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Discretionary Expenditures and Wealth Creation in Indian Companiesl l

International Journal of Trade in Services, 2(2) July-Dec. 2010 201

DISCRETIONARY EXPENDITURES ANDWEALTH CREATION IN INDIAN COMPANIES

B. Rajesh KumarAssistant Professor, Institute of Management Technology, Dubai, UAE

Abstract: Theoretical and empirical studies have modeled R&D andadvertising expenditures as investments in intangible capital. Thisstudy involves an empirical analysis on the valuation effects ofdiscretionary expenditures. The potential differences in theeffectiveness of R&D and Advertisement on valuation according tofirm size is examined. The study was carried out using a sample of126 R&D intensive and 393 Advertisement intensive firms. Fourregression models were used to examine the significance of valuationeffects. The study finds that the size of a firm is an important variablein determining the amount invested in R&D expenses. As the size ofthe firm increases, greater is the investment in R&D expenses. HighR&D intensive firms have higher excess valuation effects, which maylead to the creation of intangible capital. The study also suggests thatlesser the investment opportunities for a firm greater will be itsinvestment in R&D expenses. Higher advertisement investments willlead to greater profitability for the firm and vice versa. This researchpaper attempts to fill the gap with respect to valuation studies involvingdiscretionary expenditures in Indian context.

1. INTRODUCTION

Research and development has traditionally been regarded byacademics and industry alike as the management of scientificresearch and development of new products. R&D activities havechanged dramatically since 1950. The main factors that havecontributed to these changes are technology explosion, shorteningof the technological cycle and globalization of technology.

R&D in Indian industry has undergone paradigm shift. Morethan 100 international companies including Fortune 500 outfits have

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202 International Journal of Trade in Services, 2(2) July-Dec. 2010

set up their research and development centers in India during thelast ten years. India has emerged as the R&D hub for the world andthis is reflected from about 1000 patents filed by MNCs based here.Multinational companies like Motorola and Pfizer are establishingR&D hubs in India in a big way. The factors that drive global firmsto set up R&D centers in India are low costs; access to qualifiedmanpower, world-class standards and easy approvals bygovernment. The cost of a researcher in India is one fifth than thatin US or Europe. Moreover India has a vast pool of high quality,technically qualified and English speaking manpower. TheWorld-class standards particularly in software sector are significant.

R&D expenditures can be considered as a type of investmentexpenditure that give rise to economic benefits. If the benefits arefor more than one year, then the market value effects can be expected.

Theoretical and empirical studies have modeled R&D andadvertising expenditures as investments in intangible capital.

The favorable market reaction to announcements of increasedR&D spending can be considered as evidence of a strong linkbetween R&D spending and the market value of the firm. R&Dexpenditures can be considered as a type of investment expenditurethat give rise to economic benefits. If the benefits are for more thanone year, then the market value effects can be expected .The previousinvestment in advertising and R&D may lead into increase of currentcash flows. On an average if R&D is a valuable activity for the firm,the new knowledge should lead eventually to the generation ofprofits. This profit stream ought to be reflected in the firm’s marketvalue.

The study involves an empirical work on the valuation effectsof discretionary expenditures like R&D and Advertisement. Thestudy was carried out using a sample of 126 R&D intensive and 393Advertisement intensive firms. The firms were selected on the basisof average value of their R&D intensity and advertisement intensitywith respect to sales for three year period. The sample firms includedhad a minimum intensity of 2 per cent with respect to sales. Four



major regression models were utilized for the study. The paperexamines whether the market value effects of R&D and advertisingexpenditures vary according to the size of the firm. The impact ofdebt and profitability on discretionary expenses is also focused inthe paper. The degree of magnitude of relationship between theagency costs associated with R&D expenditures and cash flows ofthe firms is also examined. This paper aims to fill the existing gapon studies involving valuation effects of discretionary expendituresin Indian context.

2. LITERATURE REVIEW

Chauvin & Hirschey (1993) considers the cross sectional influencesof both advertising and R&D expenditures on the market value ofthe firm. This study consider how the traditionally recognizedvaluation effects of current cash flow, growth, risk and market shareare augmented when both advertising and R&D are considered aspotentially important sources of intangible capital. Their studysuggests that size advantages make advertising and R&D moreprofitable for larger firms. The valuation effects of advertising andR&D are typically greater for larger as opposed to smaller firms inboth manufacturing and non-manufacturing sectors. The studiesby Hirschey (1985), Jose et al (1986), Lustgarten and Thomadakis(1987), Morck et al 1988), Morck and Yeung (1991) reports positivemarket value effects of advertising and R&D expenditures.Hirscheyand Weygandt (1985) show that if economic amortization of theexponential decay type can be assumed, along with constantpercentage rates in growth in advertising and R&D expenditures,then the magnitude of intangible capital equals annual expenditureon advertising or R&D multiplied by a constant. Given theseassumptions, the stock of intangible advertising and R&D capital isstrictly proportional to the flow of advertising and R&Dexpenditures and the valuation effects of each type of expenditurecan be taken as indicative of intangible capital influences. Griliches(1981) based on the analysis of the effect of R&D on Tobin’s q findsthat the long run effect of a dollar of R&D is to add about $2 to the

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market value of the firm.Pakes (1985) found that a $ 100 unexpectedincrease in R&D is associated with research and patent activity haveled to the increase in the value of the firm by $ 1870. Jaffe (1986)estimates that market apparently places more than three times asmuch value on a dollar of R&D stock as on a dollar of capital stock.Salinger (1984) finds that the estimated main effects of advertisingon Tobin’s q range from 1.32 to 2.72. Connolly and Hirschey (1984)considers a complex relation among R&D, market structure and amarket value based measure of profits The study find thatadvertising like R&D has a large and statistically significant effecton increasing the spread between the market value and book valueof assets.

Grabowski and Mueller (1978), Ben –Zion (1984), Switzer (1984)suggest that R&D and advertising expenditure should be based onthe present discounted value of the future stream of earnings. Theearning streams associated with R&D and advertising are subjectto more uncertainty than other investments like plant andequipment. A firm’s current earnings are crucial for financingdiscretionary expenditures. Erickson and Jacobson (1992) explorethe extent to which R&D and advertising expenditures generate acomparative advantage that allows firms to earn supernormalprofits. Their study after controlling for unobserved firm specificfactors and feedback between discretionary expenditures andprofitability finds lower accounting and stock market returns to R&Dand advertising. The study suggest that obtaining a comparativeadvantage through R&D or advertising depends crucially on thespecific nature of the expenditure and how it interacts with the firm’sasset and skill base so as to prevent imitation by competitors.Szewczky et al (1996) examine the role of investment opportunitiesand free cash flow in explaining R&D induced abnormal returns.After controlling for firm size, financial leverage, dividend yield,ownership structure and industry structure, the study finds asignificant positive relation between a firm’s Tobin’s q and its stockprice reaction to announcements of increases in R&D expenditures.The study also reports that R&D induced abnormal returns are also



positively related to the percentage increase in R&D spending, thefirm’s debt ratio and institutional ownership.

Comanor and Wilson (1967) were the first to try advertisingintensity as a proxy measure of product differentiation entry barriersin a structure performance model. They found a strong, robustpositive relation between industry and profit rates and advertisingintensities .The primary objective of the paper by Grabowski et al(1978) is to investigate the role of industrial research anddevelopment (R&D) as a source of above average profit rates. Theiranalysis indicates that firms in research-intensive industries earnsignificantly above average returns on their R&D capital.

In the context of modeling the productivity of R&D, the generalapproach taken is to assume that there exists a stable relationshipbetween the investment by the firm in R&D and the production ofnewly economically useful knowledge. This relationship isconditioned by the spillovers that the firms receive. On average ifR&D is a sensible activity for the firm; the new knowledge shouldlead eventually to the generation of profits. This profit stream shouldbe reflected in the firm’s market value. (Jaffe 1986).

