TRADITIONAL V/S COEVAL TOOLS FOR MEASURING FINANCIAL ... · PERFORMANCE: AN EMPIRICAL STUDY OF HUL LTD Hardik Bhadeshiya Assistant Professor, Department of Commerce and Business Management,

TRADITIONAL V/S COEVAL TOOLS FOR MEASURING FINANCIAL

PERFORMANCE: AN EMPIRICAL STUDY OF HUL LTD

Hardik Bhadeshiya

Assistant Professor, Department of Commerce and Business Management, Faculty of

Commerce, The Maharaja Sayajirao University of Baroda, Vadodara. Gujarat, India.

Prakash Patel

Assistant Professor, Department of Commerce and Business Management, Faculty of

Commerce, The Maharaja Sayajirao University of Baroda, Vadodara. Gujarat, India.

ABSTRACT

Accounting profit creates a hypothetical picture about firm’s performance and so only

traditional tools for measuring shareholders’ value are becoming outdated. The current

research paper is related to fundamental analysis, where it has been attempted to analyze

the real value of the company by applying contemporary tools by selecting the secondary

data of last 10 years i.e. from 2009 to 2019. In contemporary tools Economic Value

Added (EVA) and Market Value Added (MVA) have been selected and in traditional

tools Dividend paid, Earnings per share (EPS) and Return on Investment (ROI) are

adapted. The calculation of EVA and MVA is done with the formulas given by Stern

Stewart & co. and furthermore to analyze the association of variables like EVA, MVA,

Dividend paid, ROI and EPS multiple co-relation analysis technique is used.

Additionally, Multiple Regression model is established between EVA, MVA, Dividend

Paid, ROI and EPS.

Keywords: HUL, EVA, MVA, Dividend Paid, EPS

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Volume IX, Issue V, MAY/2020

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1. Introduction

Creating shareholders’ value is the key to success in today's marketplace where there's

increasing pressure on corporate executives to quantify, manage and report it on a daily

basis. In the emerging field of shareholders’ value analysis, various measures are

established which claim to measure the creation of shareholder’s value and wealth.

Moreover, corporate executives are under increasing pressure to demonstrate daily that

they're creating shareholders’ value. This pressure has led to an emergence of a spread of

measures which claim to quantify value-creating performance. Creating value for

shareholders is now a widely accepted corporate objective. The interest in value creation

has been stimulated by several developments.

2. Hindustan Unilever Limited: A company

HUL is functioning to create a higher future daily, and aids which make people feel good,

look good and obtain extra out of life with products and rendering services that are upright

for them and good for others. With quite 35 brands spread through 20 discrete types like

detergents, Shampoo, soaps, deodorants, skin care, toothpastes, cosmetics, packaged

foods, coffee, ice cream, and water purifiers, the corporate may be a part of the way of

life of countless customers athwart India. Its range comprises leading household brands

like Lifebuoy, Lux, Rin, Surf Excel, Pond’s, Wheel, Vaseline, Lakmé, Sunsilk, Clinic

Plus, dove, Axe, Closeup, pepsodent, Brooke Bond, kwality wall’s, Knorr, Kissan, brue,

Wall’s and Pureit. the corporate has the manpower of around 18,000 people and contains

a net sale of ` 37,660 crores (Accounting year 2018-19). HUL may be a minor company

of Unilever, one amongst the world’s leading distributor of Food, Refreshment products,

attention and residential care with turnover in over 190 countries and an annual turnover

of 52.7 billion USD in 2019. Unilever has quite 67% stake in HUL. In India HUL has

capitalization of ` 4,40,376.89 crores, which is that the highest as compared to its peers

like Dabur India, Godrej Consumer, Marico, Colgate, P & G, etc. [27]

3. Review of Literature

Various articles dealing with the theory and applications of EVA & MVA have been

published over the years, but the concept is still under development.

