janani eva final

7/29/2019 Janani Eva Final

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1.1 INTRODUCTION TO THE STUDY

Indian Banking has seen many changes in the last decade like imposition of prudential standards,

greater competition among banks, entry of new private banks, etc. This paradigm shift in the

Indian banking sector can be seen in terms of two dimensions: One relates to operational aspect

especially performance and risk-management system and the second dimension relates to

structural and external environment or exogenous aspects. Is evaluating Indian banks

performance a rather straight forward issue? The answer is no. One might say that like a

corporate, even banks can be judged from the behaviour of their stock prices. However, as bank

stocks have not been very active on exchanges, barring few on few occasions, should we

conclude that Indian banks have by and large failed to add values to their shareholders wealth.

The answer is once again no, as one needs to evaluate private and public sector banks in a more

dynamic manner than just looking at their stock prices, non-performing assets (NPAs), C/D

ratios and others. Some may also argue that the general slowdown in lending by banks and their

eternal problem of recovery of non performing assets (NPAs) has led to the sufferings of Indian

banks.

Many Indian banks are discovering that the key to their long-term growth does not lie in

products and services alone but in assets that can never be replicated, that is, their uniquerelationship with customers, employees, suppliers and distributors, investors and the

communities they serve. One of the most fateful errors bankers usually commit relates to their

belief that merely reducing NPAs and thereby maximizing profit would solve the problem of

banking industry. Not only is this belief still held by most of the bankers in India - and therefore

professionally unacquainted by the changing profile of their shareholders and the capital market-

it is held by virtually large number of myopic captains of the industry. That things are not going

as well as they ought to be going for such banks could be due to economic recession, poor

demand for credit, rising manpower costs, political uncertainty, inefficient ways of doing

business. Or is it something else? In order to help management understand their own economics

and arrive at value creating investment decision that adequately satisfies the two sensitive factors

mentioned earlier, bankers must understand the concept and relevance of Economic Value

Added (EVA)., a period based measure of value creation. EVA provides a unique insight into

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value creation and links theory of finance with the competitive strategy framework as

enumerated by Michael Porter. EVA is also a quantifiable driver of value creation for the stock

markets. Large number of International banks (such as Citibank, Deutsche Bank, Barclays, ABN

AMRO) use value based frameworks such as EVA to run their banking operations. Although

EVA an a yardstick in India may be at an evolving stage, banks like HDFC Bank, ICICI Bank

etc. have gradually started adapting such measure to cater to the increasingly discerning investor

base.

A banks management creates value when it takes decisions that provide benefits, in excess of

costs. These benefits may come to banks in the near or distant future depending on the strategies

involved in decision making process. The bankers of todays world therefore must be sensitive to

two fundamental drivers that drive shareholders wealth. First, there must be an unrelenting

focus to ensure that funds mobilized by the banks (whether through depositors, equity or debt

issues) generate returns in excess of the cost of capital (or can reasonably be expected to do so)

with an eye toward returning non productive capital back to providers of the capital or

shareholders. Second, bankers should constantly seek to invest in technology that increases their

reach and also be open to strategic alliances, mergers and acquisitions and restructuring.

EVA is the invention of Stern Stewart and Co., a global consulting firm, which launched EVA in

1989. EVA is Economic Value Added, a measure of economic profit. It is calculated as the

difference between the Net Operating Profit after Tax and the opportunity cost of invested

Capital. This opportunity cost is determined by the weighted average cost of Debt and Equity

Capital (WACC) and the amount of Capital employed.

What separates EVA from other performance metrics such as EPS, EBITDA, and ROIC is that it

measures all of the costs of running a businessoperating and financing. This makes EVA the

soundest performance metric, and the one most closely aligned with the creation of shareholder

value. In fact, EVA and Net Present Value arithmetically tie, so companies can be assured that

increasing EVA is always a good thing for its investorscertainly not the case with EPS or Free

Cash Flow. Many even argue that EVA is a better decision tool than NPV because it captures the

period-by-period value creation or destruction of a given firm or investment, and makes it easy to

audit performance against management projections. Given the usefulness of the measure, many

companies have adopted it as part of a comprehensive management and incentive system that

drives their decision processes. They strive to increase their EVA by:

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Increasing the NOPAT generated by existing Capital

Reducing the WACC( WEIGHTED AVERAGE COST OF CAPITAL)

Investing in new projects where the Return exceeds the WACC

Divesting Capital where the Return is below the WACC

Such focus on value creation has served the shareholders of these companies well. A banks

invested capital multiplied by WACC gives the minimum level of operating profits the bank

should generate to satisfy shareholders. EVA measures how much net operating profit (adjusted

for tax and also called NOPAT) exceeds the capital charge. Mathematically, EVA can be

estimated focusing both on Management of Capital as well as the Management of Profits.

A banks present value should equal its invested capital plus the present value of future EVA and

if the banks present value is lower, the stock is undervalued and vice versa. Value of a banks

share is also said to equal the market value of assets and the sum of EVAs of all future periods

discounted back to the present. A bank once it reaches a period when it no longer earns a return

on its incremental investments greater than its cost of capital, from this period onward no EVA is

added or destroyed from new investments. While competitive forces are likely to drive returns to

WACC for Indian banks, the emergence of indifference vary from bank to bank and is

determined by several factors such as industry structure, a banks position in the industry, capital

spending for strategic investments etc. A banks invested capital multiplied by WACC gives the

minimum level of operating profits the bank should generate to satisfy shareholders. EVA

measures how much net operating profit (adjusted for tax and also called NOPAT) exceeds the

capital charge. Mathematically, EVA can be estimated focusing both on Management of Capital

as well as the Management of Profits.

EVA - (As a measure of Value creation through Management of Profits)

EVA - (As a measure of value creation through Management of Capital)

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The use of this formula will produce either a positive or negative EVA number. A positive EVA

reflects that the company is increasing its value to its shareholders, whereas a negative EVA

reflects that it is diminishing its value to its shareholders. EVA is based on the principle that

since a companys management employs equity capital to earn a profit; it must pay for the use of

this equity capital. Including a cost for the use of equity capital sets EVA apart from more

popular measures of bank performance, such as return on assets (ROA), return on equity (ROE)

and the efficiency ratio, which do not consider the cost of equity capital employed. As a result,

these measures may suggest a bank is performing well, when in fact it may be diminishing its

value to its shareholders.

Until a business returns a profit that is greater than its cost of capital, it operates at a

loss... The enterprise still returns less to the economy than it devours in resourcesUntil

then it does not create wealth; it destroys it

- Peter Drucker

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1.2 ABOUT BANKING INDUSTRY

The Indian banking system is financially stable and resilient to the shocks that may arise due to

higher non-performing assets (NPAs) and the global economic crisis, according to a stress test

done by the Reserve Bank of India (RBI).