A large number of research has considered the market valueeffects of a wide range of corporate investment decisions. Chan,Martin and Kensinger (1990) and Doukas and Switzer (1992) findsstatistically significant R&D announcement day returns, especiallyin the case of large “high tech” industrial firms that devotesubstantial resources to R&D.The study by Chan, Martin andKensinger (1990) and Zantout and Tsetsekos (1994) reportssignificantly negative returns for firms operating in low technologyindustries. The research by Wooldridge (1988) shows a significantmarket response to announced increases in R&D expenditures.

3. OBJECTIVE OF THE RESEARCH

The study aims to analyze the impact of discretionary expenditureson the value of a firm. The paper focuses on the influences of R&Dand advertising expenditure on the valuation effects of the firm.

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4. Hypothesis

(1) Discretionary expenditures are value creating activities.

(2) The market value impact of advertisement and R&D may differaccording to firm size based on the assumption that R&Dspending and advertisement is likely to be generally moreeffective for relatively larger firms.

(3) Profitability significantly influences both advertisement andR&D expenditures. Firms with higher profits spend more onboth advertisement and R&D. Firms with higher profits will alsohave higher stock returns. Discretionary expenditures are likelyto be higher when a firm has a higher ROI or when it has greateraccess to funds. Conversely expenditures decrease when firmsare constrained by low earnings/low ROI or are subject to moreimmediate pressure on funds like substantial interests paymentdue to the assumption of debt.

(4) Discretionary expenditures influence the profitability of firms.Higher the discretionary expenditures, higher will be theprofitability of the firm.

(5) Debt influences discretionary expenditures. Firms with high debtspend less on R&D and Advertisement due to pressures to payits interest expenses. Hence the firm may be forced to cut backon discretionary expenditures. A higher debt position reducesthe firm’s ability to borrow. It may be less likely to obtain capitalfrom external financing to pay for advertising and R&Dexpenditures. In other words, firms with greater access to fundseither through internal resources or having greater availabilityto external financing because of a low level of debt are morelikely to undertake discretionary expenditure.

The firms may require to rely more on internal financing ratherthan using the external financial markets for borrowing due tothe uncertainty about R&D projects.

(6) The potential agency costs of R&D expenditures are lowest forlow free cash flow /high q firms. The converse holds true forhigh free cash flow/low q firms.



5. SAMPLE SELECTION

The study was based on a sample size of top 126 R&D intensivefirms and 393 Advertising intensive firms selected from a populationof about 9950 companies. The samples were selected on the basis oftheir respective intensity. The source of the database is the CMIEprowess database. The firms were selected on the basis of averagevalue of their R&D intensity and advertisement intensity withrespect to sales for the past three years. The sample firms includedhad a minimum intensity of 2 per cent with respect to sales.

6. METHODOLOGY

Four major regression models were used for the study.

6.1. Model Summary

6.1.1. Model 1

The regression model 1 for R&D Intensive firms (126) is given by

Market Value = α+β1Cash flow +β2Growth + β3 Risk +β4R&D Intensity +β5 Advt Intensity + β6HI+ +β7Dcs+ β8Dph (1)

The regression model for advertisement intensive firms (393) isgiven by

Market Value = α+β1Cash flow +β2Growth +β3Risk + β4R&D Intensity + β5 Advt Intensity + β6HAI+ β7Dcs+

β8 Dph + β9 Dser + + β10Df&b (2)

6.1.2. Model 2

In this section five regression models were used where in the firsttwo the dependent variable of value was regressed on variables ofR&D, Advertisement Intensity. In the last three models,advertisement, R&D and ROI was the dependent variable.

Valueit = R&Dit + Advtit + εit – (Model 2.1)

Valueit = ROIit + R&Dit +Advtit + εit (Model 2.2)

Advtit = ROIit-1 + Debtit-1 + εit (Model 2.3)

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R&Dit = ROIit-1 + Debti t-1 + εit (Model 2.4)

ROIit = Advtit-1 + R&Dit-1 + εit (Model 2.5)

6.1.3. Model 3

In model 3, the dependent variable was EV/S and R&D/S for R&DIntensive firms while EV/S and AD/S for Advertising Intensityfirms.

6.1.3.1. For R&D Intensive Firms

EV/S = α+β1 R&D/S + β2 AD/S + β3 Beta + β4GR + β5 HI + β7 Dcs+ β8 Dph

R&D/S = α+β1 EV/S + β3 Beta + β4 GR + β6 Dcs+ β7 Dph

6.1.3.2. For Advertisement Intensive Firms

EV/S = α+β1 R&D/S + β2 AD/S + β3 Beta + β4 GR + β5 HI+ β7Dcs+ β8 Dph + β9 Dser + + β10 Df&b

AD/S = α+β1 EV/S + β3 Beta +β4GR + + β7Dcs+ β8Dph + β9Dser + + β10Df&b

6.1.4. Model 4

In model 4, the dependent variable of RDI was regressed uponvariables of Tobin q, cash flow ratio, firm size , debt ratio ,dividendyield and equity ownership variables .

RDI = α+β1 Tobin q + β2 Cash flow ratio + β3 Firm Size + β4Debt Ratio + β5 Div Yield + β6 MPower + β7 D1 + β8 D2+ β9 D3

6.2. Model Analysis, Results and Interpretation

6.2.1. Model 1

The focus of this model is to understand the role played byadvertising and R&D as determinants of the market value of equity.Tobin’s q and relative excess valuation (EV/S) can be viewed asaccounting adjusted and size adjusted valuation measures, wherethe replacement value of tangible assets and sales respectively are



employed for size normalization purposes.1 The model is analyzedusing two sets of sample firms – 126 R&D and 393 Advertisementintensive firms.

The regression model 1 for R&D Intensive firms (126) is givenby

Market Value = α+β1 Cash flow + β2 Growth + β3 Risk + β4R&D Intensity + β5 Advt Intensity + β6 HI+ +β7 Dcs+ β8Dph (3)

The variables of market value of Equity, Cash flow, Researchand Development, Advertisement expenses are deflated by the sales.The values of the variable are the averages for all the firms in theperiod 2004-2006.Cash flow is measured by operating income beforedepreciation minus interest expenses, taxes, preferred dividends andcommon dividends. Growth is measured by three-year averagegrowth rate of sales in the latest three-year period. Risk is measuredby the logarithm of the ratio of the 52-week high and low stockprice of each firm. The advertising and R&D intensity with respectto sales is the average for the three-year period.

Then inorder to analyze the extent to which firm size can play arole in determining the market value effects of advertisement andR&D, the overall sample was further subjected to three part samplepartition according to firm size measured by average sales revenuein three year period. The dummy variable of HI represent highintensity firms with respect to R&D where high intensity isdefined as firms having R&D intensity greater than 2.5% withrespect to sales. The basic research typical of high tech firms will bequite different from the R&D efforts of firms in the low-tech sectors.Dcs and Dph are dummy variables representing the computersoftware.

The regression model for advertisement intensive firms (393) isgiven by

Market Value = α + β1Cash flow +β2Growth +β3 Risk + β4R&D Intensity +β5 Advt Intensity + β6HAI + β7 Dcs+ β8

Dph + β9 Dser + + β10Df&b (4)

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The variable definitions are similar as explained above. HAIrepresent high advertisement intensive firms having an intensity ofabove 2.5% with respect to sales. The dummy variables includedrepresent sectors like computer software, Pharma, services and foodand beverages.

Advertising intensive firms were subdivided into manufacturingand non-manufacturing firms. The sample firms were againsubdivided into three on the basis of size (measured by averagesales in the three year period).

