Godrej Consumer Products Limited - Implementing EVA

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Case Details:

Case Code : FINC034
Case Length : 14 Pages
Period : 1997 - 2004
Pub. Date : 2004
Teaching Note :Not Available
Organization : Godrej Consumer Products Limited
Industry : FMCG
Countries : India

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Please note:

This case study was compiled from published sources, and is intended to be used as a basis for class discussion. It is not intended to illustrate either effective or ineffective handling of a management situation. Nor is it a primary information source.

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Excerpts Contd...

The Aftermath

One month before the demerger, the shares of GSL were trading at Rs 65 on the Bombay Stock Exchange (BSE). Soon after the demerger, both the companies witnessed distinct financial and stock market performances.

On June 18, 2001, GCPL was listed on the BSE quoting at Rs 48.50 while GIL traded at Rs 16. By August 2002, the share price of GCPL rose to Rs. 120 while that of GIL remained stagnant at Rs. 20 (Refer Exhibit I). Analysts said that this vast difference in share prices showed investors' perceived value of the two companies.

GCPL was outperforming GIL not only on the stock exchanges but also reporting better financial performance (Refer Table IV). With the significant rise in share prices of GCPL, the shareholders of the company were delighted. As GSL was a closely held company, the biggest shareholders were the promoters themselves...

How Effective is EVA?

EVA, an income measure, was calculated by subtracting the cost of capital from post tax operating profit (NOPAT) generated by a company.

EVA measured whether the post tax operating profit of a company was enough to cover its cost of capital.

Unlike the traditional methods of accounting profit, where only cost of debt was deducted, EVA took into account the cost of equity also. Therefore, EVA tried to capture the true economic profit of an enterprise. EVA was more directly linked to the creation of shareholder wealth over time.

It could be calculated as net operating profit minus an appropriate charge for the opportunity cost of all capital invested in an enterprise...


Exhibit I: GCPL and GSL - Stock Price Chart
Exhibit II: Profit & Loss Account of GCPL
Exhibit III: Profit & Loss Account of GIL
Exhibit IV: ICRA - SVG Rating
Exhibit V: Calculation of EVA in GCPL
Exhibit VI: The Capital Asset Pricing Model
Exhibit VII: Approaches to Calculate the Capital Employed


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