To find out the effect of return on investment, earning per share, operational cash flow,

economic value added, and market value added towards the stock

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return at manufacturing companies in Indonesia Stock Exchange [11] explored that

insignificant Return on investment, Earning per share, and Market value added towards

stock return, can be a suggestion to do more research with longer duration of observation

and also included all sectors in Indonesia Stock Exchange. The importance of dividend

payouts i.e. dividends really necessary to support a company's stock price and, if so, why

has been reported by [17] and the question of optimal capital structure i.e. why debt may

be cheaper than equity. But the foremost important focus is corporate performance

measurement and therefore the use of executive pay to strengthen management incentives

to extend efficiency and value. The discussion regarding blind spots and distortions that

make EBITDA highly unreliable and misleading as a measure of normalized, ongoing

profitability was done by [13]. The comparison between EBITDA with EVA,

or quantity Added, a measure of economic profit net of a full cost-of-capital charge,

demonstrates EVA's ability to produce managers and investors with far more clarity into

the levers that are driving corporate performance and determining intrinsic value. And in

support of his demonstration, he reports the finding of his analysis of Russell 3000 public

companies that EVA explains almost 20% relatively EBITDA of their changes in value,

while at the identical time providing much more insight into the way to improve those

values. The firm value of Reysa? Transportation and Logistics Trade transportation

sectors is determined by [14] using EVA to see which of the firm valuation methods

yields closer to the market price and for the same the firm's 2017 and 2018 values were

found and concluded that EVA gives the closest result to the market price in

transportation sectors.

4. Research Methodology

The study is carried out to do quantitative and qualitative analysis of selected private

banks of India. For this purpose, descriptive and diagnostic research design has been

adopted and it is based on the secondary data.

5. Objectives of the study

The objective of the study is to analyze EVA, MVA, Dividend Paid, EPS, ROI and the

relationship in between these all of HUL for the period under study

6. Hypothesis of the study

A study would be consisting of the following hypothesis and to carry out a further

analysis suitable test will be applied on the same.

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1. HO1: There is no relationship between EVA & MVA of HUL Limited

2. HO2: There is no relationship between EVA & ROI of HUL Limited

3. HO3: There is no relationship between EVA & Dividend paid of HUL Limited

4. HO4: There is no relationship between EVA & EPS of HUL Limited

5. HO5: There is no relationship between MVA & ROI of HUL Limited

6. HO6: There is no relationship between MVA & Dividend Paid of HUL Limited

7. HO7: There is no relationship between MVA & EPS of HUL Limited

8. HO8: There is no relationship between ROI & Dividend paid of HUL Limited

9. HO9: There is no relationship between ROI & EPS of HUL Limited

10. H10: There is no relationship between Dividend paid & EPS of HUL Limited

7. Scope of the study

The study will define a relationship between EVA, MVA, ROI, Dividend Paid and EPS.

EVA & MVA will be representing as modern tools of performance measurement, whereas

Dividend paid, ROI and EPS will become a representative of traditional tools of

performance measurement.

8. Period of the study

The study is based on the financial data of HUL limited of last 10 accounting years i.e.

from April 2009 to March 2019.

9. Data Collection Method

In this study secondary data collection method is applied and data is collected through

various resources like annual report of the company and from the websites of money

control, RBI, BSE, and NSE.

10. Tools and techniques used to analyze and interpret the data

10.1 Accounting Tools

10.1.1 Traditional Tools: Dividend, Return on Investment (ROI),

Earnings Per Share (EPS)

10.1.2 Coeval Tools: Economic Value Added (EVA), Market Value

Added (MVA)

10.2 Statistical Tools

10.2.1 Mean, Standard Deviation, Multiple Correlation Analysis,

Multiple Regression

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11. Traditional Tools to measure the Shareholders’ value

11.1 Dividend

Dividend is part of profits of a company which is distributed by the company among its

shareholders. Dividend paid represents a cash outflow which depletes the cash resources.

It is the reward of the shareholders for investments made by them in the shares of the

company. The investors are interested in earning the maximum return on their investment

and to maximization their wealth.

It can be analyzed from the above Table 1 that dividend paid of the company is also

increased over the years from ` 1,417.94 crore in 2009 to ` 4,546 crores in 2019 which

symbolizes that the company is doing wealth creation of its’ shareholder’s not only by

raising the market price of the share, but company is paying dividend too.

