excise duty)

Less- Direct Material,Power & Fuel and 23051 20427 17458 11767 10142

Payments to Contractors 23051 20427 17458 11767 10142

Value Added 18476 13171 9894 8323 7182

Less - Other Operating Exp 3461 845 567 415 679

(Net of income)

Net Value Addition 15015 12326 9327 7908 6503

% to value of production 36.16% 36.69% 34.10% 39.36% 37.54%

B. Application of Value Addition

Employees payments 5410 5243 4113 3146 2451

% to net value addition 36.03% 42.54% 44.10% 39.78% 37.69%

Depreciation 544 458 334 297 273

% to net value addition 3.62% 3.72% 3.58% 3.76% 4.20%

Financing charges : 55 34 31 35 43

% to net value addition 0.36% 0.27% 0.33% 0.44% 0.67%

Tax Provision

(Income Tax., Def. tax, FBT & Prior Period) 2995 2280 1711 1571 1321

% to net value addition 19.95% 18.50% 18.34% 19.87% 20.31%

Dividend (incl. dividend tax) 1775 1332 974 873 692

% to net value addition 11.82% 10.81% 10.43% 11.04% 10.65%

Retained Profit 4237 2979 2164 1986 1722

% to net value addition 28.22% 24.17% 23.21% 25.11% 26.48%

The statement shows the details value addition of last five

years by the company. Highest income generation source

is due to production activities which is carrying 34% to

40%. Likewise company is mostly devoted to its

employees and around 40% of value is paid to them. It is

paying 20% of income in tax. 11% of earning is paid to

shareholder as dividend. Still company is able to retain 2.5

times of dividend, means enough fund for growth of its

business.

International Journal of Management and Social Sciences Research (IJMSSR) ISSN: 2319-4421 Volume 2, No. 5, May 2013

i-Xplore International Research Journal Consortium www.irjcjournals.org

Economic Value Added in Infosys

2010-11 2009-10 2008-09 2007-08 2006-07

Cost of capital

Return on risk free Investment (%) 7.99 7.66 7.2 7 8

Market premium 5 5 5 7 7

Beta Varient 0.71 0.71 0.68 0.74 0.76

Cost of equity (%) 11.54 11.21 10.6 12.18 13.32

Average debt/ total capital(%) 0 0 0 0 0

cost of debt- net of tax(%) NA NA NA NA NA

Weighted average cost of capital (WACC) (%) 11.54 11.21 10.6 12.18 13.32

Average capital employed 30382 25688 21634 17431 12527

Economic Value added

Operating profit 9779 8102 6910 6421 4640

less: tax 3367 2490 1681 919 685

Less: Cost of capital 3506 2880 2293 2123 1669

Economic value added 2906 2732 2936 3379 2286

Enterprise Value

Market Value of equity 164592 186100 150110 75837 82362

Add: Debt 0 0 0 0 0

Less: Cash and cash equivalents 20968 16810 15819 10993 8307

Enterprise value 143624 169290 134291 64844 74055

Return Ratio

PAT/ Average capital Employed (%) 27.4 26.6 28.7 34.3 37.2

EVA/ Average capital Employed (%) 9.6 10.6 13.6 19.4 18.2

Enterprise value/ Average capital Employed (%) 4.7 6.6 6.2 3.7 5.9

Growth %

Operating profits 20.7 17.3 7.6 38.4 19.7

Average capital employed 18.3 18.7 24.1 39.1 37

EVA 6.4 -6.9 -13.1 47.8 7.7

Market value of Equity -11.6 24 97.9 -7.9 -28.6

Enterprise value -15.2 26.1 107.1 12.40 -32.2

Company is not a levered firm. It is running its business

on its own money, means company is confident enough

and no dependency on borrowing sources. It may be

reason for heavy cost of capital in comparison to EVA.

Ratios are calculated on the basis of average capital

employed.

Economic Value Added & conventional technique of measurement in Infosys

2011-12 2010-11 2009-10 2008-09 2007-08

Economic value added 2906 2732 2936 3379 2286

PAT 37.20% 26.60% 28.70% 34.30% 37.20%

EPS 147.5 112.22 101.13 101.58 78.15

operating profit per share 368.4 353.75 273.57 230.2 327.63

Return on Net worth 26.56 25.89 34.76 33.09 37.37

Return on Assets 426.73 384.02 310.9 235.84 235.84

International Journal of Management and Social Sciences Research (IJMSSR) ISSN: 2319-4421 Volume 2, No. 5, May 2013

i-Xplore International Research Journal Consortium www.irjcjournals.org

Economic Value Added in Infosys in %

2010-

2009-

2008-

2007-

2006-

07 Mean

Standard

Deviation

Operating profits 20.7 17.3 7.6 38.4 19.7 20.74 9.974487456

Average capital employed 18.3 18.7 24.1 39.1 37 27.44 8.926723923

EVA 6.4 -6.9 -13.1 47.8 7.7 8.38 21.22822649

Market value of Equity -11.6 24 97.9 -7.9 -28.6 14.76 44.91336549

Enterprise value -15.2 26.1 107.1 12.4 -32.2 19.64 48.25891006

500

1000

1500

2000

2500

3000

3500

2011-12 2010-11 2009-10 2008-09 2007-08

Economic value added

PAT

-40

-20

100

120

2010-11 2009-10 2008-09 2007-08 2006-07

Operating profits

Average capital employed

EVA

Market value of Equity

Enterprise value

International Journal of Management and Social Sciences Research (IJMSSR) ISSN: 2319-4421 Volume 2, No. 5, May 2013