Regression Model A Results

Variable ALL Firms Largest Middle SmallestModel 1.1 One Third One Third One Third

Model 1.2 Model 1.3 Model 1.4

Intercept 13226.68 50857.57 2073.68 1089.13(1.4) (2.5) b (0.06) (1.72)c

Cash Flow 0.318 0.39 0.27 0.303(3.7)a (2.7) b (2.02)b (1.78)c

Growth 0.038 0.05 0.35 0.06(-0.45) (0.32) (3.10)a (0.39)

Risk -0.237 -0.38 -0.13 -0.37(-2.77) a (-2.54)b (-1.06) (-2.45)b

R&D Intensity -0.028 0.06 0.83 0.05(-0.21) (0.19) (3.62)a (0.23)

Advt Intensity -0.083 -0.16 0.16 -0.007(-0.95) (-1.09) (1.45) (-0.04)

HI 0.134 -0.25 -0.22 0.36(0.95) (-0.84) (-0.80) (1.64)

Dcs 0.085 0.17 0.014 -0.29(0.88) (1.19) (0.12) (-1.47)

Dph -0.086 0.09 -0.065 -0.06(-0.79) (0.29) (-0.303) (-0.32)

R2 0.236 0.41 0.66 0.35F 4.34a 2.89b 7.76a 2.09c

Size 126 42 42 42

Beta values given are standardized Coefficientsa indicates statistical significance at 0.01 levelb indicates statistical significance at 0.05 levelc indicates statistical significance at 0.1 level , t values in parenthesis



7. RESULTS & INTERPRETATION

7.1. Model 1.1

The results for all the firms in the sample indicate that about 23.6%variation in market value is attributed by variation in cash flow,growth, risk factors, R&D and Advertisement intensity. The variableof cash flow is positively related to the market value of equity withstatistical significance at all levels. This can be interpreted as thathigher the cash flow, greater will be the wealth creation as reflectedby the market value of the equity. Moreover the results for all thesample firms indicate that the risk of the firm is inversely related tothe market value of the firm. The variable risk has a coefficient of –0.237 with t statistics value of –2.77 with statistical significance at1% level. The variables of R&D intensity and advertisement intensityhave negative slope coefficient, but are statistically insignificant. Itcan be stated that market is skeptical about discretionaryexpenditures which might have reflected in the negative relationshipof R&D and Advertisement intensity with market value of equity.The F value is statistically significant at all levels of significance.

7.2. Model 1.2

The regression analysis for the largest one third of sample firmsindicate that about 41% of variation in market value of equity offirms is explained by changes in cash flow, growth, risk, R&D andAdvt Intensity etc. Cash flow has positive effect on market valuewith statistical significance. Risk has negative impact on value offirm. R&D intensity is positively related and Advertisement intensityis negatively related to the market value of equity. But both theresults are statistically insignificant. The F value of 2.89 is statisticallysignificant at 5% level of significance.

7.3. Model 1.3

The variables of cash flow, growth and R&D intensity are positivelyrelated to the value of firm. The slope coefficient of 0.27 with t value

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2.02 is statistically significant at 5% level for the variable of cashflow. Higher the sales growth of the firm greater would be the marketvalue of equity of firm. R&D intensity variable was positively relatedto market value with statistical significance at 1% level. Hence itcan be interpreted that that R&D spending is likely to be generallymore effective for relatively medium sized firms. Advertisingintensity is positively related to the market value though notstatistically significant. The F value of 7.76 is statistically significantat all levels.

7.4. Model 1.4

According to model 1.4 regression results, cash flow is positivelyrelated to the market value with statistical significance at 10 %. Thevariable of risk is negatively related to the value of firm. Lower therisk, higher the value of firm. The effect of all other variables onmarket value is statistically insignificant.

7.5. Regression Results- Model B

The model is tested using the sample of 393 advertising intensivefirms. In this section six models were used. The first model involvedthe exhaustive sample of 393 advertisement intensive firms. Thesample of firms was further divided into manufacturing and non-manufacturing firms.2 Then the sample was divided on basis of size.

In model 1.5 involving all the Advertising Intensive firms, thereis positive valuation effects on advertising though not statisticallysignificant. The valuation effects are positive and statisticallysignificant for firms in the Pharma and food & beverages sector.Model 1.6 and Model 1.7 represent the advertising intensive firmsin the manufacturing sector (217) and non manufacturing sector(176). The valuation effects of advertising though positive are notstatistically significant for both the manufacturing and non-manufacturing sectors. The valuation effects of firms in the firms inthe Pharma sector of manufacturing companies have positivestatistical significance. Other variables are having statisticalinsignificance.



Variable ALL Firms Manu Non Largest Middle SmallestModel 1.5 Model 1.6 Manu One Third One Third One Third

Model 1.7 Model 1.8 Model 1.9 Model 1.10

Intercept 1210.50 1198.58 560.10 1933.02 54.56 -2.45(1.99)b (1.21) (1.05) (1.67) (0.48) (-0.14)

Cash Flow -0.009 -0.009 0.12 0.28 0.087 -0.15(-0.10) (-0.07) (0.46) (2.16) b (0.22) (-0.69)

Growth -0.024 0.004 -0.12 -0.12 0.025 0.56(-0.29) (0.032) (-0.49) (-0.97) (0.064) (2.31)b

Risk -0.12 -0.121 -0.16 -0.08 0.31 0.35(-1.4) (-0.96) (-1.07) (-0.76) (2.08)b (1.35)

R&D Intensity 0.025 0.032 0.60 0.71 0.18(0.27) (0.246) (1.88) (0.49) (1.20)

Advt Intensity 0.032 0.065 0.024 0.02 -0.01 -0.032(0.37) (0.54) (0.18) (0.24) (-0.06) (-0.13)

HAI -0.03 0.012 0.007 -0.13 -0.08 0.16-0.41 (0.096) (0.051) (-1.29) (-0.49) (0.73)

Dcs -0.10 -0.18 0.039 -0.09 0.08 -0.26(-1.14) (-1.38) (0.25) (-0.98) (0.53) (-0.98)

Dph 0.23 0.22 -0.17 -0.15 -(0.05) -0.10(2.55) b (1.84)c (-0.56) (-1.06) (-0.39) (-0.51)

Dser 0.11 0.15 0.28 0.33 -0.13(1.27) (1.02) (2.52) (2.24)b (-0.45)

Df&b 0.16 0.23 0.24 0.17 -0.14 -0.15(1.9)c (1.99) (1.78)c (1.66) (-1.01) (-0.77)

R2 0.19 0.24 0.28 0.56 0.29 0.49F 2.81a 1.9c 1.77 6.13a 1.59 1.60Size 396/393 217 176 131 131 131

Beta values given are standardized Coefficientsa indicates statistical significance at 0.01 levelb indicates statistical significance at 0.05 levelc indicates statistical significance at 0.1 level , t values in parenthesis

Model 1.8 results suggest that about 56% variation in thevaluation effects are explained by changes in the variables of cashflow, growth, risk, effects of R&D and advertising intensity etc. Butonly the variable of cash flow has positive effects on valuation withstatistical significance. In model 1.9, the risk variable of mediumsized advertising intensive firms have positive valuation effects.

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Moreover medium sized firms in the services sector also havepositive valuation effects with statistical significance. In model 1.10,the growth variable of smallest firms among the advertisingintensive firms have positive valuation effects.

7.6. Model 2

In this model the value of a firm is assumed to be influenced by theR&D intensity and Advertisement intensity .In this section it is alsopostulated that firms with higher profits spend more on bothadvertising and R&D. Firms with higher profits will also have higherstock returns. Inorder to determine the effects of R&D andadvertising on stock return it is necessary to control for the effectsof firm profits. It is also postulated that discretionary expenditureswill influence the profitability of the firm. The lag distribution forR&D and advertising is taken care of in models 2.3-2.5. The timeperiod lag of one year is taken into account. The variables of R&Dand Advertisement were deflated by total assets in the model. It isalso postulated that a higher debt position reduces the firm’s abilityto borrow and spend less on R&D and Advertisement .A firm withhigher debt will face pressures to pay its interest expense. To meetthis expense, the firm may be forced to cut back on less pressingexpenditures like advertising and R&D. Moreover a higher debtposition reduces the a firm’s ability to borrow. Then it will be lesslikely to obtain capital from financial markets to pay for advertisingand R&D expenses3 The following models were used:

Valueit = R&Dit + Advtit + εit – (Model 2.1

Valueit = ROIit + R&Dit +Advtit + εit (Model 2.2)

Advtit = ROIit-1 + Debtit-1 + εit (-Model 2.3)

R&Dit = ROIit-1 + Debti t-1 + εit (Model 2.4)

ROIit = Advtit-1 + R&Dit-1 + εit (Model 2.5)

Model 2.1 and Model 2.2 were used for both the R&D intensivefirms and Advertisement intensive firms. The model 2.3 was usedfor Advertisement intensive firms. Model 2.4 was used for R&D



intensive firms. Model 2.5 were used for both the sets of R&Dintensive and Advertisement intensive firms.