Significantly, the RBI has the tenth largest gold reserves in the world after spending US$ 6.7

billion towards the purchase of 200 metric tonnes of gold from the International Monetary Fund

(IMF) in November 2009. The purchase has increased the country's share of gold holdings in its

foreign exchange reserves from approximately 4 per cent to about 6 per cent.

Following the financial crisis, new deposits have gravitated towards public sector banks.

According to RBI's 'Quarterly Statistics on Deposits and Credit of Scheduled Commercial

Banks: September 2009', nationalised banks, as a group, accounted for 50.5 per cent of the

aggregate deposits, while State Bank of India (SBI) and its associates accounted for 23.8 per

cent. The share of other scheduled commercial banks, foreign banks and regional rural banks in

aggregate deposits were 17.8 per cent, 5.6 per cent and 3.0 per cent, respectively.

With respect to gross bank credit also, nationalised banks hold the highest share of 50.5 per cent

in the total bank credit, with SBI and its associates at 23.7 per cent and other scheduled

commercial banks at 17.8 per cent. Foreign banks and regional rural banks had a share of 5.5 per

cent and 2.5 per cent respectively in the total bank credit.

The report also found that scheduled commercial banks served 34,709 banked centres. Of these

centres, 28,095 were single office centres and 64 centres had 100 or more bank offices.

The confidence of non-resident Indians (NRIs) in the Indian economy is reviving again. NRI

fund inflows increased since April 2009 and touched US$ 45.5 billion on July 2009, as per the

RBI's February bulletin. Most of this has come through Foreign Currency Non-resident (FCNR)

accounts and Non-resident External Rupee Accounts. India's foreign exchange reserves rose to

US$ 284.26 billion as on January 8, 2010, according to the RBI's February bulletin.

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Major Developments

The State Bank of India (SBI) has posted a net profit of US$ 1.56 billion for the nine months

ended December 2010, up 14.43 per cent from US$ 175.4 million posted in the nine monthsended December 2009.

The SBI is adding 23 new branches abroad bringing its foreign-branch network number to 160

by March 2010. This will cement its leading position as the bank with the largest global presence

among local peers.

Amongst the private banks, Axis Bank's net profit surged by 32 per cent to US$ 115.4 million on

21.2 per cent rise in total income to US$ 852.16 million in the second quarter of 2009-10, overthe corresponding period last year. HDFC Bank has posted a 32 per cent rise in its net profit at

US$ 175.4 million for the quarter ended December 31, 2009 over the figure of US$ 128.05

million for the same quarter in the previous year.

Government Initiatives

In its platinum jubilee year, the RBI, the central bank of the country, in a notification issued on

June 25, 2009, said that banks should link more branches to the National Electronic ClearingService (NECS). Ideally, all core-banking-enabled branches should be part of NECS. NECS was

introduced in September 2008 for centralised processing of repetitive and bulk payment

instructions. Currently, a little over 26,000 branches of 114 banks are enabled to participate in

NECS.

In the Third Quarter Review of Monetary Policy for 2009-10, the RBI observed that the Indian

economy showed a degree of resilience as it recorded a better-than-expected growth of 7.9 per

cent during the second quarter of 2009-10.

In its Third Quarter Review of Monetary Policy for 2009-10, the RBI hiked the Cash Reserve

Ratio (CRR) by 75 basis points (bps) to 5.75 per cent, while keeping repo and reverse repo rates

unchanged.

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According to the RBI, the stance of monetary policy for the remaining period of 2009-10 will be

to:

Anchor inflation expectations and keep a vigil on inflation trends and respond swiftlythrough policy adjustments,

Actively manage liquidity to ensure credit demands of productive sectors are met

adequately,

Maintain an interest rate environment consistent with financial stability and price

stability.

The money supply (M3) growth on a year-on-year basis at 18.9 per cent as on October 9, 2010,

remained above the indicative projection of 18.0 per cent set out in the First Quarter Review of

July 2010. The main source of M3 expansion was bank credit to the government, reflecting large

market borrowings of the Government.

Meanwhile, outstanding bank credit in the 15 days up to January 29 2010 rose by US$ 4.32

billion, pointing to a revival in credit growth. This is the highest year-on-year growth recorded

since August 14, 2010.

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LVB profile.

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Date of Establishment 03-11 1926

Revenue 238.806 ( USD in Millions )

Market Cap 8587.150212 ( Rs. in Millions )

Corporate AddressSalem Road,,Kathaparai,, Karur-639006, Tamil Naduwww.lvbank.com

Managemen t DetailsChairperson -

MD - P R Somasundaram

Directors - B K Manjunath, B Murali Nair, D L N Rao, E

Sreedhar, G Sudhakara Gupta, K Balaji, K R Pradeep, K

Ravindrakumar, Ksr Anjaneyulu, Kusuma R Muniraju, M

P Shyam, M Palaniappan, N Saiprasad, Naganna

Prabhakaran, P R Somasundaram, R Mohan, R Sridharan,

Rajat Baldhi, S Dattathreyan, S G Prabhakharan, S L

Sivashanmugam, S Narayan, S Venkateswaran, V

Prakash, V S Reddy

Business Operation Bank Private

Background

Lakshmi Vilas Bank (LVB) was founded eight decades

ago in 1926 by seven people of Karur under the leadership

of VSN Ramalinga Chettiar, mainly to cater to the

financial needs of varied customer segments. The bank

was incorporated on November 03, 1926 under the Indian

companies act, 1913 and obtained the certificate to

commence business on November 10, 1926, the bank

obtained its license from Reserve Bank

Financials Total Income - Rs. 12018.514 Million ( year ending

Mar 2011)

Net Profit - Rs. 1011.368 Million ( year ending

Mar 2011)

Company Secretary S Venkateswaran

Bankers

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Lakshmi Vilas Bank (LVB) was founded eight decades ago in 1926 by seven people of Karur

under the leadership of VSN Ramalinga Chettiar, mainly to cater to the financial needs of varied

customer segments. The bank was incorporated on November 03, 1926 under the Indian

companies act, 1913 and obtained the certificate to commence business on November 10, 1926,

the bank obtained its license from Reserve Bank of India (RBI) in June 1958 and in August 1958

it became a scheduled commercial bank.

During 1961-65 LVB took over nine banks and raised its branch network considerably. To meet

the emerging challenges in the competitive business world, the bank started expanding its

boundaries beyond Tamil Nadu from 1974 by opening branches in the neighboring states ofAndhra Pradesh, Karnataka, Kerala, Maharashtra, Madhya Pradesh, Gujarat, West Bengal, Uttar

Pradesh, Delhi and Pondicherry.

