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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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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"Implementing the EVA framework is a key business performance initiative in support of our efforts to evolve as a world class organization and enhance shareholder value. Our main objective behind implementing EVA is to be driven, measured and rewarded by our ability to create sustainable shareholder value." 1

- Adi Godrej, Chairman of Godrej Group.


Adi Godrej (Adi), the Chairman of the Godrej group,2 announced on August 29, 2001, that the group had successfully implemented the Economic Value Added (EVA) framework. It took ten months for Stern Stewart & Company,3 the originator of EVA, to implement EVA in the Godrej group.

Although EVA was a very widely accepted framework globally, it was a new concept in India. Only a few companies like TCS and NIIT had adopted EVA in the country by mid-2001. While the Godrej group adopted EVA, industry analysts were busy debating the pros and cons of EVA in general and for the group in particular. A few weeks after the EVA announcement, Adi declared the half yearly financial results of Godrej Consumer Products Limited (GCPL) for the period ended September 30, 2001. The revenues had grown by 19% to Rs 2.529 bn as against the growth of 15% in the corresponding period in 2000. GCPL reported an EVA of Rs. 0.137 bn for the six months ended September 30, 2001. Announcing the results, Adi said, "Our strong focus on EVA has delivered rising profitability."

EVA was considered a complex concept in India at that time. Some analysts raised doubts as to whether Adi would be able to efficiently use EVA to increase shareholders' value in future. Reportedly, Adi's ability was being questioned because many joint ventures and alliances had failed previously.

Allaying all doubts, Adi said, "'I met up with the CEOs of both TCS and NIIT, and they advised not to complicate the exercise in the beginning."4 He indicated that the concept would be simplified for easy implementation in the company. However, financial analysts were not satisfied with Adi's statement. They commented that EVA was not an efficient financial tool that can deliver improved profitability in quick time. In their opinion, EVA was an accounting measure that could be easily manipulated by accounting juggleries. Analysts felt that Adi had adopted the EVA framework only to achieve better market valuation of the consumer product division of the group represented by GCPL.

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1] In a media release on August 29, 2001, in Mumbai, posted on www.prdomain.com.

2] Godrej group was established in 1897 and included Godrej Consumer Products Ltd (GCPL), Godrej Industries Limited (GIL) and eight other associate companies. The combined revenues of the group amounted to Rs 40 bn in the fiscal 2002-03.

3] Stern Stewart & Co. is a global consulting firm that specializes in helping companies in the measurement and creation of shareholders' wealth through the application of tools based on modern financial theory.

4] Brian Carvalho, Godrej: The Quest for Value.


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