7.7. Model 2 Regression Results

Value it (stock return) represents the value of firm i in the latest year t.Stock return is given by the (market value of stockt plus dividendt dividedby market value of stockt-1 plus dividendt-1)-1. ROIit is defined as the ratioof profit before depreciation, interest and tax to the total assets in the latestyear. R&Dit and Advtit are the R&D intensity and Advertising intensitywith respect to total assets for each firm i in the latest year t. Debtt-1 representthe debt equity ratio of each firm i in the year t-1. Similarly ROIit-1, R&Dit-

1, Advtit-1 represents the respective values of return on investment, researchand development intensity, advertisement intensity in the year t-1. R&Dand Advt Intensity is with respect to total assets in the respective years.

7.8. Interpretation of Results

The R&D intensity is found to have significant negative valuationeffects. (Model 2.1 & Model 2.2). Firms with higher profits havehigher stock returns (model 2.2 results). The profitability ratio isfound to be positively related to advertising intensity. (model2.3)Hence it can be stated that firms with higher profits spend more onadvertising expenses. The results for R&D intensive firms in Model2.5 suggest that negative relationship of R&D intensity onprofitability of the firm. It can be interpreted that as R&D expensesincreases, the profitability of the firm decreases. With respect toadvertising intensity firms, the evidence suggests that there is asignificant positive relationship between the advertising intensityand profitability of the firm. In other words advertising has a positiveimpact on the profitability of the firm. In clearer terms as advertisingexpenditures increases, the profitability of firm also increases. Thenegative effect of debt provides support for the conclusion that firm’sspending levels for discretionary expenditures increases due to lowlevel of debt. But evidence does not provide statistical confirmation.The results also support the hypothesis that higher advertisingexpenditures will lead to greater profitability for the firms.

B. Rajesh Kumarl l


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7.9. Model 3

This methodology also involves adoption of a market value basedmeasure of profits. The market value of firm can be written as4

MV (F) = MV (T) + MV (I) (5)

Where MV (F) is the market value of the firm and MV (T) and MV(I) are the capitalized values of profits attributable to tangible andintangible assets (influences) respectively. Using the book value oftangible assets, BV (T), as a useful, but imperfect measure of MV(T), a measure called relative excess valuation, EV/S can be created.

( ) – ( )/

MV F BV TEV S

S=

( )MV Ie

S= + (6)

= f(X)+ e

S is sales and X includes R&D, advertising and other potentiallyimportant determinants of EV/S. EV/S is a factor and leverageneutral measure of profitability. This relative excess value will alsoaccount for the influences of risk, opportunity cost and inflationetc. The influence of R&D on relative excess value denoted byEV/S can be explained in terms of intangible capital effect. If R&Dhas an economic life of more than one year, these expenditures canbe considered as investments in valuable intangible assets.

7.10. Model5

7.10.1. For R&D Intensive Firms

EV/S = α+β1 R&D/S + β2 AD/S +β3 Beta + β4 GR +β5 HI+ β7 Dcs+ β8 Dph

R&D/S = α+β1 EV/S + β3 Beta + β4 GR + β6 Dcs+ β7 Dph

7.10.2. For Advertisement Intensive Firms

EV/S = α+β1R&D/S +β2 AD/S +β3 Beta +β4GR +β5 HI+ β7Dcs+ β8 Dph + β9 Dser + + β10 Df&b

AD/S = α+β1 EV/S + β3 Beta +β4 GR + + β7 Dcs+ β8 Dph + β9 Dser + + β10 Df&b

B. Rajesh Kumarl l


7.11. Results and Interpretation

The relative excess valuation of R&D intensive firms is positivelyrelated to the growth variable. Greater the growth in terms of sales,greater the excess valuation effects. The risk variable of beta isnegatively related to excess valuation effects. High R&D intensivefirms have higher excess valuation effects .The model 3 results alsosuggest the negative relationship between beta and R&D intensivefirms. It can also be stated that larger firms in terms of size havegreater R&D intensity. Hence greater the size of firms, higher willbe the expenditures on R&D.

Larger the size of the advertising intensive firms, greater will bethe excess valuation effects. Advertising intensive firms belongingto food and beverages sector also have higher excess valuationeffects.

7.12. Model 4:

Jensen (1986) argues that manages will invest free cash flow inwasteful investments rather than pay it out to shareholders. Thepotential agency costs of R&D investments are therefore higher forhigh free cash flow firms. The R&D investments by low free cashflow firms increase the chance that the firm will seek new externalfinancing .Free cash flow agency cost may depend on the firm’sinvestment opportunities. Firms with relatively more growthopportunities are less likely to have free cash flow. According tofree cash flow hypothesis, low free cash flow /high q firms have thelowest potential agency costs connected with R&D expenditures .Thehigh cash flow/low q firms have the largest potential agency costsconnected with R&D expenditures (Szewczyk 1996). It is assumedthat high cash flow and low q firms spend more on R&D comparedto firms with low cash flow and high q firms.

7.12.1. Variable Definition

Tobin’s q is the ratio of the market value of the firm’s assets to theirreplacement cost based on three-year average value. It is found out by the



Variable R&D Intensive R&D Intensive Advertisement AdvertisementFirms (Dependent Firms (Dependent Intensive firms Intensive firmsVariable–EV/S) Variable- RD/S) (Dependent (Dependent

Variable–EV/S) Variable- AD/S)

Intercept 2.77 0.024 6.24 0.066(4.14)a (2.7) a (1.56) (4.13)a

EV/S 0.096 0.083(1.4) (0.420)

RD/S 0.20 -0.013(1.4) (-0.37)

AD/S -0.09 0.020(-1.06) (0.56)

BETA -0.25 -0.15 -0.053 -0.018(-2.58)b (-2.47)b (-1.53) (-0.210)

GR 0.18 -0.08 0.014 -0.03(2.17) b (-1.4) (0.40) (-0.39)

1/S 0.028 0.29 0.93 -0.096(0.28) (4.5)a (27.12)a (-0.48)

HI 0.27 -0.023(1.89)c (-0.64)

Dcs 0.104 0.11 0.053 -0.062(1.05) (1.64) (1.44) (-07.4)

Dph 0.099 -0.30 0.011 -0.055(0.35) (-0.39) (0.31) (-0.66)

Dser 0.020 -0.047(0.57) (-0.55)

Df&b -0.06 0.018(-1.76)c (0.218)

R2 0.33 0.66 0.83 0.011F 6.78a 30.7a 75.93a 0.211

a indicates statistical significance at 0.01 levelb indicates statistical significance at 0.05 levelc indicates statistical significance at 0.1 level, t values in parenthesis

adding the book value of assets plus market value of common equity minusbook value of common equity divided by book value of assets. Cash flowratio is the operating income before depreciation minus interest expense,taxes, dividends divided by the book value of total assets. High and low q

B. Rajesh Kumarl l


firms are defined by q being above or below one respectively. High and lowcash flow firms are defined by a cash flow ratio being above or below thesample median. R&D intensity is the firm’s ratio of R&D to total assets.Debt ratio is the firm’s total debt to total assets. The firm’s debt ratio anddividend yield are included as alternate measures of free cash flow andinvestment opportunities. Main shareholder power (Mpower) defined asthe percentage of equity ownership held by the main promoter. This variableis included to control the impact of ownership on monitoring managers.Size is measured by the inverse of total assets. All variables representaverage values for the period 2004-2006. D1 represent the dummy variablefor low cash flow and high q firms. D2 represent the dummy variable forhigh cash flow and low q firms. D3 represent the dummy variable for highcash flow and high q firms.