Mechanization was introduced in the head office of the bank as early as 1977. At present, with a

network of 249 branches, 3 satellite branches and 6 extension counters, spread over 14 states and

the union territory of Pondicherry, the banks focus is on customer delight, by maintaining high

standards of customer service and amidst all these new challenges, the bank is progressing

admirably. LVB has a strong and wide base in the state of Tamil Nadu, one of the progressive

states in the country, which is politically stable and has a vibrant industrial environment. LVB

has been focusing on retail banking, corporate banking and bank assurance.

The banks business crossed Rs. 12,606 crores as on March 31, 2009. The bank earned a net

profit of Rs. 50.30 crores. The net owned fund of the bank reaches Rs 453.70 crore. With a fairly

good quality of loan assets the net NPA of the bank was pegged at 1.24 % as on March 31, 2009.

Banking

Savings Bank

Current Account

No FRILLS SB A/C

Fixed Deposits

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Loans

International Banking

NRI Banking

Net Banking

SMS Banking

Services

Shop online

Bill Payment

Online RTGS

SMS alerts

NEFT

RTGS

ATM Network

Forex Services

Western Money Transfer

100 % CBS Branches.

VISA Enabled International Debit Card.

RTGS & NEFT enabled electronic funds transfer services.

Internet Banking, Mobile Banking & SMS Alerts.

Electronic Clearing Services (ECS).

National Electronic Clearing Services (NECS).

Payment through mobile phone via, paymate coupled with all our existing recently launchedinnovative & attractive deposit schemes, and other loan schemes which suits large number of

employees, comparable only with Best in the industry to-day.

Total business volume grew with the deposits level at around Rs.12813 Crores and the credit

portfolio expanding to Rs.8183 Crores with a total Business mix of Rs.21625 Crores and

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registered growth at 37% for the year Half Year ended September 2011. The bank has a suite of

products that are constantly innovated to suit the changing needs of the customers. To facilitate

all the financial services under one roof, the bank has tied up for a bancassurance pact with Life

Insurance Corporation of India for marketing life insurance products, Bajaj Allianz General

Insurance Co. Ltd for General Insurance distribution business and arrangements for distributing

the mutual fund products of 16 various reputed AMCs. The Bank believes in cost effective

service delivery powered by appropriate technology to enhance value to customers. All our

bank branches are in the state-of-the-art core banking software viz. Flex cube. The Bank has an

ATM network of 502, in vital/Major locations. Consequent to the tie-up with Cash Tree Network

and NFS for ATMs, over 81000 & above ATMs.

In terms of service standards and operational efficiency, the bank has bench marked its practices

with the best in the industry. The bank has taken great strides in reaching out to the various

segments of the society through its innovative products delivered through multiple channels

woven around branches in different geographies. True, life smiles where LVB serves.

VISION

"To be a sound and dynamic banking entity providing financial services of excellence with Pan

India presence."

MISSION

To develop a range of quality financial services and products to create value for customers,

shareholders and the society; to motivate people to achieve excellence in performance leading to

sustained profitable growth and build a vibrant organization.

PRODUCT PROFILE

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LVB offers a comprehensive range of Products & Services:

1. SAVINGS

Savings Bank

LVB Savings Bank is intended to promote the healthy habit of saving and for the steady growthof one's money in the bank. LVB recognizes that Savings Bank customers are the pulse of all

banking activity and that a satisfied customer at the SB counter is the best advertisement to the

bank. Savings Bank is the landing ground for all deposits and its customers are the opinion

leaders. Hence LVB attaches a lot of importance to the efficient functioning of the savings

department.

No Frills SB Account

It is available primarily to low income group people of the society, downtrodden men and

women, students, senior citizens, weaker sections of the society, financially and economically

backward people, who are mainly residing in rural and semi urban centres of our country. The

main idea behind the NO-FRILLS SB ACCOUNT is to reach out a sizable section of the

population, who have been deterred and discouraged in availing Banking services for one reason

or the other.

Lakshmi Savings Gold

Lakshmi Savings Gold account offers special privileges to our customers who maintain an

Average Monthly Minimum Balance of Rs. 10,000 and above.

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Lakshmi Savings Star Gold

Lakshmi Savings Gold account offers special privileges to our customers who maintain an

Average Monthly Minimum Balance of Rs. 20,000 and above.

Lakshmi Savings Balance Free

Lakshmi Balance Free account is available in all the branches, specially meant for salaried

persons.

The employer firm/organization should have account with the bank.

Salary of the employees shall be credited directly to the employees account.

It shall be a Zero balance account.

ATM withdrawal of Rs.25000/- per day

Free Net Banking

Lakshmi Savings Youth Power

A savings account exclusively for children/youth.

2. CURRENT

Lakshmi Supreme

Multicity current account is termed as "Lakshmi Supreme". The current account will be for

Business Organisations and Small & Medium Enterprises. Features of Multicity Cheque

Facility Accounts.

Lakshmi Current Diamond

Lakshmi Current Diamond account offers special privileges to our customers who maintain an

Average Monthly Minimum Balance of Rs. 5 Lacs and above.

Lakshmi Current Diamond Plus

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Lakshmi Current Diamond account offers special privileges to our customers who maintain an

Average Monthly Minimum Balance of Rs. 10 Lacs and above.

Lakshmi Current Silver

Lakshmi Current Silver account offers special privileges to our customers who maintain an

Average Monthly Minimum Balance (AMMB) of Rs. 1 Lakh and above.

3. FIXED RATE DEPOSITS

Fixed Deposits

Suitable for planned expenditure or savings

Recurring

Save in dribbles - receive a lump sum. Suitable for Tax planning, Annual payment

commitments like Insurance premium, long-term requirements like purchase of consumer

articles/ durables, house construction, children's education etc.

Lakshmi Freedom Deposit (LFD)

The scheme has several unique features, which are customer friendly and an attractive form of

investment.

Lakshmi Tax Saver Deposit

The scheme has several unique features, which are customer friendly and an attractive form of

investment.

ONLINE SERVICES

Open term deposit online

Make donation

Book Movie ticket

Recharge Mobile

Pay utility bills

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Shop online

Recharge DTH

Repay loan online

Net banking

ECS

Apply online

CUSTOMER SERVICES

Branch locator map

ATM map

Grievance Redressal

Customer care

Cash tree and NFS

MOBILE BANKING

Enables Funds Transfer form one Bank A/C to another Bank A/C through Mobile Phone.

Air Ticket Booking

Train Ticket Booking

Movie Ticket Booking

Mobile/DTH recharge

CORE BANKING

Anytime, anywhere banking.

