Title: Value Addition at Syndicate Bank: -An EVA Analysis

About Economic Value Added (EVA)

The concept of Economic Value Added was introduced by a New York based consulting firm M/s Stewart & Co in early eighties. The corporate sector in India is gradually recognizing the importance of EVA as a result of which some Indian companies viz., Ranbaxy Laboratories, Samtel India Ltd.etc., have started calculating EVA. Infosys Technologies Ltd is the first Indian company to report its EVA in the annual report. EVA attempts to measure the true economic profit as it compares actual rate of return as against the required rate of return. EVA explains whether a business unit best utilizes its assets to generate return and maximize shareholders value. EVA is just a way of measuring an operations real profitability. EVA efficiently measures the productivity of all the factors of production viz., land, labour, capital, entrepreneur and management. EVA is a residual income that subtracts the cost of capital from the operating profits generated by a business. It is an excess profit of a firm generated by a business. EVA essentially seeks to measure the actual rate of return as against the required rate of return In simple terms it is the difference between Net Operating Profit after Tax (NOPAT) and the capital charge for both debt and equity (WACC- Weighted Average Cost of Capital). If NOPAT exceeds the capital charges (WACC), EVA is positive and if NOPAT is less than capital charges, EVA is negative. EVA is the corporate surplus which is shared by the employees, management and the shareholders. Efficiency bonus, profit sharing schemes, managerial remuneration over and above minimum sustenance salary, issue of bonus shares and incentive dividend to equity and preference shareholders respectively can be linked.

Scope of EVA
EVA is a superior performance measure both for corporate reporting and for internal governance. It does not provide additional information to investors; it can be adapted as a corporate philosophy for motivating and educating employees to differentiate between value creations. Investors measure overall performance of a firm as a whole to decide whether to invest in the firm or to continue with the firm or to exit from it. In order to achieve goal congruence, managers compensation is often linked with the performance of the responsibility centers and also with firm-performance. Therefore selection of the right measure is critical to the success of a firm. Each metric of performance claims its superiority over others. Performance of a firm is usually measured with reference to its past record and the performance of other firms with comparable risk profile. The various performance metrics currently in use are based on the returns on investment generated by the business entity. Therefore to reach a meaningful conclusion, returns generated by the firm in a particular year should be compared with returns generated by assets with similar risk profile (cross sectional analysis). Similarly return on investment for the current period should be compared with returns generated in past (time series analysis). A firm creates value only if it is able to generate return higher than its cost of capital. Cost of capital is the weighted average cost of equity and debt (WACC).

According to accounting concept, business profit is measured by deducting expenses from income earned during the period. On the other hand, according to economic concept business profit is considered to be the maximum amount that the business is capable of distributing to its shareholders while still retaining in the same position at the end of the period as it was at the beginning. Notably the accounting concept does not take into account opportunity cost and risk adjusted return on capital employed in the business in order to overcome limitations of accounting based measures of financial performance, EVA as a tool of financial performance measurement enlightens whether the operating profit is enough to cover the cost of capital. Shareholder must earn sufficient return for the risk they have taken in investing their funds in company capital. This return generated by the company for shareholders has to be more than the overall cost of capital to justify risk taken by shareholders. The EVA framework is becoming more and more admired tool for measuring the financial performance of corporate. EVA offers a consistent approach to set goals and measure performance, communicate with investors, evaluate strategies, allocate capital valuing acquisitions and determine incentive bonuses. However, the EVA implementing and improvement process is one of the several ongoing initiatives for a new corporate,

A firm can improve its EVA in 3 ways Earn more profit without using more capital Downsize unprofitable units and divisions Make investment where the return is more than the marginal cost of capital.

Computation of EVA EVA is the excess of net operating profit after tax (NOPAT) over the capital charge (WACC), In other words EVA is a companys net operating profit after tax after deducting the cost of capital employed on total investment in the business. EVA takes in to account the total cost of capital employed which makes EVA so revealing. EVA = Adj PAT- (C * Ke) i.e. EVA = Adjusted Net profit-(capital*cost of equity) Where Adjusted Net Profit is profit after tax plus depreciation less Non recurring income plus Non recurring expenses adjusted for tax. Capital means the amount owes to the share holders, so it includes equity capital and retained earnings. Cost of equity is the minimum rate of return which has to be made from an equity financed project in order to maintain the present wealth of the shareholders unaffected. It can be computed based on either Dividend model or capital asset pricing model (CAPM). Since CAPM is market based method which considers risk it has clear advantage on the former. In CAPM Ke = Rf + Beta ( km- Rf ) Cost of equity, Ke = Risk free rate + (Beta * Market Premium) Risk Free Rate is the rate of return from the risk free securities, say government securities Beta is the measure of the volatility of a stock in relation to the market. It is the index of the systematic risk. Market premium is the excess return offered by the market over the risk free rate.

OBJECTIVE Primary Objective: To compute the Economic Value Added of Syndicate Bank and to compare it with the productivity of the bank. Secondary Objective: To compute the banks economic profit. To find out whether the bank is creating wealth to its shareholders. To find out whether EVA leads to better decision making for stakeholders.

DATA SOURCE AND THE PERIOD OF STUDY Analysis will be made for ten years starting from the accounting year 2001-2002 to 2011-2012. The required information will be collected from the annual report of the bank. And also the other required details will be taken from the Capitaline Plus.