The model is given by

RDI = α+β1 Tobin q + β2 Cash flow ratio + β3 Firm Size + β4

Debt Ratio + β5 Div Yield + β6M Power + β7 D1 + β8 D2+ β9 D3

Model 1 includes all the variables; Model 2 includes all variables exceptthe cash flow ratio. Model 3 excludes Tobin’s q ratio. Model 4 includesdummy variable D1 and excludes D2 and D3. Model 5 includes dummyvariable D2 and excludes D1 and D3. Model 6 includes dummy variable D3

and excludes D1 and D2

In this model, the R&D intensity is regressed over variables likeTobin’s q, cash flow ratio, firm size, debt ratio, main shareholderpower and dividend yield. The impact of R&D intensity on theinteraction of investment opportunities and cash flow is alsoexamined. The model results of 4-6 suggest that Tobin’s q ratio issignificantly negatively related to R&D expenses. Hence it can beconcluded that lesser the investment opportunities for the firm,higher would be the investment for R&D. All the model resultssuggest that the firm size is positively related to R&D Intensity withstatistical significance. Greater the size of the firm, higher will bethe investment in discretionary expenditures like R&D. The debtratio is negatively related to the R&D intensity. But the results donot show statistical significance. The study also finds that dividend



yield is negatively related to R&D intensity with statisticalsignificance. TheR2 of the models varies from 15.8% to 17.7 %. Thestudy does not find evidence for the fact that the high cash flow /low q firms have the largest potential agency costs connected withR&D expenditures.

8. CONCLUSION

The results based on model 1 suggest that the valuation effects ofR&D are positive and significant for medium sized R&D intensivefirms. The cash flow of R&D intensive firms has significant positivevaluation effects. The results based on model 2 signifies that that

Variable Model 1 Model 2 Model 3 Model 4 Model 5 Model 6

Intercept 0.047 0.039 0.038 0.048 0.04 0.047(4.4)a (4.13)a (4.13)a (4.62)a (4.40)a (4.40)a

Tobin q -0.19 -0.16 -0.19 -0.21 -0.23(-1.61) (-1.3) (-1.66)c (-1.99)b (-2.17)b

Cash flow ratio -0.20 -0.16 -0.17 -0.19 -0.133(-1.5) (-1.25) (-1.50) (-1.51) (-1.24)

D1 -0.067 -0.06 -0.16 -0.10(-0.48) (-0.45) (-1.27) (-0.88)

D2 0.07 -0.03 0.054 0.09(0.53) (-0.27) (0.36) (0.85)

D3 0.012 -0.03 -0.03 0.006(0.107) (-0.31) (-0.30) (0.06)

Firm Size 0.23 0.22 0.24 0.22 0.23 0.22(2.5) b (2.41)b (2.76)a (2.65)a (2.71)a (2.46)b

Debt Ratio -0.09 -0.08 -0.15 -0.10 -0.09 -0.099(-0.91) (-0.77) (-1.59) (-0.97) (-0.89) (-0.95)

MPower 0.025 0.01 0.055 0.024 0.022 0.016(0.28) (0.12) (0.62) (0.26) (0.24) (0.18)

Div Yield -0.16 -0.21 -0.19 -0.16 -0.16 -0.18(-1.64) (-2.27)b (-1.98)b (-1.73)c (-1.71)c (-1.86)c

R2 0.177 0.16 0.158 0.17 0.17 0.169F 2.74a 2.75a 2.72a 3.53a 3.52a 3.4a

a indicates statistical significance at 0.01 levelb indicates statistical significance at 0.05 levelc indicates statistical significance at 0.1 level, t values in parenthesis

B. Rajesh Kumarl l


stock market reacts adversely to R&D expenditures As R&Dexpenses increases, the profitability of the firm decreases. Withrespect to advertising intensity firms, the evidence suggests thatthere is a significant positive relationship between the advertisingintensity and profitability of the firm. Higher the profit, greater theamount spend on advertisement. The results also support thehypothesis that higher advertising expenditures will lead to greaterprofitability for the firms.

The model 3 results suggest that High R&D intensive firms havehigher excess valuation effects. Greater the size of firms, higher willbe the expenditures on R&D. Larger the size of the advertisingintensive firms, greater will be the excess valuation effects.

The model 4 results signal that greater the size of the firm, higherwill be the investment in discretionary expenditures likeR&D.Tobin’s q ratio is significantly negatively related to the R&Dexpenses. Hence it can concluded that lesser the investmentopportunities for the firm, higher would be the investment for R&D.

8.1. Implications

The results based on positive valuation effects for medium sizedR&D intensive firms suggest the significance of the marketperception towards R& D expenses. Discretionary expenses likeR&D will send a positive signal to the market and helps in valuecreation. The significant effect of profitability indicates that theamount of profit influences the level of advertising spending.Another interpretation is that higher profitability is an indicator ofhigher future profits. As a result firms will invest in areas that yieldhigher returns leading to a generation of a positive association ofcurrent profits with discretionary expenditures like advertisement.

The results also support the hypothesis that higher advertisingexpenditures will lead to greater profitability of the firm. Thenegative reaction to R&D expenditures signifies the importance ofbetter communication between managers and investors relating tothe long-term impact of strategic decisions like R&D investment.



Advertising can be termed more discretionary than R&D expenses.Firms might see a greater need to continue R&D than advertising ifprofits are low. Another interpretation would be that the perceivedincentive to engage in R&D would be lesser when firms experiencehigher profitability.

The size of a firm is an important variable in determining theamount invested in R&D expenses. High R&D intensive firms havehigher excess valuation effects which may lead to the creation ofintangible capital. The study also suggests that lesser the investmentopportunities for a firm greater will be its investment in R&Dexpenses. Higher advertisement investments will lead to greaterprofitability for the firm and vice versa.

8.2. Future DirectionsThis research paper attempts to fill the gap with respect to valuationstudies involving discretionary expenditures in Indian context. Themarket reaction to discretionary expenditures announcementinvolving event study methodology can be explored.

NOTES

1. Chauvin Keith & Hirschey Mark, Advertising, R&D Expenditures and Marketvalue of Firm, Financial Management, winter, 1993.

2. Almost all the firms in the R&D intensive firms in the sample study weremanufacturing firms.

3. Gay Erickson, Gaining Comparative advantage through discretionaryexpenditure: The returns to R&D and advertising, Management Science, Vol.38, No. 9, 1992.

4. This model is based on study by Hirschey (1982), Thomadakis (1977) Connollyet al (1984).

5. EV/S = Relative excess value= market value of common equity plus book value ofdebt minus book value of common equity divided by sales. R&D intensity is theaverage value for latest three years of R&D expenses divided by sales (RD/S).Advertisement intensity is also the average value of the ratio of Advertisementexpenses to sales for three years. (AD/S) Growth rate is the average growth rate ofsales for three years (GR). Size is measured as inverse of average sales for threeyears.(1/S). Beta value is the average value for three years. HI is a dummy variablefor high intensive intensive firms with intensity greater than 2.5 with respect tosales.. Dcs,Dph,Dser,Df&b are dummy variables representing computer software, Pharma,services and food and beverages sector.

B. Rajesh Kumarl l


REFERENCES

Adam B Jaffe (1986), Technological Opportunity and Spillovers of R&D: Evidencefrom Firms Patents, Profits and Market Value, The American Economic Review,Vol. 76, No. 5, pp. 984-1001.

Ben-Zion, Uri, (1984), The R&D and Investment Decision and its Relationship tothe Firm’s Market value: Some Preliminary Results, R&D, Patentsand Productivity, Zvi Griliches (ED), University of Chicago Press, Chicago,pp. 299-312.

Chauvin W Keith, Hirschey Mark (1993), Advertising, R&D Expenditures andthe Market Value of the Firm, Financial Management, pp. 128-140.

Comanor W S and Wilson T A (1967), Advertising, Market Structure andPerformance, Review of Economics and Statistics, Vol. 49 pp. 423-440.

Connolly, Robert A and Mark Hirschey (1984), R&D Market Structure and Profits:A Value Based Approach, Review of Economics and Statistics, Vol. 66, pp.682-686.

Gary Erickson and Robert T Jacobson (1992), Gaining Comparative Advantagethrough Discretionary Expenditure: The Returns to R&D and Advertising,Management Science. Vol. 38, No. 9, pp. 1264-1279.

Grabowski, Henry G and Dennis C Mueller (1978), Industrial Research andDevelopment, Intangible Capital, Stocks and Firm Profit Rates, Bell Journal ofEconomics, pp. 328-343.