Online statement of accounts from any ATM.

Instant funds transfer between CBS branches.

Single view for all accounts of customers.

TECHNOLOGICAL PRODUCTS & SERVICES AT LVB

Funds Transfer through NEFT/RTGS

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VISA ATM debit cards/VISA gold card

Internet Banking

Door step banking

SMS alerts

IMPS-Fund transfer through mobile phone up to Rs. 50,000

E-Tax payments

Money transfer through Western Union Money, X-Press Money & Money Gram

Bank assurance- Tie up with LIC

General Insurance products through BAJAJ ALLIANZ ASSURANCE LTD

Investment opportunity arrangements with top Mutual Funds In India

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19

Competitors

Company

Sales

(Rs.Million)

Current

Price

Change

(%)

P/E

Ratio

Market

Cap.(Rs.Million)

52-Week

High/Low

HDFC Bank 199282.12 522.85 1.47 25.39 1226178.86 540/400

ICICI Bank 259740.53 914.70 6.22 17.53 1054314.37 1138/641

Axis Bank 151548.06 1213.10 4.07 12.57 500857.22 1461/785

Kotak Mahindra

Bank43035.58 558.55 1.19 39.86 413271.52 585/403

Indusind Bank 35893.57 316.65 1.75 19.70 147958.31 334/222

Yes Bank 40417.47 365.10 8.07 14.17 128756.10 374/231

Centurion Bk of

Punj12685.30 41.40 0.00 52.93 78932.68 43/41

Federal Bank 40520.28 415.10 2.77 9.99 71001.82 480/322

ING Vysya Bank 26940.64 329.35 1.21 11.76 49427.40 374/275

J&K Bank 37131.32 843.80 3.20 5.58 40905.57 915/645

Karur Vysya

Bank22176.95 373.00 0.47 8.51 40008.57 479/322

Bank of Raj 13594.89 212.10 1.80 0.00 34222.35 214/207

South Indian

Bank24460.17 25.30 2.02 7.94 28683.86 28/20

City Union Bank 12184.08 47.25 0.53 7.41 19247.54 52/39

Karnataka Bank 23708.47 101.75 4.63 7.55 19157.55 134/64

Standard

Chartered63524.25 79.10 0.76 0.92 18984.00 118/69


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1.4 OBJECTIVES OF THE STUDY

PRIMARY OBJECTIVE:

The purpose of report is to use EVA as measure to evaluate the lakshmi vilas Bank and

performance and also see which banks have been able to create (or destroy) shareholders wealth

since 2006-2007 to 2010-2011

SECONDARY OBJECTIVE

To learn about EVA and its applications to increase the shareholders wealth.

To analyse the debt and equity utilized in the banks

To study about the optimum utilisation of resources

To analyse about the productivity of staff

To measure a banks historical success in creating values

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1.5 SCOPE OF STUDY

The study aims to find out the ECONOMIC VALUE ADDED TOWARDS

SHAREHOLDERS IN LVB, Coimbatore.

This study helps to find out the usage of Economic value .

This study helps the bank for the overall improvement from the suggestions given by

the employees.

The study can find out the changes that the bank should bring out in their product in

future.

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LIMITATIONS OF THE STUDY

This study is limited to five years.

The collected data has been analyses with the help of EVA (Economic Value

added) and also through ratio analysis. So its limitation is also applicable

Reliability of the results depends on reliability and accuracy of the secondary data.

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2.0 REVIEW OF LITERATURE

The study by Stewart (1991) is the first study, which showcases EVA as a proxy for MVA.

Using a sample of more than 600 US companies for the period of 1987-88, the author has argued

that the ability of change in EVA to explain the change in MVA is quite high. Stern, Stewart, and

Chew (1995) reported that the change in EVA over a period of five years explained 50% of the

change in MVA. Stern and Shiely (2001) mentioned in their book, that there is significant link

between EVA growth and growth in MVA.

There are other studies, which have shown the relationship between EVA and the firm values.

OByrne (1996) studied the information content of EVA and NOPAT and argued that EVA,

unlike other earnings measures like NOPAT, net income or earnings per share, is systematically

linked to market value and concluded that the EVA outperforms earnings in explaining firms

values. Grant (1996) calculates regression statistics between the MVA-to-capital and EVA-to-

capital ratios from the data of 983 firms. He finds explanatory levels (r) of 32% with statistical

significance. Milunovich and Tsuei (1996) review the correlation between MVA and several

conventional performance measures in the computer industry. They find EVA to correlate

somewhat better with MVA than the other measures. Victor (1996) observed that correlation

between EVA and MVA is very high. He concluded that any effort to improve EVA would lead

to increase in MVA. Lehn and Makhija (1997) studied the relationship between several

performance measures and stock return and found that correlation between EVA and return is

higher than that of other indicators. The relationship between EVA and MVA in the financial

institutions was studied by Uyemura, Kantor, and Pettit (1996) and documented a strong relation

between EVA and MVA.

There are several studies, which do not support the strong relation between EVA and MVA.

Dodd and Chen (1996) studied the ability of EVA to track stock returns and found that EVA

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accounts for only 20% in the variations in stock returns, whereas, ROA explains more than 24%.

Dodd and Chen (1997) found that the traditional measures, residual income and operating

income display a greater ability to explain stock return than EVA. Biddle, Bowen, and Wallace

(1997) studied the incremental content and concluded that earnings reflect stock returns better

than EVA. The study did not find any evidence to support Stewarts (1991) claim that EVA

dominates earnings in relative information content. Also Kramer and Pushner (1997), Easton and

Harris (1991) arrived at similar conclusions.

Karpik and Riahi-Belkaoui (1994) used the market model test value-added variables in

explaining market risk, and found that the incremental information content given by value added

variables is beyond that provided by accrual earnings and cash flows. Earlier work by Bannister

and Riahi-Belkaoui (1991) also used the market model to explain a target firms abnormal

returns during the takeover period. Their findings suggested that takeover targets have lower

value-added ratios than other firms do in the year preceding completion of the takeover.

Empirical studies relating EVA and MVA of the Indian corporate sector are conspicuous by

absence. One of the reasons is the non-availability of EVA data for the Indian companies. BT-

Stern Stewart Ltd published EVA and MVA data in the year 1999 for the first time. The latest

one has been published in the month of April 2004. However, the BT-Stern Stewart study is

predominantly anecdotal. Gandhok, Kulkarni, and Dwivedi (2002) claim that MVA is a function

of a sustainable fundamental economic performance and EVA reflects the fundamental

performance better than traditional metrics. Parasuraman (2000) used EVA to evaluate the

performance of some Indian banks and concluded that EVA is an important measure to judge a

banks performance.

