Data Update and Economic Value Added (EVA)

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Starting from 2019, I will be making the ‘India Inc., in Numbers’ series of posts once a year. I will be showcasing how the different companies / industries in India have fared in terms of several financial ratios and others numbers.

India Inc., in Numbers

In case you are wondering where I got the idea, you may not have to guess too much. Prof. Aswath Damodaran is kind enough to provide everyone with market-related data for free on his website and a commentary on the new data on his blog every year. Here is the exact way to get the data for yourself:

Starting this 2019, I thought I’d take India-related data alone from the lot and brief it in a blog post. I will be using a lot of this data in my valuations, so it makes sense to provide a preview first. Please note that in the few places I see data missing, I may have done a normalization or approximation.

Let me remind you again that this is data largely related to India. A few of them may be data relating to the Emerging Markets (EM), due to lack of more granular data. I will call those out specifically. Probably another interesting point to note is that the data is from companies both listed and unlisted, so don’t get confused when you see some data that’s different compared to what you see in the listed companies alone.

Number of Firms (India – Sample)

The number of companies considered in this whole data collection exercise is a whooping 3,570 (Both listed and unlisted). Since showing all of them may not be required, I have shown here only the industries which are the most crowded. Clearly, this does not constitute all the companies in India. This is just a sample data set to serve our needs. So, we can take the liberty to claim that the Apparel, BFSI and Retailers industries have the most operating companies in India.

Beta, Cost of Equity and Cost of Capital (India)

Trucking, Retail outlets and Oil & Gas companies remain the riskiest businesses in India, all clocking in a Cost of Capital around the 20% mark, with Trucking taking the cake. This shouldn’t come as a big surprise, since these three industries are both capital heavy and quasi-commoditized in nature. The market estimates that they may post wildly fluctuating Sales and Profits based on the industry trend. On the other send of the scale, Beverages (Soft), Software (Internet) and Environment & Waste Services industries have very low Cost of Capital, around the ~8% range, which is just slightly above India’s Risk-free Rate of ~7.71% or so.

If you do not like a mechanical formula to arrive at the Discounting Rate (AKA Cost of Equity/Capital) in a valuation exercise, I suggest you read the blog post I made earlier, titled Apple Juice Investing: Do You Know Your Cost of Capital? It is my humble effort at unraveling the puzzle that is the Cost of Capital to an individual investor.

A very interesting thing to note is the fact that the correlation between the Beta and Cost of Equity is about 99%+ for the entire data (As it should be). But the correlation between the Beta and Cost of Capital is only around ~89% or so. Why do you think this is the case? If you’ve got the answer, comment below the post. I’ll let you know how good you were at guessing this one.

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Capital Expenditure and Capital Efficiency (Emerging Markets)

This is the list of top 20 industries by total Capital Expenditure (Capex) and Capital Efficiency (Sales-to-Capital Ratio). It is only logical that we see the names Oil & Gas, Power and Bank at the top end of the list. If you think about it, some of the largest companies in India hail from these sectors. It makes sense that they are the ones with the largest absolute amount of Capital Expenditure.

The data is in Millions of Dollars. So, we may realize that both Oil & Gas and Power companies alone invested a whooping $202 Billion in India. That is very close to 10% of India’s GDP of $2600 Billion. Impressive!

But on a more subliminal level, the absolute level of Capex matters lesser compared to how efficiently the investment was utilized to generate sales. The Sales-to-Capex Ratio captures exactly this (The larger the Ratio, the more productive the investment). The Home Furnishings, Healthcare Support Services and Retailers score very highly here at ~3.30 levels. Surprisingly, Investment & Asset Managers, Brokerage & Investment Banking and Real Estate (Not so surprisingly) score a lowly ~0.13 on average. Banks closely follow at around 0.36 levels, although the calculation for highly levered businesses like Banking may have skewed the calculation.

Mergers & Acquisitions (Emerging Markets)

It may or may not surprise you to know that Real Estate Developers have consolidated the most this year across all Emerging Markets. They have done M&As up to the level of a gigantic $42.12 Billion. Power and Shipbuilding industries follow by a wide margin with ~$11 Billion each. On the flip side, Shoe, Online Retailers and Cable TV operators have de-merged to a small extent.