Griliches Zvi, Market Value, R&D and Patents (1981), Economic Letters 7, pp.183-187.

Henry G Grabowski and Dennis C. Mueller (1978), “ Industrial Research andDevelopment, Intangible Capital Stocks and Firm Profit Rates, The Bell Journalof Economics, Vol. 9, Issue 2, pp. 328-343.

J Doukas and L N Switzer (1992), “The Stock Market’s view of R&D Spendingand Market Concentration“, Journal of Economics and Business, pp. 95-114.

Jensen M, “Agency Costs of Free Cash Flow, Corporate Finance and Takeovers“,American Economic Review, (May), 323-329.

Lorne Switzer (1983), “The Determinants of Industrial R&D: A Funds FlowSimultaneous Equation Approach“, The Review of Economics and Statistics,Vol. 5, pp. 163-168.

M Hirschey and J J Weygandt (1985), Amortization Policy for Advertising andResearch and Development Expenditures, Journal of Accounting Research,pp. 326-335

M Hirschey (1985), Market Structure and Market Value, Journal of Business, Jan.,pp. 89-98

M L Jose, I M Nicholas and J L Stevens (1986), Contribution of Diversification,Promotion and R&D to the Value of the Multiproduct Firms: A Tobin’s qApproach, Financial Management, pp. 33-42.



Michael L Katz and Carl Shapiro (1987), R&D Rivalry with Licensing or Imitation,The American Economic Review, Vol. 77, No. 3, pp. 402-420.

Pakes, Ariel (1985), On Patents, R&D and the Stock Market Rate of Return, Journalof Political Economy, Vol. 93 , pp. 390-409.

R Morck and B Yeung (1991), Why Investors Value Multinationality, Journal ofBusiness, pp. 165-187

R Morck, A Shleifer and R W Vishny (1988), Management Ownership and MarketValuation: An Empirical Analysis, Journal of Financial Economics, pp. 293-315.

S. H. Chan, J. D. Martin and J. W. Kensinger (1990), “Corporate Research andDevelopment Expenditure and Share Value, Journal of Financial Economics,pp. 255-276.

S. Lustgarten and S. Thomadakis (1987), Mobility Barriers and Tobin’s q, Journalof Business, pp. 519-537.

Salinger, Michael A (1984), Tobin’s q, Unionization and the Concentration-ProfitsRelationship, Rand Journal of Economics, Vol. 15, pp. 159-170.

Schmalensee R (1972), The Economics of Advertising. Amsterdam: North Holland.

Switzer Lorne, (1984), The Determinants of Industrial R&D: A Funds FlowSimultaneous Equation Approach, Review of Economic and Statistics, Vol. 66,pp. 163-168

Szewczyk S H, George P Tsetsekos, and Zaher Zantout (1996), The Valuation ofCorporate R&D Expenditures: Evidence from Investment Opportunities andFree Cash Flow, Financial Management, Vol. 25, No. 1, Spring, pp. 105-110.

B. Rajesh Kumarl l


APPENDIX–AList of R&D Intensive firms

SL Company Name SL Company Name SL Company Name

1 3I Infotech Ltd. 49 Hindalco Industries Ltd. 97 Sasken Communication Tech2 A C C Ltd. 50 Hindustan Motors Ltd. 98 Shasun Chemicals & Drugs Ltd.3 Alembic Ltd. 51 I T C Ltd. 99 Shriram Pistons & Rings Ltd.4 Apollo Tyres Ltd. 52 Ind-Swift Laboratories 100 Siemens Ltd.

Ltd.5 Areva T & D India Ltd. 53 Indian Oil Corpn. Ltd. 101 Steel Authority of India Ltd.6 Ashok Leyland Ltd. 54 Indian Petrochemicals 102 Strides Arcolab Ltd.

Corpn. Ltd.7 Asian Paints Ltd. 55 Indoco Remedies Ltd. 103 Subros Ltd.8 Astra Microwave 56 Infosys Technologies Ltd. 104 Sun Pharmaceutical Inds. Ltd.

Products Ltd.9 Atul Ltd. 57 Ipca Laboratories Ltd. 105 Sundaram-Clayton Ltd.10 Aurobindo Pharma Ltd. 58 J B Chemicals & 106 Surya Pharmaceutical Ltd.

Pharmaceuticals.11 Bajaj Auto Ltd. 59 J K Industries Ltd. 107 Suven Life Sciences Ltd.12 Balaji Amines Ltd. 60 J S W Steel Ltd. 108 Syngenta India Ltd.13 Bharat Earth Movers Ltd. 61 Jubilant Organosys Ltd. 109 T V S Motor Co. Ltd.14 Bharat Electronics Ltd. 62 Kale Consultants Ltd. 110 Tata Consultancy Services Ltd.15 Bharat Forge Ltd. 63 Kansai Nerolac Paints Ltd. 111 Tata Elxsi Ltd.16 Bharat Heavy 64 Kirloskar Oil Engines Ltd. 112 Tata Motors Ltd.

Electricals Ltd.17 Bharat Petroleum 65 Lakshmi Machine 113 Tata Power Co

Corpn. Ltd. Works Ltd.18 Bilcare Ltd. 66 Larsen & Toubro Ltd. 114 Tata Steel Ltd.19 Biocon Ltd. 67 Lupin Ltd. 115 Thirumalai Chemicals Ltd.20 Britannia Industries Ltd. 68 M R F Ltd. 116 Torrent Pharmaceuticals Ltd.21 C M C Ltd. 69 Madras Cements Ltd. 117 Triton Valves Ltd.22 Cadila Healthcare Ltd. 70 Mahindra & Mahindra Ltd. 118 Ucal Fuel Systems Ltd.23 Chennai Petroleum 71 Marksans Pharma Ltd. 119 Ultratech Cement Ltd.

Corpn. Ltd.24 Cipla Ltd. 72 Maruti Udyog Ltd. 120 Unichem Laboratories Ltd.25 Clariant Chemicals 73 Matrix Laboratories Ltd. 121 United Phosphorus Ltd.

(India) Ltd.26 Colgate-Palmolive 74 Micro Inks Ltd. 122 Visualsoft Technologies Ltd.

(India) Ltd.27 Crompton Greaves Ltd. 75 Minda Industries Ltd. 123 Wanbury Ltd.28 Cummins India Ltd. 76 Moser Baer India Ltd. 124 Wheels India Ltd.29 Dabur India Ltd. 77 Motor Industries Co. Ltd. 125 Whirlpool Of India Ltd.30 Dabur Pharma Ltd. 78 N T P C Ltd. 126 Wockhardt Ltd.31 Dishman Pharmaceuticals 79 Nagarjuna Fertilizers &

& Chemicals Ltd. Chemicals.32 Divi’S Laboratories Ltd. 80 Natco Pharma Ltd. 33 Dr. Reddy’S 81 National Mineral Devp.

Laboratories Ltd. Corpn. Ltd.34 Eicher Motors Ltd. 82 Nestle India Ltd.

Contd...




35 Escorts Ltd. 83 Neyveli Lignite Corpn. Ltd.36 Exide Industries Ltd. 84 Nicholas Piramal India Ltd. 37 F D C Ltd. 85 Oil & Natural Gas Corpn.

Ltd. 38 Flextronics Software 86 Orchid Chemicals &

Systems. Pharmaceuticals Ltd.39 Force Motors Ltd. 87 Panacea Biotec Ltd. 40 Glaxosmithkline 88 Pfizer Ltd.

Consumer Healthcare Ltd.41 Glenmark Pharmaceuticals 89 Pricol Ltd. 42 Godfrey Phillips India Ltd. 90 Punjab Tractors Ltd. 43 Gokaldas Exports Ltd. 91 Rallis India Ltd. 44 Greaves Cotton Ltd. 92 Ramco Systems Ltd. 45 Gujarat State Fertilizers 93 Ranbaxy Laboratories

& Chemicals Ltd. Ltd.46 Hero Honda Motors 94 Reliance Industries Ltd.

Ltd.47 Hikal Ltd. 95 Rico Auto Inds. Ltd. 48 Himachal Futuristic 96 Samtel Color Ltd.