Sathish.R,Rao,S.S This paper highlights the awareness and applicability of Economic Value

Added in Indian Banks on the basis of survey report. Indian Banks listed on the Mumbai Stock

Exchange BSE were analyzed. It is further divided into sub-parts which include awareness and

use of value-based financial performance, adaptability to Economic Value Added in select Indian

Banks, ownership pattern-wise Economic Value Added, and discussion on such time-honoured

statistical propensities. The Study concludes that Economic Value Added is slowly gaining an

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increased attention as a financial measure of business performance of banks. It holds up the

researchers view that the concept of Economic Value Added has been emerging in the brains of

the top brass of the corporate world in India and has nurtured a remarkably excellent time ahead

One key feature of the implementation of Stern Stewarts EVA system comprises a revised

managerial compensation plan and an amended internal benchmark for corporate performance.

There have been a number of studies that have also addressed this aspect of Value-relevance.

Lehn and Makhija (1997) enter the debate by questioning which performance measure does the

best job of predicting the turnover of chief executive officers (CEOs). Their results suggested

that labour markets evaluate CEOs on the basis of EVA and MVA performances, rather than on

the basis of more conventional accounting measures. From a slightly different perspective,

Rogerson (1997) investigated the moral hazard that exists with managers to increase shareholder

wealth and to thereby increase the firms cash flows so as to increase managerial compensation.

They concluded that residual income (or EVA as a performance measure will ensure that

managers will always make efficient investment decisions.

Wallace (1996) also tested the ability of residual income plans to align managers actions

with increasing shareholder wealth. He did this by selecting a sample of firms that began using

a residual income performance measure in their compensation plans, and comparing their

performance to a control sample of firms that continued to use traditional earnings-based

incentives (Wallace, 1996). Wallace (1996) concluded that management actions after the

adoption of the residual income compensation plan were consistent with the strong rate of return

discipline associated with the explicit capital charge. Wallace (1996) also found weak evidence

suggesting that capital market participants generally responded favourably to the adoption of

residual income-based compensation plans.

Robertson and Batsakis (1999) empirically examined the role an organisations

characteristics may play in determining the emphasis on executive share options within the

compensation system. They found that share options are viewed from an organisational

perspective to be an effective behavioural control mechanism (Robertson and Batsakis, 1999,

25). Robertson and Batsakis (1999) also found that investors respond favourably to the adoption

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of an EVA-based compensation plan, and that a flow-on effect would be that investors view

increases in EVA more favourably than improvements in traditional accounting-based

performance measures. V. Charles, Roji George, R. H.H. Subramanian (2006) Statistical Model

to Estimate Dividend in Indian Private Sector Banks, Proceedings of Third AIMS International

Conference on Managementconducted by AIMS International and IIM A during January 1-4,

2006The prime objective of any firm is considered as maximization of shareholders wealth.

Dividend decision, also known as profit allocation decision is an imperative decision of financial

management. Dividends are periodic cash payments by a firm to its shareholders. It is said that

one of the most puzzling issues in corporate finance involves dividends. How firms decide their

policy? What factors influence it? This study tries to find a solution for it in banking industry by

considering all private sector banks in India. This paper addresses the estimation of dividend

payments of twenty one Indian Private Banking Companies. Having considering various factors

the above said goal has been achieved with the help of multiple regression analysis.

EVA in Indian Banks, written by Roji George, analyses performance of 21 banks (8 public

sector banks and 13 private sector banks) during the years 2000 to 2003. A comparative study of

public sector and private sector banks is also furnished on various efficiency and competency

parameters. The article presents the combined EVA of all banks, EVA for public sector banks

and EVA for private Sector banks. It has also provided the ranking of EVA Creators. The article

also attempts to establish a relationship between EVA and non-performing assets of the banks,

EVA and Employee Productivity and EVA and Profitability and Cost of Equity of Indian Banks.

The analysis has found that both private sector and public sector are successful in creating

economic value and that there is a positive relationship between EVA and productivity and a

negative relationship between EVA and non-performing assets. The article in the end reveals that

public sector banks outperform private sector banks even though their cost of capital is higher

than that of private banks.

Evaluating Performance of Banks through CAMEL Model: A Case Study of SBI and

ICICI Bank is written byB S Bodla andRicha Verma, whose prime objective is to describe the

CAMEL (Capital Adequacy, Asset Quality, Management, Earnings and Liquidity) model of

rating banking institutions so as to catch up the comparative performance of various banks. The

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ratings so developed would enable the Reserve Bank to identify those banks whose condition

warrants special supervisory attention, which has been explained with the help of a case study of

SBI and ICICI. The basic motive behind choosing these two banks is the increasing global

presence of SBI and ICICI. The secondary objective of the present paper is to study the

performance of these two banks and to move in direction with the Indian Banking Association

report Banking Industry Vision 2010 that some of the Indian banks would become global

players in coming years. It was illustrated that the SBI had outperformed ICICI Bank on

parameters like G-Sec to total investments, spread to total assets, interest income to total income,

liquid assets to total assets, etc. On the other hand, ICICI Bank had an edge over SBI in regard to

advances to assets, total advances to deposits, business per employee, profit per employee, non-

interest income to total income, liquid assets to total deposits, etc. Thus, the study concludes that

both SBI and ICICI Bank have been performing excellently since the beginning of the 21st

century.

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3.0 RESEARCH METHODOLOGY

Research methodology is a way to systematically solve the research problem. It may be

understood as a science of studying how research is done systematically .it not only tells about

the research method used but also considers the logic behind them It involves steps that are

adopted by the researcher in studying how research is done scientifically

According to Reman andMory define research as a systematized effort to gain new

knowledge

According to Clifford woody research comprises defining and redefining problems formulating

hypothesis or suggested solution; collecting, organizing andevaluating data; making decision

andreaching conclusion andat last carefully testing the conclusion to determine whether they fit

the formulating hypothesis.

Research design:

The study aims to analyse the operational efficiency of the banks through the EVA the analysis

is based on the existing data available in annual reports and balance sheet .So the research design

followed is analytical research

In analytical research, the researcher has to use facts or information already available and

analyse these to make a critical evaluation of the material.

Nature of data

The statistical data may be classified under two categories, depending upon the sources

utilized .These categories are

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Primary data

Secondary data

Primary data

Primary dataare those data which are collected by the investigator himself for the purpose of a

specific enquiry or study .Such data are original in character and are generated by surveys

conducted by individuals or research institution

Secondary data

When an investigator uses data which have already been collected by others, such data are called

secondary data .such data are primary data for the agency that collected hem and become

secondary data for someone else who uses theses data for his own purpose .the secondary data

can be obtained from journals reports government publication, publications of professional and

research organisation etc

In this study Secondary data was mainly used for the study. These data are from published

source of the bank and also from annual report, magazines, reports and from the various

websites.