11.2 Return on Investment (ROI)

It is a traditional technique of measuring shareholder’s value where relationship is

established between Earnings before Interest and Tax (EBIT) and Capital Employed. It

signifies the earning potential of the company in relation to its total capital invested.

𝐑𝐎𝐈i =𝐄𝐚𝐫𝐧𝐢𝐧𝐠𝐬 𝐛𝐞𝐟𝐨𝐫𝐞 𝐈𝐧𝐭𝐞𝐫𝐞𝐬𝐭 𝐚𝐧𝐝 𝐓𝐚𝐱 (𝐄𝐁𝐈𝐓)

𝐂𝐚𝐩𝐢𝐭𝐚𝐥 𝐄𝐦𝐩𝐥𝐨𝐲𝐞𝐝

From the above-mentioned Table 1 it can be analyzed that there is increasing trend in

ROI of the company from 38% in 2010 to 109% in 2019. It shows the positive image of

the company and here company proves that management is doing creative use of its

resources.

11.3 Earnings per Share (EPS)

Earnings per share determines the relationship between earnings available to the equity

shareholders and no of shares outstanding on the last day of the accounting year. it has

been calculated in the study undertaken using the following formulae.2

Earnings per share =Earnings available to equity shareholders

Number of Shares outstanding

From the above table 1 it can be analyzed that EPS is increased over the years from `10.09

in 2010 to ` 27.9 in 2019. Overall, it is showing increasing trend.

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Table: 1 Dividend Paid, Return on Investment (ROI) and

Earnings per Share (EPS)

Year 2019 2018 2017 2016 2015 2014 2013 2012 2011 2010

Dividend

Paid 4546 3896 3571 3354 3245.32 2811.43 3999.99 1620.94 1410.6 1417.94

ROI 109% 98% 87% 83% 90% 87% 99% 60% 45% 38%

EPS 27.9 24.2 20.8 19.12 19.95 17.88 17.56 12.45 10.68 10.09

12. Coeval Tools to Measure the Shareholders’ value

The shareholder value creation approach helps to strengthen the competitive position of

the firm by focusing on wealth creation. It provides an objective and consistent

framework of evaluation and decision-making across all functions, departments and units

of the firm.

12.1 Economic Value Added (EVA)

The concept of Economic Value Added (EVA) is a revolutionary way to measure the

value of a business. In its simplest form, EVA is a system that determines companies’

worth and performance based on their economic reality, not numbers produced according

to traditional accounting rules. It is calculated as,

EVAii = Net Operating Profit after Tax (NOPAT) – Capital Charge

Where, Capital Charge = WACC*Capital Employed or Invested

From the above Table 2 it can be analyzed that EVA is increasing over the years from

2010 (` 2030.48 Crores) to 2019 (`4967.15 Crores). WACC is increased more than double

from 2018 to 2019 i.e. 5.80% to 11.27%. Capital employed means the total amount of

owned and borrowed capital invested by the company which is almost stable over the

years. Increase in WACC is due to increase in cost of equity as in 2018 it was 6.77%

which is increased to 13.74% in 2019.

12.2 Market Value Added (MVA)

[6] defines MVA as the excess of market value of capital (both debt and equity) over the

book value of capital. If the MVA is positive, the company has created wealth for its

shareholders. According to [15], to determine the market value, equity is taken at the

market price on the date the calculation is made, and debt at book value. The total

investment in the company since day one is then calculated as interest-bearing debt and

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equity, including retained earnings. Present market value is then compared with total

investment. If the former amount is greater than the former, the company has created

wealth.

MVAiii = Market Capitalization – Net Worth

It can be analyzed from Table (2) that value of MVA is increasing over the years from `

49,292 crores in 2010 to ` 3,59,398 crores in 2019. The company’s MVA is increased

more than 6 times in last 10 years and it is due to increase in market capitalization of the

company’s share in FMCG market.