Book Debt to Capital (India)

I have listed down the 5 most debt-free and then the 5 most indebted industries in the sample. Something to note here is that the Green & Renewable Energy and Environmental & Waste Services Industries have some of the highest Book Debt to Capital Ratios in the sample. Once, these were touted as the ‘next big thing’ in India. But as you can see, they are burdened with financial pressure and unless some miracle happens, it’s difficult for them get out of this unscathed.

Dividend Payout Ratio (India)

These sectors pay the top most dividends in India. If you’re looking to buy a “Dividend play”, you may want to look at these sectors first. Of course, the Oil & Gas sector is known to everyone for gushing out lots of Dividends, including Special Dividends, which answers the query as to why their DPR is greater than the 100% limit. Green & Renewable Energy companies surprisingly take the second spot at a DPR of 238% or so. The rest of the industries have more normalized levels of Dividends.

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There are also a bunch (36) of sectors that have paid less than 1% of their profits out at Dividends. If you ignore these and ignore the top two, the average DPR clocks in at about 17.18%, which sound alright. Indian companies are not-so-bad Dividend payers, that’s for sure.

Gross Margins and Operating Margins (India)

Real Estate (Operations & Services), General Insurance and Tobacco industries have some of the highest Operating Margins in the country. You could say that these industries have a natural pricing power over their customers. On the other side, Education, Online Retailers and Semiconductor businesses have posted a net Negative Operating Margin for the year. The obvious one like Aviation (Air Transport) and Telecom also figure at the lower end of the scale.

PEG Ratio (India)

I initially thought of posting the P/E Ratio. But to be frank, I find no good reason to post this except for the fact the P/E is one of the most used Ratios in Multiples Valuation. I generally do not support using the Multiples to value any company directly. I even argued along similar lines in my earlier blog post Buying High P/E Stocks: Was Benjamin Graham Wrong? Notwithstanding my disposition, I have added the PEG Ratio just make it a little more meaningful. Do with them what you will. But if you ask, I’d advise you to ignore plain vanilla Multiples. They are nothing short of misleading when it comes to valuing a stock.

CEO and Insider Holdings (India)

It is generally a good sign to look for high Insider/CEO holdings in a company, so they have “Skin in the game”. These are some sectors with very high Insider Holdings (Along with CEO Holdings, wherein a CEO is also an Insider).

Institutional Holdings (India)

Once again, I don’t think Institutional Holding has anything to do with the valuation of a company. But the superstition that if an investor gets into a company before a lot of institutions do, they will likely gain more in terms of value. Whether you believe in it or not is completely left to you. Of course, in industries like Precious Metals and Real Estate, the institutional holding may very well be low because of their highly cyclical nature of business.

Economic Value Added (EVA – India)

I would like to end this post on an interesting phenomenon: Economic Value Added or EVA for short. From the graph, we can see that the Tobacco products industry has created the most EVA, followed closely by the Household Products industry.

Now you may ask, what is EVA? Let’s turn to Investopedia for a moment:

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Economic value added (EVA) is a measure of a company’s financial performance based on the residual wealth calculated by deducting its cost of capital from its operating profit, adjusted for taxes on a cash basis. EVA can also be referred to as economic profit, as it attempts to capture the true economic profit of a company. This measure was devised by management consulting firm Stern Value Management, originally incorporated as Stern Stewart and Co.

In short, EVA is calculated as below:

(Return on Capital – Cost of Capital) * Capital Invested

This shows us the ‘Economic Profits’ of the company, or how much true value the company created for its shareholders and the broader economy it operates in. If you go around calculating this for a dozen companies, you will realize that the companies that have created the most wealth in the past also have fairly high and consistent rates of EVA.

Pidilite is one company in India which regularly calculates their EVA for the past 5 years and include it in their excellently drafted Annual Report (Refer to Page 31):

I have taken the liberty to mimic their model and create one of my own in Excel:

Of course, like all of my other models/tools, this one is also free to download. If you haven’t already figured it out, you need to edit the details in all the yellow cells only for the model to work completely. Try calculating the EVA for companies which have created value in the past and then for companies which have destroyed value in the past. You may find an intuitive correlation between EVA and value creation.

Happy calculating!

With that positive note, I’m taking leave. However, here’s a question for you. How useful are these ‘in-between’ posts? Would you like to see more of Valuations or are these off-beat posts related to Valuations actually useful to you? The answer would help me improve the quality of this blog, so any feedback you have would be well received.

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Dinesh Sairam

Dinesh Sairam

Dinesh: Investor | Risk Consultant | Finance Geek | Writer @Quora | Blogger | Poet | MBA from XIME
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