PERIOD OF THE STUDYThe period of study for the research work is five years from 2006-2007 to 2010-2011.

TOOLS FOR ANALYSIS

Ratio Analysis

Trend Analysis

Economic value added

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4.0 Analysis and interpretation

4.1 RATIO ANALYSIS

Ratio analysis is a powerful tool of financial analysis. A ratio is defined as the indicated

quotient of two mathematical expressions and as the relationship between two or more things.

In financial analysis, a ratio is used as an index or yard stick for evaluating the financial position

and performance of a firm .The absolute accounting figures reported in financial statements do

not provide a meaningful understanding of the performance and financial position of a firm .An

accounting figure conveys meaning when it is related in some other relevant information.

The relationship between two accounting figures, expressed mathematically is known as

financial ratios. Financial management theories provide various indexes for measuring a bank's

performance. One of them is accounting ratios. The uses of the financial ratios are quite common

in the literature. Bank regulators, for example, use financial ratios to help evaluate a bank's

performance.

Types of ratios :

Various types of ratios used in this project are

Current ratio

Interest income to working funds

Non interest income to working funds

Operating profit to working funds

Return on asset

Business per employee

Profit per employee

Net profit ratio

Operating profit ratio

Expenses ratio

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Fixed asset turnover ratio

EPS

P/E Ratio

ROI

Loan to deposit ratio

Staff productivity ratio

Liquidity ratio:

Liquidity refers to the ability of a concern to meet its current obligations as and when these

become due. The short term obligations are met by realizing amounts from current, floating or

circulating assets. The current assets should either be liquid or near liquidity. These should be

convertible into cash for paying obligations of short-term nature.

The sufficiency or insufficiency of current assets should be assessed by comparing them with

short-term (current) liabilities. If current assets can pay off current liabilities, then liquidity

position will be satisfactory. On the other hand, if current liabilities may not be easily met out of

current assets then liquidity position will be bad.

To measure the liquidity of a firm, the following ratios can be calculated.

(i) Current Ratio

(ii) Absolute Liquid Ratio or Cash Position Ratio

4.1.1 Current ratio

Current Ratio may be defined as the relationship between current assets and current liabilities.

This ratio, also known as working capital ratio, is a measure of general liquidity and is most

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widely used to make the analysis of a short-term financial position or liquidity of a firm. It is

calculated by dividing the total of current assets by total of the current liability.

Current Assets

Current Ratio =

Current Liabilities

As a convention the minimum of two to one ratio is refereed arbitrary standard of liquidity for

a firm. A ratio equal or near to the rule of thumb of 2:1 i.e., current assets double the current

liability is considered to be satisfactory.

TABLE 1:

Year Current asset Current liabilities Ratio

2007 55634559 54306927 1.02

2008 61673681 61029265 1.011

2009 79902982 78635388 1.016

2010 100945085 97432731 1.03

2011 126398338 124087481 1.01

Interpretation:

From the these table the current ratio of 2007 to 2011 is not good because the

standard norm for current ratio is 2:1. But here all five years is less than norms.so it is notsatisfactory

CHART 1

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4.1.2 Absolute liquid ratio

Although receivables, debtors and bills receivable are generally more liquid than inventories, yet

there may be doubts regarding their realisation into cash immediately or in time. Hence, some

authorities are of the opinion that the absolute liquid ratio should also be calculated together with

current ratio and acid and acid test ratio so as to exclude even receivable from the current assets

and find out the absolute liquid assets.

Absolute liquid ratio is calculated by using the following formula:

Absolute Liquid Assets

Absolute liquid ratio =

Current Liabilities

Where absolute liquid assets = Cash + Bank + marketable securities.

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Absolute liquid assets include cash in hand, cash at bank and marketable securities or temporary

investments. the acceptable norm for this ratio is 50% or 0.5:1 or 1:2

TABLE 2

Year Absolute liquid asset Current liabilities Ratio

2007 19507629 54306927 1.022008 23085806 61029265 1.011

2009 27444693 78635388 1.06

2010 38170132 97432731 1.03

2011 45454110 124087481 1.01

Interpretation :

From the above table of absolute liquid ratio is much satisfactory because the

standard norm of ratio is 0.5:1. But here from 2007 to 2011 ratio is more than 1. So here the ratio

level is good.

CHART 2

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4.1.3 Profitability ratio

A class of financial metrics that are used to assess a business's ability to generate earnings as

compared to its expenses and other relevant costs incurred during a specific period of time. For

most of these ratios, having a higher value relative to a competitor's ratio or the same ratio from a

previous period is indicative that the company is doing well.

Net profit:

Net profit ratio (NP ratio) expresses the relationship between net profit after taxes and sales.

This ratio is a measure of the overall profitability net profit is arrived at after taking into account

both the operating and non-operating items of incomes and expenses. The ratio indicates what

portion of the net sales is left for the owners after all expenses have been met.

Net profit net profit

= -------------------*100

Sales

TABLE 3

Year Net profit Sales Net profit Ratio

2007 586972 4749858 12.35

2008 257065 5885351 4.36

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2009 505916 7646004 6.61

2010 309564 5885351 3.05

2011 1012957 12018514 8. 42

Interpretation

From the above table net profit ratio 2007 have good is higher . in 2008,2009,2010 its not

satisfactory. Then in 2011 it rising the net profit ratio percentage for 8.42%.

CHART 3

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4.1.4 Operating profit

TABLE 4

Year Operating profit Sales Operating Ratio

2007 735831 4749858 15.49

2008 901675 5885351 15.32

2009 1088417 7646004 14.23

2010 1662093 5885351 16.40

2011 2738588 12018514 22.7

From the above table the year 2007 shows 15.49 is satisfactory.from next year 2008 ,2009 the

ratio is reducing so its not satisfactory .

CHART 4

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4.1.5 Operating expenses ratio

TABLE 5

Year Operating expenses Sales Operating expenses

ratio

2007 1022229 4749858 21.52

2008 1164427 5885351 19.78

2009 1516869 7646004 19.83

2010 1864779 5885351 18.4

2011 22281482 12018514 18.5

Interpretation

From the above table operating expenses of 2011 and 2010 is low . so it is satisfactory.

In the year 2007 the ratio of expenses is higher than 2011. So it is not satisfactory.