Table 2: Economic Value Added (EVA) and Market Value Added (MVA)

Year 2019 2018 2017 2016 2015 2014 2013 2012 2011 2010

(` in Crores)

EVA 4967.15 4743.55 4192.70 3747.09 4019.40 3553.46 3747.46 2441.79 2176.75 2030.48

MVA 359398 280041 188957 180544 183266 126568 97122 84123 57917 49292

13. Analysis & Interpretation of Data

13.1 Correlational Analysis

The data is processed by applying multiple correlation matrix to test the hypothesis.

Table 3: Multiple Correlation

MVA ROI Dividend Paid EPS

EVA Pearson Correlation .907** .949** .958** .986**

Sig. (2-tailed) .000 .000 .000 .000

MVA Pearson Correlation .782** .813** .960**

Sig. (2-tailed) .008 .004 .000

ROI Pearson Correlation .965** .918**

Sig. (2-tailed) .000 .000

Dividend

Paid

Pearson Correlation .931**

Sig. (2-tailed) .000

**. Correlation is significant at the 0.01 level (2-tailed).

*. Correlation is significant at the 0.05 level (2-tailed).

(Source: calculated through SPSS)

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Table: 4 Hypothesis Testing

The data is tested at 1% level of significance and the result is derived as under.

Sr.

No.

Hypothesis Pearson

Correlation

(r)

Sig. (2 tailed) Result

1 HO1: There is no relationship between

EVA & MVA of HUL Limited

0.907 0.000 Correlation Significant


EVA & ROI of HUL Limited



EVA & Dividend paid of HUL Limited



EVA & EPS of HUL Limited



MVA & ROI of HUL Limited



MVA & Dividend Paid of HUL Limited



MVA & EPS of HUL Limited



ROI & Dividend paid of HUL Limited



ROI & EPS of HUL Limited


10 H10: There is no relationship between

Dividend Paid & EPS of HUL Limited


With the help of co-relation analysis, one can analyze the association of one variable to

another but to measure the influence of independent variable to dependent variable one is

required to undergo for regression analysis.

13.2 Regression Analysis

Regression analysis analyzes the statistical association in between of two or more

variables. In simple regression, there are two variables i.e. independent variable which is

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the cause of the behavior of another one i.e. dependent variable. But when there are more

than two variables than in that case, we must go for multiple regression analysis. In case

of current research, the relationship is required to be established in between of Economic

Value Added, Market Value Added, Dividend Paid, Return on Investment, Earnings per

share, Hence, in this case it is required to undergo with multiple regression analysis.

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13.2.1 Multiple Regression Model 1

In this model EVA is set as Dependent variable and other variables like MVA, Dividend Paid, ROI, and EPS are treated as independent

variable. The model finds the extends to which EVA as a dependent variable influences other independent variables.

𝑬𝑽𝑨 = 𝜶𝒊 + 𝜷𝟏 𝑴𝑽𝑨𝒊,𝒕 + 𝜷𝟐 𝑫𝑷𝒊,𝒕 + 𝜷𝟑 𝑹𝑶𝑰𝒊,𝒕 + 𝜷𝟒 𝑬𝑷𝑺𝒊,𝒕 (𝑾𝒉𝒆𝒓𝒆 𝜶 𝒊𝒔 𝒊𝒏𝒕𝒆𝒓𝒄𝒆𝒑𝒕, 𝜷 𝒊𝒔 𝑹𝒆𝒈𝒓𝒆𝒔𝒔𝒊𝒐𝒏 𝑪𝒐𝒆𝒇𝒇𝒊𝒄𝒊𝒆𝒏𝒕, 𝒂𝒏𝒅 𝝐 𝒊𝒔 𝒕𝒉𝒆 𝒆𝒓𝒓𝒐𝒓)

Table 5: Multiple Regression Model 1

Equation Parameters 95% Confidence/Autocorrelation

R Squared 0.9916 3.597 Durbin-Watson Statistic

Adjusted R Squared 0.9849 0.53 - 1.78 Negative autocorrelation detected

Standard Error 126.8581 3.633 Critical F-Statistic - 95% Confidence

F - Statistic 147.3485 85.94% Confidence to which analysis holds

Multiple Regression Equation Independent Analysis Auto Correlation Multicollinearity

Coefficients Standard

Error t Stat

p

Value

R

Squared Coefficient

Intercept Dl=0.88 Du=1.32

Adjusted R-

Squared against

other Independ.