& Comm

B. Rajesh Kumarl l


APPENDIX – BList of Advertisement Intensive Firms


1 3M India Ltd. 49 Bharti Cellular Ltd. 97 Emcure Pharmaceuticals Ltd.2 A D F Foods Ltd. 50 Bharti Hexacom Ltd. 98 Entertainment Network (India)

Ltd.3 A I S Glass Solutions Ltd. 51 Bharti Teletech Ltd. 99 Essel Software & Services Ltd.4 Aastha Broadcasting 52 Birla V X L Ltd. 100 Esskay Telecom Ltd.

Network.5 Accentia Technologies Ltd. 53 Bliss G V S Pharma Ltd. 101 Eureka Forbes Ltd.6 Add Pens Ltd. 54 Britannia Industries Ltd. 102 Eveready Industries (India) Ltd.7 Aditya Birla Nuvo Ltd. 55 Business India Publications 103 F D C Ltd.8 Advani Hotels & Resorts 56 C C S Infotech Ltd. 104 F M C Healthcare Pvt. Ltd.

(India).9 Aircel Digilink India Ltd. 57 C H D Developers Ltd. 105 F S L Projects Ltd.10 Ajay Home Products Ltd. 58 Cadbury India Ltd. 106 Federal-Mogul Goetze (India)

Ltd.11 Ajwa Fun World & 59 Camlin Ltd. 107 Fem Care Pharma Ltd.

Resort Ltd.12 Amara Raja Batteries Ltd. 60 Candico (I) Ltd. 108 Fomento Resorts & Hotels Ltd.13 Ambica Agarbathies. 61 Career Launcher (I) Ltd. 109 Forbes Infotainment Ltd.14 Amco Batteries Ltd. 62 Castrol India Ltd. 110 Fortune Park Hotels Ltd.15 American Express Bank 63 Ceenik Exports (India) 111 Futuristic Securities Ltd.

Ltd. Ltd.16 Amrutanjan Ltd. 64 Celebrity Fashions Ltd. 112 G Claridge & Co. Ltd.17 Anant Raj Inds. Ltd. 65 Century Plyboards (India) 113 G E S Technologies Ltd.18 Apex Laboratories Ltd. 66 Cera Sanitaryware Ltd. 114 G I V O Ltd.19 Apollo Health & 67 Chase Bright Steel Ltd. 115 G L Hotels Ltd.

Lifestyle Ltd.20 Aponline Ltd. 68 Choksi Imaging Ltd. 116 G T C Industries Ltd.21 Apple Credit Corpn. Ltd. 69 Colgate-Palmolive (India) 117 G T L Infrastructure Ltd.22 Aptech Ltd. 70 Colorplus Fashions Ltd. 118 G V Films Ltd.23 Archies Ltd. 71 Compulink Systems Ltd. 119 Galaxy Entertainment Corpn.

Ltd.24 Aroni Commercials Ltd. 72 Coorg Tea Co. Ltd. 120 Galaxy Lifestyle Restaurants

Pvt. Ltd.25 Arvind Clothing Ltd. 73 Cravatex Ltd. 121 Gandhimathi Appliances Ltd.26 Arvind Fashions Ltd. 74 Crossword Bookstores 122 Garnet Construction Ltd.

Ltd.27 Ashiana Housing & 75 Cyber Media (India) Ltd. 123 Gateway Hotels & Getaway

Finance Resorts Ltd.28 Asian Cerc Information 76 D I L Ltd. 124 Gem & Jewellery Export Prom

Tech Council29 Asian Hotels Ltd. 77 D L F Services Limited 125 Gemini Exhibitors Ltd.30 Asian Paints Ltd. 78 D S Kulkarni Developers. 126 Gillette India Ltd.31 Atco Weighing Solutions 79 D S P Merrill Lynch Fund 127 Glaxosmithkline Consumer

Co. Ltd. Healthcare

Contd...




32 Avaya Globalconnect Ltd. 80 Dabur Foods Ltd. 128 GlaxosmithklinePharmaceuticals Ltd.

33 Aventis Pharma Ltd. 81 Dabur India Ltd. 129 Global Software Ltd.34 Avon Cycles Ltd. 82 Dabur Pharma Ltd. 130 Godfrey Phillips India Ltd.35 B 2 B Software 83 Datanet Systems Ltd. 131 Godrej & Boyce Mfg. Co. Ltd.

Technologies Ltd.36 B P L Ltd. 84 Dawn Apparels Ltd. 132 Godrej Appliances Ltd.37 B P L Mobile 85 Delhi Metro Rail 133 Godrej Beverages &

Communications. Corpn. Ltd. Foods Ltd.38 B S L Ltd. 86 Dharampal Satyapal Ltd. 134 Godrej Consumer Products Ltd.39 B T A Cellcom Ltd. 87 Domino’S Pizza India Ltd. 135 Godrej Hicare Ltd.40 Bajaj Consumer Care Ltd. 88 Donear Industries Ltd. 136 Godrej Sara Lee Ltd.41 Bajaj Electricals Ltd. 89 Dorcas Market Makers 137 Greenply Industries Ltd.

Ltd.42 Balsara Home 90 E I H Associated Hotels 138 Gujarat J H M Hotels

Products Limited Ltd. Ltd.43 Balsara Hygiene 91 E I H Ltd. 139 Gujarat Lease Financing Ltd.

Products Ltd.44 Bayer Cropscience Ltd. 92 E K L Appliances Ltd. 140 Gujarat State Petroleum Corpn.

Ltd.45 Benares Hotels Ltd. 93 E.Com Infotech (India) Ltd. 141 Gujarat Tea Processors &

Packers Ltd.46 Berger Paints India Ltd. 94 Educomp Solutions Ltd. 142 H & R Johnson (India) Ltd.47 Best Eastern Hotels Ltd. 95 Eldeco Housing & Inds. Ltd. 143 H T Media Ltd.48 Bharti Airtel Ltd. 96 Emami Ltd. 144 Haria Exports Ltd.145 Hawkins Cookers Ltd. 195 Kaya Skin Care Ltd. 245 Network Ltd.146 Helios & Matheson IT Ltd. 196 Kewal Kiran Clothing Ltd. 246 New Era Entertainment

Network.147 Herbertsons Ltd. 197 Khaitan Electricals Ltd. 247 Next Gen Publishing Ltd.148 Hero Honda Motors Ltd. 198 Kinetic Motor Co. Ltd. 248 Nicco Parks & Resorts Ltd.149 Hicks Thermometers 199 Kishco Ltd. 249 Nicholas Piramal India Ltd.

(India) Ltd.150 Hifco Marwel Ltd. 200 Kodak India Ltd. 250 Nippo Batteries Co. Ltd.151 Hindustan Latex Ltd. 201 Kosha Cubidor Con Ltd. 251 Niryat-Sam Apparels (India) Ltd.152 Hindustan Lever Ltd. 202 Kothari Products Ltd. 252 Nitco Tiles Ltd.153 Hindustan Times Ltd. 203 Kothari Safe Deposits Ltd. 253 Novar India Ltd.154 Hindustan Wires Ltd. 204 Kovalam Hotels Ltd. 254 Novartis India Ltd.155 Hitachi Home & 205 L M L Ltd. 255 Nutrine Confectionery Co. Pvt.

Life Solutions Ltd.156 Howard Hotels Ltd. 206 La Opala R G Ltd. 256 Nuway Organic Naturals India

Ltd.157 Hutchison Essar 207 Liberty Retail 257 O P G Metals & Finsec Ltd.

South Ltd. Revolution Ltd.158 Hyderabad IntlTrade 208 Liberty Shoes Ltd. 258 Omega Interactive

Expositions. Technologies.159 Hyundai Motor India Ltd. 209 Linc Pen & Plastics Ltd. 259 Orient Ceramics & Inds. Ltd.

Contd...