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CHART 5

4.1.6 Turnover ratio

Fixed asset turnover ratio

Fixed asset turnover ratio = Net fixed asset

Sales

TABLE 6

Year Net fixed asset Sales Turn over

2007 355042 4749858 7.4

2008 399405 5885351 6.7

2009 539798 7646004 7

2010 656707 5885351 6.42011 1791314 12018514 14.9

From the above table net fixed asset turnover ratio level is high in 2011 . It is around 15 times

from turnover ratio, so the level is satisfactory. During the other year all the ratio is coming

around 7. So it is under satisfactory level.

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CHART 6

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4.1.7 ROI

ROI OPERATING PROFIT

= -------------------------------

CAPITAL EMPLOYED

TABLE 7

Year Operating profit Capital employed ROI

2007 735831 3960887 18.5

2008 901675 4176776 21.5

2009 1088417 4537159 23.9

2010 1662093 7389974 22.4

2011 2738588 8924349 30.68

Interpretation:

From the above table the investment level of the 2011 is much satisfactory than other

years. During the year 2007 to 2010 the level of the return on investment is satisfactory .

CHART 7

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4.1.8 Interest income as a percentage to working funds

The ratio measures the income from lending operation as a percentage of total income generated

by in the year. Interest income includes income on advances, interest on deposits with bank.

Interest income to working funds Interest income

= -----------------------

Working funds

TABLE 8

Year Interest income Working funds Ratio

2007 42917.89 537973.73 7.98

2008 50605.76 619743.38 8.17

2009 65761.11 707630.80 9.29

2010 90932.39 941008.33 9.66

2011 106483.55 1106051.45 9.63

Interpretation :

From the above table shows 2010 and 2011th year of income is more satisfactory. And

in 2008 and 2007th year of the income levels are under than satisfaction. So the year 2010 is

More good than other years.

CHART 8

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4.1.9 Non interest income as a percentage to working funds

There are two common measures of the income banks generate from sources other than interest:

the non-interest income level and the fee income level.

Different banks have very different sources of income. This in turn means they have different

profit drivers.

Interest income is influenced by both the economic cycle and the level of interest rates. Fee

income is cyclical. Non-interest income other than fees (primarily bank charges) is

comparatively defensive.

Non interest income to working fund Non interest income

= -----------------------------

Working funds

TABLE 9

Year Non interest income Working funds Non interest income

Ratio

2007 4580.69 537973.73 0.85

2008 8247.76 619743.38 1.33

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2009 10698.93 707630.80 1.51

2010 16620.93 941008.33 1.10

2011 13701.59 1106051.45 1.24

From the above table shows non interest income level percentage is satisfactory in 2009. But

2007 is not satisfactory level.and other years 2008,2010,2011 are better level in non interest

income.

CHART 9

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4.1.10 Operating profit as a % to working funds

Operating net profit ratio is calculated by dividing the operating net profit by sales. This ratio

helps in determining the ability of the management in running the business.

Operating profit ratio = (Operating profit / Net sales) 100

Operating profit = Gross profit - Operating Expenses

OR

Operating profit = Net sales - Operating cost

OR

Operating profit= Net sales - (Cost of goods sold + Administrative and office expenses + Selling

and distribution exp.)

TABLE 10

Year Operating profit Working funds Operating profit to

workingRatio

2007 7358.31 537973.73 1.37

2008 9016.75 619743.38 1.45

2009 10884.17 707630.80 0.54

2010 16620.93 941008.33 1.77

2011 27385.88 1106051.45 2.48

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From the above table shows the operating profit as a percentage is good level in 2011. The level

of the 2007,2008,2010 is better level in these year. During 2009 the position of operating profit

was not satisfactory level.

CHART 10

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4.1.11 Return on asset

Its is an indicator informing the user about the how profit a company is relative to its total

asset.it tells the user how effective a business has been putting It asset to work.in other words

,ROA, is assett of capital utilization that is how much profit before earned on the total capital

used to make the profit.

ROA Net profit

=---------------

Working funds

TABLE 11

Year Net profit Working funds ROA

2007 1758.43 537973.73 0.33

2008 2526.90 619743.38 0.41

2009 5029.33 707630.80 0.712010 3066.80 941008.33 0.33

2011 10113.68 1106051.45 0.91

From the above table shows net profit and working funds ratio is less than 1 in all the year.

Comparing to other year 2011 is better than other years .itz was coming nearly to 1 %. So 2011

is little satisfactory.

CHART 11

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4.1.12 Business per employee

Business ratio is calculated in monetary terms by dividing total amount of business (deposits and

advances) by total number of employees. It is also calculated by using various formula ,Here the

formula is

Business ratio = Deposits + loans

Number of employees

TABLE 12

Year Business No of employee Ratio

2007 8285.89 1926 4.30

2008 9423.17 2078 4.53

2009 12387.09 2433 5.09

2010 15159.39 2705 5.60

2011 18888.70 2626 7.19

From the above table we found business per employee is good in all the year. In 2011 the ratio is

7.19 was good. And before four year all the level of business per ratio is satisfactory.

CHART 12

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4.1.13Profit per employee

A financial benefit that is realized when the amount of revenue gained from a business

activity exceeds the expenses, costs and taxes needed to sustain the activity. Any profit that is

gained goes to the business's owners, who may or may not decide to spend it on the business

Profit per employee Net profit

= -------------------

No.of employees

TABLE 13

Year Net profit No of employee PROFIT PER Ratio

2007 1758.43 1926 0.91

2008 2526.90 2078 1.22

2009 5029.33 2433 2.07

2010 3066.80 2705 1.13

2011 10113.68 2626 3.85

From the above table shows the ratio of 2011was 3.85 is much satisfactory than other years.

During the year 2007 the ratio of profit is 0.91 .from next year the profit ratio is increasing till

2009.

CHART 13

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4.1.14 EARNINGS PER SHARE

Earnings per share are generally considered to be the single most important variable in

determining a share's price. It is also a major component used to calculate the price-to-earnings

valuation ratio

Earnings per share = Net profit

Number of equity shareholders

The portion of a company's profit allocated to each outstanding share of common stock. Earnings

per share serve as an indicator of a company's profitability.

TABLE 14

Year NPAT No of equity shares Eps

2007 1758.43 48789555 3.602008 2526.91 48772189 5.18

2009 5029.53 48776176 10.31

2010 3066.80 6996027 4.95

2011 10113.65 97517320 10.37

F rom the above table shows the earning per share of employee have a good level in 2011 and

2009(10.37 and 10.31) and for 2007,2008,2009 was below satisfactory level.

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CHART 14

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4.1.15 P/E RATIO

TABLE 15

Year M . V EPS P/E RATIO

2007 - 3.60 -

2008 - 5.18 -

2009 1662.28 9.93 167.372010 2503.88 4.95 505.83

2011 2867.50 10.37 276.51

From the above table there is no market value of the company.so they start from 2009 . During

these years the profit earning ratio is more than 100. So it is satisfactory. In the year 2010 the P/E

ratio crossed more than 500. This is much satisfactory.