Variables

with RSQ at

> 90% Intercept -463.018 473.228 -0.978 37.28% DW-Stat

MVA -0.007 0.004 -1.865 12.12% 82.31% 0.01 2054.29 1.83 97.81% EPS

DP 0.061 0.166 0.369 72.71% 91.85% 0.87 969.89 2.36 92.48% ROI

ROI -720.315 1,004.258 -0.717 50.53% 90.00% 4088.79 303.69 1.18 95.35% DP

EPS 302.878 99.236 3.052 2.84% 97.16% 177.29 361.01 1.83 99.17% MVA

98.49% of the change in EVA can be explained by the change in the 4 independent variables to +/- on result of Regression Equation Therefore analysis

is Significant

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In this model MVA is set as Dependent variable and other variables like EVA, Dividend Paid, ROI, and EPS are treated as independent

variable. The model finds the extends to which MVA as a dependent variable influences other independent variables.

𝑴𝑽𝑨 = 𝜶𝒊 + 𝜷𝟏 𝑬𝑽𝑨𝒊,𝒕 + 𝜷𝟐 𝑫𝑷𝒊,𝒕 + 𝜷𝟑 𝑹𝑶𝑰𝒊,𝒕 + 𝜷𝟒 𝑬𝑷𝑺𝒊,𝒕 (𝑾𝒉𝒆𝒓𝒆 𝜶 𝒊𝒔 𝒊𝒏𝒕𝒆𝒓𝒄𝒆𝒑𝒕, 𝜷 𝒊𝒔 𝑹𝒆𝒈𝒓𝒆𝒔𝒔𝒊𝒐𝒏 𝑪𝒐𝒆𝒇𝒇𝒊𝒄𝒊𝒆𝒏𝒕, 𝒂𝒏𝒅 𝝐 𝒊𝒔 𝒕𝒉𝒆 𝒆𝒓𝒓𝒐𝒓)




Adjusted R Squared 0.9845 0.53 - 1.78 No autocorrelation detected





Error t Stat p Value

R Squared Coefficient Intercept Dl=0.88 Du=1.32

Adjusted R-

Squared against

other Indep

Variables with

RSQ at > 90% Intercept -1,02,309.532 21,449.483 -4.770 0.50% DW-Stat

EVA -62.663 33.596 -1.865 12.12% 82.31% 87.74 -151815.66 2.02 97.86% DP, EPS

DP -5.580 16.254 -0.343 74.53% 66.12% 71.20 -51984.38 2.36 92.51% EVA, ROI

ROI -1,68,378.148 70,531.569 -2.387 6.26% 61.12% 325884.41 -98969.03 1.18 90.98% DP

EPS 35,285.845 4,561.881 7.735 0.06% 92.11% 16695.23 -140709.42 1.83 96.25% EVA

98.45% of the change in MVA can be explained by the change in the 4 independent variables to +/- on result of Regression Equation Therefore analysis is

Significant

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In this model Dividend Paid is set as Dependent variable and other variables like EVA, MVA, ROI, and EPS are treated as independent

variable. The model finds the extends to which DP as a dependent variable influences other independent variables.

