VALUE REPORTING -AN INSIGHT

WHAT IS VALUE REPORTING

• The Value-Reporting model is about broadening corporate reporting to have companies identify and meet analysts’ and investors’ needs for relevant information about value drivers, intangible assets and estimated future cash flows

• The Value Reporting Revolution clearly explains why corporations must move toward greater transparency

TYPES OF VALUE REPORTING

Brand Valuation

Economic value Added

Intellectual Capital & Human

Resource Accounting

Wealth Creation

BRAND VALUATION

Evidence of brand value• Recognition of value of intangible assets • Continuous increase in the gap between companies’ book values and their

stock market valuations• Sharp increases in premiums above the stock market value that were paid

in mergers • Management attention has increased to these assets• Brand is a special tangible because of the economic impact• It influences the choice of customers,employees,investors• Brand plays a major role to contribute to shareholder value• Eg:Mc donald’s brand accounts for more than 70 percent of shareholder

value• Brand owning companies can earn huge returns on their capital and grow

faster.

Brand valuation models• Research –based brand equity valuations• Purely financially driven approaches• The most widely used is the brand –earnings- multiple model• Eg: if we see infosys brand valuation calculation,follows;• Determine brand profits by eliminating the non-brand prfits from the

total profits• Restate the historical profits at present day values• Provide for the remuneration of capital to be used for purposes other

than promotion of the brand• Adjust for taxes• Determine the brand- strength or brand-earnings multiple• The valuation based on factors on a scale of 1-100 internally.

Infosys brand value-year 2011

2011 2010 2009Profit before interest and tax 9,313 7,900 6,894Less : Non-brand income 1,090 891 426Adjusted profit before tax 8,223 7,009 6,468Inflation factor 1.000 1.103 1.217Present value of brand profits 8,223 7,732 7,871Weightage factor 3 2 1Weighted average profits 8,001 – –Remuneration of capital 1,284 – –Brand-related profits 6,717 – –Tax 2,231 – –Brand earnings 4,486 – –Brand multiple 9.03 – –Brand value 40,509 – –

(In Crores)

ECONOMIC VALUE ADDED

Economic Value Added• EVA is the difference between after tax operating profit and

cost of capital invested by both debt holder and equity holder.

– EVA=NOPAT-(Cost of Capital*Capital) where NOPAT is Net Operating Profit after tax

Capital is capital invested by both debt holder and equity holder Cost of Capital = Weighted Average of after tax cost of equity and debt

• NOPAT = EBIT*(1-Tax Rate)• WACC = Debt/ (Debt+Equity)*(1-tax rate)*rdebt

+ Equity/(Debt+Equity)*requity

where rdebt and requity are the specific return expected by debt and equity holders and these are calculated by CAPM.

requity = rf + b(rm-rf)

List of EVA Disclosure Companies in Indian Corporate Sector

• TCS • INFOSYSTCH • HINDUNILVR • LT • TATASTEEL • SATYAMCOMP

• HEROHONDA • DRREDDY • OFSS • CROMPGREA

V• PIRHEALTH • CADILAHC • GODREJCP

• LAXMIMACH • PIDILITIND • MOSERBAER • J&KBANK • ISPATIND• ROLTA• FINPIPE• UNICHEMLAB• SASKEN• ORCHIDCHEM• THOMASCOOK• NUCLEUS • NAVNETPUBL

• EMAMILTD• SUNDRMFAST• JBCHEPHARM• VESUVIUS • ICSA • TATAMETALI • SHASUNCHEM

Medium of Disclosure Used for EVA Reporting

Medium of Disclosure Used Number of Companies

Percentage

Director’s Report 5 14

Management Discussion 10 27

Separate Section 13 35

Corporate Governance Report 2 5

Additional Information to Shareholders 4 11

Financial Highlights 11 30Others like Notes to accounts, Financials statements 2 5

in compliance with Indian GAAP

More than one 9 24

Areas of EVA-Application in Indian Companies

Scope of Use Number of Companies Percentage

Business/Financial Performance Measurement 19 51

Shareholder Value Enhancement 18 49

Incentive Payments/Equitable Reward System 7 19

Setting targets 4 11

More than one 8 22

Extent of EVA Disclosure by Indian Companies

Particulars Number of EVA Number of EVA

Reporting Non Reporting

Companies Companies

CAPM-based Cost of Equity Calculation 19 18

EVA (in Rs) 34 3

EVA Ratio 17 20

EVA Statement Basic 25 12

EVA Statement With Adjustments 2 35

INTELLECTUAL CAPITAL

WHAT IS INTELLECTUAL CAPITAL

• Intellectual capital is the difference in value between tangible assets (physical and financial) and market value. This contrasts with physical and financial forms of capital; all three make up the value of an enterprise.

• Measuring the real value and the total performance of intellectual capital's components is essential for any corporate head who knows how high the stakes have become for corporate survival in the Knowledge Economy and Information Age. So, the main point is how an organization can affect the firm's stock price using the leverage of intellectual assets.

Classification of Intellectual CapitalHUMAN CAPITAL

STRUCTURAL CAPITAL

RELATIONAL CAPITAL

• The value that the employees of a business provide through the application of skills, know how and expertise.

• Human capital also encompasses how effectively an organization uses its people resources as measured by creativity and innovation.

HUMAN CAPITAL

• The supportive infrastructure, processes and databases of the organisation that enable human capital to function.

• Structural capital includes such traditional things as buildings, hardware, software, processes, patents, and trademarks. In addition, structural capital includes such things as the organization’s image, organization, information system, and proprietary databases.

STRUCTURAL CAPITAL

• trademarks, licences, franchises, but also the less definable, such as customer interactions and relationships

RELATIONAL CAPITAL

HUMAN RESOURCE ACCOUNTING

ASSUMPTIONS• The people are valuable

organizational resources• Value of the people is

influenced by the Management Style

• Investors are aware about how is the employee being treated in the organisation.

OBJECTIVES• To provide the feedback to

the managers on the performance.

• To compute the return on the total assets employed. (Men & Machinery)

• To enable planning of Manpower.

WEALTH CREATION

Wealth is a total amount of economically relevant assets including physical, financial, human, IP asset ( R & D, technical knowhow, trade secret, etc.), and that benefits to society.

To create is to make something new, better, beneficial.

Wealth creation is more than mere possessing wealth

Making money and creation of wealth should go hand in hand

Will shareholders commit same mistake?????Theory of demand and supply –decisions based

on price of a shareRole of shareholders, consumers, governmentRole of institutional investorsShould value reporting be mandatory?

Conclusion ------- Highly subjective……No concept of belongingness

Long term perspectiveIncreasing the ability to earnInsure future incomeBanks, M&A, debenture holders, public deposits

Case analysis – Sahara’s issue of OFCD – a lesson – on brand value – is that every thing?

• TEAM MEMBERS– PRABHASH AGARWAL– SHIVANS GUPTA– SRIDHAR HARI BABU PURAM– SHARADA SHINDE– SIDDHANT GOYAL