CHART 15

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P/E RATIO = Market value

EPS


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4.1.16Staff productivity ratio:

Staff productivity ratio is calculated in monetary terms by dividing total amount of business

(deposits and advances) by total number of employees. It is also calculated by using various

formula ,Here the formula is

Staff productivity ratio = Deposits + loans

Number of employees

TABLE 16

Year Loans+deposits No of employee Staff productivity

Ratio

2007 8285.89 1926 4.30

2008 9423.17 2078 4.53

2009 12387.09 2433 5.09

2010 15159.39 2705 5.602011 18888.70 2626 7.19

From the above table we found business per employee is good in all the year. In 2011 the ratio is

7.19 was good. And before four year all the level of business per ratio is satisfactory.

CHART 16

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4.1.17Loans to Deposits

This ratio indicates how much of the advances lent by banks is done through deposits. It is the

proportion of loan-assets created by banks from the deposits received. The higher the ratio, the

higher the loan-assets created from deposits. Deposits would be in the form of current and saving

account as well as term deposits.

Loan to deposit ratio: Loans

Deposits

The outcome of this ratio reflects the ability of the bank to make optimal

use of the available resources the most basic liquidity ratio is loans-to-deposits. This ratio is

simply an institution's total deposit base divided by net loans (total loans less loan loss reserve).

As a general rule-of-thumb there is an inverse relationship between loan-to-deposit ratio and

liquidity.

A loan-to-deposit ratio of 70-75% was considered a good balance between liquidity and

allocation of funds in the loan portfolio

TABLE 17

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Year Loans Deposits Loan to deposit Ratio

2007 3679.18 4606.71 79

2008 3931 5492.08 71

2009 5319.78 7067 75

2010 6350.40 8808.99 72

2011 8187.67 10701.03 76

From the above table shows all the year of liquidity and allocation of funds in the portfolio have

a good balance. The standard norm for loans to deposit ratio is 70-75%. During the year 2007 the

ratio is 79% so it is much satisfactory .

CHART 17

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4.2 TREND ANALYSIS

The financial statements may be analysed by computing trends of series of information. This

method determines the direction upwards or downwards and involves the computation of the

percentage relationship that each statement item bears to the same item in base year .The

information for a number of years is taken up and one year, generally the first year ,is taken as a

base year .The figures of the base year are taken as 100 and trend ratios for other years are

calculated on the basis of base year

Trend analysis current year

= --------------------------- *100

Base year.

Trend analysis is used to measure the performance of both the banks

4.2.1SALES :

TABLE 18

Year Sales Trends

2007 4749858 100

2008 5885351 123.93

2009 7646004 160.97

2010 10128810 213.24

2011 12018514 253.02

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From the above table shows the trend level is increasing by year. All the are coming more than

100. So in the bank sales level is high.

CHART 18

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4.2.2 OPERATING EXPENSES

TABLE 19

Year Operating expenses Operating expenses

Trends

2007 1022229 100

2008 1164427 113.9

2009 1516869 148.3

2010 1864779 182.42

2011 22281482 217.44

From the above table the operating expenses is increasing year by year. So the expenses in LVB

is too high. It is not satisfactory .CHART 19

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4.2.3 OPERATING PROFIT:

TABLE 20

Year Operating profit Operating profit

Trends2007 735831 100

2008 901675 122.50

2009 1088417 147.91

2010 1662093 225.88

2011 2738588 372.17

From the above table shows operating profit all the year is increasing from base year. In trend

operating profit of 2007 to 2011 is much satisfactory.

CHART 20

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4.2.4 FIXED ASSET:

TABLE 21

Year Fixed asset Fixed asset Trend

2007 355042 100

2008 399405 112.49

2009 539798 152.03

2010 656707 184.96

2011 1791317 504

From the above table shows fixed asset of the LVB is increasing year by year. So they earning

more asset by trend. During the period of 2007 to 2011 is much satisfactory.

CHART 21

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Table 22

4.2.5 CAPITAL EMPLOYED:

TABLE 22

Year Capital employed Trends

2007 3960887 100

2008 4176776 105.45

2009 4537159 114.54

2010 7389974 186.57

2011 8924349 225.31

From the above table shows the capital and reserve and surplus of trend is very high. So the

capital of the LVB is the satisfactory

Chart 22

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4.3.1 ECONOMIC VALUE ADDED

EVA is Economic Value Added, a measure of economic profit. It is calculated as the

difference between the Net Operating Profit after Tax and the opportunity cost of invested

Capital. This opportunity cost is determined by the weighted average cost of Debt and Equity

Capital (WACC) and the amount of Capital employed

FORMULA FOR EVA

EVA=NOPAT-COST OF CAPITAL EMPLOYED

COST OF CAPITAL EMPLOYED=WACC*CAPITAL EMPLOYED

WACC=COST OF DEBT+COST OF EQUITY

NOTE: WACC: WEIGHTED AVERAGE COST OF CAPITAL

Table 23

EVA

Year NOPAT COCE EVA2007 175843 39608.87 136234

2008 252691 41767.76 237923

2009 502953 45371.59 457581

2010 306680 73899.74 232780

2011 1011365 89243.49 922121

From the above table shows economic value added is high in 2011.so it is satisfactory

in 2011. From the year 2007 it is increasing till 2009. But in 2010 the EVA is falling and next

year it is rised very high.

Chart 23

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65

5.1 Findings:

Current asset

The current ratio of 2007 to 2011 is not good because the standard norm for

current ratio is 2:1. But here all five years is less than norms. so it is not satisfactory.

Absolute liquid asset

Absolute liquid ratio is much satisfactory because the standard norm of ratio is

0.5:1. But here from 2007 to 2011 ratio is more than 1. So here the ratio level is good.

Net profit ratio:

Net profit ratio 2007 have good is higher . in 2008,2009,2010 its not satisfactory.

Then in 2011 it rising the net profit ratio percentage for 8.42%.

Operating profit ratio;

The year 2007 shows 15.49 is satisfactory.from next year 2008 ,2009 the ratio is

reducing so its not satisfactory .

Operating expenses:

operating expenses of 2011 and 2010 is low . so it is satisfactory.

In the year 2007 the ratio of expenses is higher than 2011. So it is not satisfactory.

Fixed asset turnover ratio:

Net fixed asset turnover ratio level is high in 2011 . It is around 15 times from

turnover ratio, so the level is satisfactory. During the other year all the ratio is coming

around 7. So it is under satisfactory level.

ROI


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janani eva final

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