i-Xplore International Research Journal Consortium www.irjcjournals.org

Economic Value Added & conventional technique of measurement of

performance in Infosys

2011-12 2010-11 2009-10 2008-09 2007-08

PAT 37.20% 26.60% 28.70% 34.30% 37.20%

Return on Capital Employed 26.56 25.89 34.76 33.09 37.37

Return on Assets 426.73 384.02 310.9 235.84 235.84

Economic value added 2906 2732 2936 3379 2286

Capital Employed 29,757.00 24,501.00 22,036.00 17,809.00 13,490.00

EVA / Capital Employed 9.765769399 11.15056528 13.32365 18.97355 16.94589

PAT 8,470.00 6,443.00 5,803.00 5,819.00 4,470.00

PAT / Capital Employed 28.46389085 26.29688584 26.33418 32.67449 33.13566

operating profit per share 10063 8,415.00 7,362.00 6,908.00 4,964.00

OP / Capital Employed 33.81725308 34.34553692 33.40897 38.78938 36.79763

EPS 147.5 112.22 101.13 101.58 78.15

EPS/ Capital Employed 0.495681688 0.458022122 0.458931 0.570386 0.579318

Study of traditional profit tools i.e, PAT, OP, EPS and

EVA is taken to compare traditional and modern approach.

Percentages of all the tools are calculated on capital

employed. EVA is increasing other than first year. It

shows the real picture of financial strength of a company,

as it is the residual income

RESEARCH TECHNIQUE APPLIED

Table for applying statistical tool

Particulars 2011-12 2010-11 2009-10 2008-09 2007-08 Mean

Standard

Deviation

EVA / Capital Employed 9.765769 11.15057 13.32365 18.97355 16.94589 14.03189 3.461641803

PAT / Capital Employed 28.46389 26.29689 26.33418 32.67449 33.13566 29.38102 2.985983255

OP / Capital Employed 33.81725 34.34554 33.40897 38.78938 36.79763 35.43175 2.050238299

EPS/ Capital Employed 0.495682 0.458022 0.458931 0.570386 0.579318 0.512468 0.05279347

Economic value added 2906 2732 2936 3379 2286 2847.8 352.8083899

PAT 8,470.00 6,443.00 5,803.00 5,819.00 4,470.00 6201 1304.424317

operating profit 10063 8,415.00 7,362.00 6,908.00 4,964.00 7542.4 1685.111818

EPS 147.5 112.22 101.13 101.58 78.15 108.116 22.61604262

Table for applying statistical tool

Corelation T-Test

EVA/ PAT 0.364391318 5.95265E-05

EVA/ OPERATING PROFIT 0.383936403 0.077064165

EVA/ EPS 0.365045231 3.89E-07

The various statistical tools i.e., mean, standard deviation,

correlation and t-test are applied to compare conventional

measures and EVA of Infosys. On the basis of last five

years study, it is found that is an achievement for a

company. Standard deviation indicates that variability is

highest in EVA, which is 3.46%. PAT, operating profit

and EPS has less variability 2.98%, 2.05%, 0.05%

respectively. There is lack of consistency in EVA. Heavy

cost of capital may be one of reason.

International Journal of Management and Social Sciences Research (IJMSSR) ISSN: 2319-4421 Volume 2, No. 5, May 2013

i-Xplore International Research Journal Consortium www.irjcjournals.org

Co-relation between EVA and PAT is 0.364391318, which

shows the moderate correlation between both the

variables. It is approximately same in EVA and OP, EVA

and EPS. As EVA is residual income after paying cost of

capital. So directly it is correlated with operating profit.

CONCLUSION

EVA is now recognized as an important tool of

performance measurement and management all over the

world, particularly in advance economies by adopting it as

corporate strategy. Still there are mixed evidences about

the superiority of EVA over traditional performance

measurement tools. Country specific evidences are also

not clear when compared with other residual income

metrics. In this review paper, an attempt has been made to

find correlation and compare tradition profit measurement

method to EVA. We have presented the literature

classification scheme by categorizing the articles in four

sub-streams of EVA, viz., EVA –PAT relationship EVA

and Operating Profit, It is encouraging to note that last 10

years, in particular 2000 to 2008, have seen a remarkable

increase in research on EVA. EVA is found more

appropriate tool for measuring financial performance.

EVA better represents the market value of company in

comparison to conventional performance measures. It is

felt that further research is needed on implementation

issues, role of accounting adjustments, empirical

evidences in developed economies, EVA as a strategy,

EVA and discounting techniques like NPV, IRR and

managerial performance measurement aspects of EVA.

Empirical studies conducted till date on EVA had used

data for smaller period whereas there is scope for future

research on the concept by considering the data. Therefore

efforts should be made in this direction to further broaden

the horizon of applicability of this useful concept.

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