A Comparative Study of Economic and Market Value Added of IT Sector Companies in India

Abstract

In today's business world shareholder's wealth maximization is very important. The survival of any company is not possible without wealth generation for its shareholders. Many companies consider equity capital as free cost of capital but this approach is not relevant in the modern business world because equity is a costlier source of finance than other sources of finance. Economic Value Added (EVA) helps to calculate the true profitability of the company by considering the cost of equity. EVA concept has been given by Stern Stewart and Co. The company has given 160 adjustments in GAAP (General Accepted Accounting Practices) rules for the calculations of true economic profit. In the study three adjustments has been taken for the calculation of economic profit. Economic value added an important performance metrics and Market Value Added (MVA) is the wealth metrics of economic value added and is positively linked with economic value added. IT sector companies have been taken under consideration for this study. In this study it has been found that Indian Oil Corporation Ltd. is the most wealth creating company and Reliance Power is the most wealth destroying company for the year 2009-2011. The reason for negative economic value added is high cost of equity.There has been a long felt realization that the traditional metrics to analyze a firm's performance neither precisely measure the extent of wealth creation nor attach much value to the cost of equity shareholders funds. Considering the need for measures that can effectively assess wealth creation, Stern Stewart & Company has developed two metrics namely Economic Value Added (EVA) and Market Value Added (MVA). The IT sector company in India has not been immune to the global economic crisis which has led to slowdown of the industrial sector. Infosys, which is an important player in the IT sector companies in India, has been facing challenging times due to the recent slow-down. The sales and profits of the company are under strain and therefore the researchers considered it appropriate to take up the company for the purpose of assessing the extent of economic and market value added by the company.