𝑫𝑷 = 𝜶𝒊 + 𝜷𝟏 𝑬𝑽𝑨𝒊,𝒕 + 𝜷𝟐 𝑴𝑽𝑨𝒊,𝒕 + 𝜷𝟑 𝑹𝑶𝑰𝒊,𝒕 + 𝜷𝟒 𝑬𝑷𝑺𝒊,𝒕 (𝑾𝒉𝒆𝒓𝒆 𝜶 𝒊𝒔 𝒊𝒏𝒕𝒆𝒓𝒄𝒆𝒑𝒕, 𝜷 𝒊𝒔 𝑹𝒆𝒈𝒓𝒆𝒔𝒔𝒊𝒐𝒏 𝑪𝒐𝒆𝒇𝒇𝒊𝒄𝒊𝒆𝒏𝒕, 𝒂𝒏𝒅 𝝐 𝒊𝒔 𝒕𝒉𝒆 𝒆𝒓𝒓𝒐𝒓)









Error t Stat

p

Value

R

Squared Coefficient


Adjusted R-

Squared against

other Indep

Variables

with RSQ at

> 90% Intercept -1,270.328 1,251.322 -1.015 35.66% DW-Stat

EVA 0.433 1.174 0.369 72.71% 91.85% 1.06 -783.15 2.02 98.70% EPS

MVA -0.004 0.012 -0.343 74.53% 66.12% 0.01 1494.74 1.83 98.68% EPS

ROI 1,736.797 2,696.211 0.644 54.79% 93.05% 4592.01 -671.98 1.18 95.44%

EPS 110.395 443.987 0.249 81.35% 86.58% 184.85 -350.21 1.83 99.71% EVA, MVA

91.22% of the change in Dividend Paid can be explained by the change in the 4 independent variables to +/- on result of Regression

Equation Therefore analysis IS Significant

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In this model ROI is set as Dependent variable and other variables like EVA, MVA, Dividend Paid, and EPS are treated as independent

variable. The model finds the extends to which ROI as a dependent variable influences other independent variables.

𝑹𝑶𝑰 = 𝜶𝒊 + 𝜷𝟏 𝑬𝑽𝑨𝒊,𝒕 + 𝜷𝟐 𝑴𝑽𝑨𝒊,𝒕 + 𝜷𝟑 𝑫𝑷𝒊,𝒕 + 𝜷𝟒 𝑬𝑷𝑺𝒊,𝒕 (𝑾𝒉𝒆𝒓𝒆 𝜶 𝒊𝒔 𝒊𝒏𝒕𝒆𝒓𝒄𝒆𝒑𝒕, 𝜷 𝒊𝒔 𝑹𝒆𝒈𝒓𝒆𝒔𝒔𝒊𝒐𝒏 𝑪𝒐𝒆𝒇𝒇𝒊𝒄𝒊𝒆𝒏𝒕, 𝒂𝒏𝒅 𝝐 𝒊𝒔 𝒕𝒉𝒆 𝒆𝒓𝒓𝒐𝒓)









Error t Stat

p

Value

R

Squared Coefficient


Adjusted R-

Squared against

other Indep

Variables

with RSQ

at > 90% Intercept -1,270.328 1,251.322 -1.015 35.66% DW-Stat

EVA 0.433 1.174 0.369 72.71% 91.85% 1.06 -783.15 2.02 98.70% EPS

DP -0.004 0.012 -0.343 74.53% 66.12% 0.01 1494.74 1.83 98.68% EPS

ROI 1,736.797 2,696.211 0.644 54.79% 93.05% 4592.01 -671.98 1.18 95.44%

EPS 110.395 443.987 0.249 81.35% 86.58% 184.85 -350.21 1.83 99.71% EVA, MVA

94.94% of the change in SP500 can be explained by the change in the 4 independent variables to +/- on result of Regression Equation Therefore

analysis is Significant

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14. Limitations of the study

The present research paper is purely based on the secondary data and financial

information produced by the company in its annual report. So, if a company has made

any manipulations, mistake, or articulations to produce these data then it leads to affect

the research paper too. Moreover, the selected period under the study is of 10 years which

may also would not be sufficient to derive the conclusion.

15. Conclusion

EVA and MVA are not only tools to measure standard performance of the company but

it breaks the odds of traditional tools and hence they are treated as more appropriate tools

for measuring performance of the study. HUL is the company whose profit is grown up

by 12% in Q3 of accounting year 2019-20, and operating performance has beat the analyst

estimates regarding the company. So, researcher has attempted through this research

paper that company has the same level of earning potentials when it comes to the modern

tools of accounting i.e. EVA and MVA.

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