B. Rajesh Kumarl l



160 I C C International 210 Living Media India Ltd. 260 P C S Technology Ltd.Agencies Ltd.

161 I C I C I Home 211 Living Room Lifestyle Ltd. 261 P V R Ltd.Finance Co. Ltd.

162 I F B Industries Ltd. 212 Lloyds Finance Ltd. 262 Pan India Paryatan Ltd.163 I F S L Ltd. 213 Lok Housing & Constr. 263 Panasonic Battery India Co. Ltd.164 I Power Solutions 214 Lotte India Corpn. Ltd. 264 Panasonic Home Appliances

India Ltd. India.165 Idea Cellular Ltd. 215 M T R Foods Ltd. 265 Pancard Clubs Ltd.166 Idea Mobile 216 Macro (Intl) Exports Ltd. 266 Pantaloon Retail (India) Ltd.

Communications.167 Incon Engineers Ltd. 217 Magna Publishing Co. Ltd. 267 Paras Pharmaceuticals Ltd.168 Indiaco Ventures Ltd. 218 Mahindra Holidays 268 Peerless Abasan Finance Ltd.

India Ltd.169 Indian Hotels Co. Ltd. 219 Mahyco Monsanto Biotech 269 Pennzoil-Quaker State India

Ltd.170 Indian Resort Hotels Ltd. 220 Majestic Auto Ltd. 270 Perfect Circle India Ltd.171 Indicarb Ltd. 221 Manappuram GenFin Ltd. 271 Perk Pharmaceuticals Ltd.172 Indo Asian Finance Ltd. 222 Marathon Nextgen Textiles. 272 Pfizer Ltd.173 Indo Continental Hotels. 223 Marico Ltd. 273 Pidilite Industries Ltd.174 Indo Nissin Foods Ltd. 224 Maruti Udyog Ltd. 274 Piem Hotels Ltd.175 Indoco Remedies Ltd. 225 Mashobra Resort Ltd. 275 Praveen Properties Ltd.176 Indus League Clothing 226 Max Healthcare Institute 276 Priya Food Products Ltd.

Ltd. Ltd.177 Infomedia India Ltd. 227 Max Healthstaff Intl. Ltd. 277 Procter & Gamble Home

Products Ltd.178 Innetwork Entertainment 228 Maxwell Industries Ltd. 278 Procter & Gamble

Ltd. Hygiene&Health .179 Inox Leisure Ltd. 229 Media Video Ltd. 279 Provestment Services Ltd.180 Integrated Hitech Ltd. 230 Mewar Industries Ltd. 280 Provogue (India) Ltd.181 Ion Exchange Enviro 231 Millennium Beer Inds. 281 Prozone Enterprises Pvt. Ltd.

Farms Ltd. Ltd.182 J I K Industries Ltd. 232 Mirasu Marketing Ltd. 282 R P G Global Music Ltd.183 J K Agri Genetics Ltd. 233 Mirc Electronics Ltd. 283 Radico Khaitan Ltd.184 J K Helene Curtis Ltd. 234 Mirza International Ltd. 284 Radio Mid-Day West (India) Ltd.185 J L Morison (India) Ltd. 235 Monsanto India Ltd. 285 Rajath Finance Ltd.186 Jaipan Industries Ltd. 236 Monto Motors Ltd. 286 Ramco Industries Ltd.187 Jeet Machine Tools Ltd. 237 Moschip Semiconductor 287 Ramco Systems Ltd.

Tech188 Jeevan Softech Ltd. 238 Multi Comm Exchange 288 Ranbaxy Laboratories Ltd.

of India189 Jetking Infotrain Ltd. 239 Mysore Breweries Ltd. 289 Rane Brake Linings Ltd.190 Jyothy Laboratories Ltd. 240 N D A Commodity 290 Raptakos, Brett & Co. Ltd.

Brokers Pvt. Ltd.191 Kajaria Ceramics Ltd. 241 N I I T Ltd. 291 Ras Resorts & Apart Hotels Ltd.

Contd...




192 Kamat Hotels (India) Ltd. 242 Nalanda Hotels & 292 Ratan Glitter Inds. Ltd.Properties Ltd.

193 Kansai Nerolac Paints Ltd. 243 National Plastic Inds. Ltd. 293 Ray Ban Sun Optics India Ltd.194 Karnataka Soaps & 244 Nestle India Ltd. 294 Raymond Apparel Ltd.

Detergents295 Raymond Ltd. 345 Tata Tea Ltd.296 Reckitt Benckiser 346 Tata Teleservices

(India) Ltd. (Maharashtra) Ltd.297 Rediff.Com India Ltd. 347 Tata Teleservices Ltd.298 Relaxo Footwears Ltd. 348 Technojet Consultants Ltd.299 Religare Comdex Ltd. 349 Tide Water Oil Co. (India)

Ltd.300 Residency Housing 350 Times Internet Ltd.

Finance Ltd.301 Ricoh India Ltd. 351 Timex Watches Ltd.302 Royal Orchid Hotels Ltd. 352 Tips Industries Ltd.303 Royale Manor Hotels & 353 Titan Industries Ltd.

Inds. Ltd.304 Runwal Multiplex Pvt. Ltd. 354 Transcorp International Ltd.305 Rupa & Co. Ltd. 355 Trent Ltd.306 S I E L Financial Services 356 Tudor India Ltd.

Ltd.307 Saboo Sodium Chloro Ltd. 357 U D V India Ltd.308 Sagar Tourist Resorts Ltd. 358 U T V Software

Communications Ltd.309 Sahara One Media & 359 Unichem Laboratories Ltd.

Entertainment Ltd.310 Sanofi-Synthelabo 360 Unilever India Exports Ltd.

(India) Ltd.311 Sarda Plywood Inds. Ltd. 361 Uniphos Enterprises Ltd.312 Saregama Films Ltd. 362 United Hotels Ltd.313 Saregama India Ltd. 363 United Spirits Ltd.314 Saurashtra Cement Ltd. 364 Universal Prime

Aluminium Ltd.315 Savant Infocomm Ltd. 365 Usha International Ltd.316 Seasons Furnishings Ltd. 366 V I P Industries Ltd.317 Sharp India Ltd. 367 V S T Distribution, Storage

& Leasing Co. Pvt. Ltd.318 Shaw Wallace 368 Vadilal Enterprises Ltd.

Distilleries Limited319 Shivdeep Industries Ltd. 369 Valuemart Info

Technologies Ltd.320 Shree Raj Travels & 370 Valvoline Cummins Ltd.

Tours Ltd.321 Shri Dinesh Mills Ltd. 371 Varun Mercantile Ltd.322 Shringar Cinemas Ltd. 372 Victor Gaskets India Ltd.

Contd...


323 Shyam Telelink Ltd. 373 Victoria Enterprises Ltd.324 Silver Smith India Ltd. 374 Videocon Industries Ltd.325 Simco Industries Ltd. 375 Videsh Sanchar Nigam Ltd.326 Siyaram Silk Mills Ltd. 376 Vimta Labs Ltd.327 Skol Breweries Ltd. 377 Vintron Informatics Ltd.328 Softbpo Global Services 378 Visu International Ltd.

Ltd.329 Software Tech Group 379 Walchand Peoplefirst Ltd.

International Ltd.330 Sri Skandan Inds. Ltd. 380 Wall Street Finance Ltd.331 Srivatsa Electric & 381 Wanbury Ltd.

Electronic Ltd.332 Stic Pens Ltd. 382 Warner Multimedia Ltd.333 Subway Finance & 383 Webel Communication

Investment Co. Ltd. Inds. Ltd.334 Sundaram Home 384 Welcure Drugs &

Finance Ltd. Pharmaceuticals Ltd.335 Super Crop Safe Ltd. 385 Whirlpool of India Ltd.336 Swastik Surfactants Ltd. 386 Wyeth Ltd.337 Systematix Corporate 387 Yes Bank Ltd.

Services Ltd.338 T O C Disinfectants 388 Zandu Pharmaceutical

Ltd. [Merged] Works Ltd.339 T T K Healthcare Ltd. 389 Zee Entertainment

Enterprises Ltd.340 T T K Prestige Ltd. 390 Zenith Computers Ltd.341 T V S Motor Co. Ltd. 391 Zenith Infotech Ltd.342 T V Today Network Ltd. 392 Zodiac Clothing Co. Ltd.343 Taj G V K Hotels & 393 Zuventus Healthcare Ltd.

Resorts Ltd.344 Taparia Tools Ltd.

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