EVA Financial Management at Godrej Consumer Products Ltd

Author Language Length Discipline

: Vishwanath S R : English : 27 pages : Finance

Description: The case discusses the implementation of economic value added (EVA) financial management system at Godrej Consumer Products Limited (GCPL), a leading FMCG (Fast Moving Consumer Goods) company in India, in 2001. The EVA program consists of three elements: EVA centers (business units), EVA drivers (operational practices that improve EVA results), and an EVA-based incentive program for bonus-eligible managers. The case highlights the motivations, benefits, mechanics, limitations and issues in implementing EVA. Students are required to analyze the effectiveness of the EVA compensation system. Learning Objective: To introduce issues in implementing EVA compensation system Subjects Covered: EVA, Performance measurement, Incentives, organizational design

Electronic copy available at: http://ssrn.com/abstract=1354422

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 In June 2008, P Ganesh, the CFO of Godrej Consumer products, a well known fast moving consumer goods company in India, checked his calculations once again. In a while he had to update Adi Godrej, the chairman of Godrej group, on the long run effects of implementing Economic Value Added as a performance measure in his company. In the initial years of implementation the company had experienced substantial improvement in operating and stock market performance. Company History Started in 1897 as a locks-manufacturing company, the Godrej Group is today one of the most accomplished and diversified business houses in India2. In 1930, Godrej became the first company in the world to develop the technology to manufacture soap with vegetable oils; that spirit of innovation has continued throughout the organization's history. Today Godrej is a leading manufacturer of goods and provider of services in a multitude of categories: home appliances, consumer durables, consumer products, industrial products, and agri products to name a few. A recent estimate suggested that 350 million people across India use Godrej products. The group has more recently entered the real estate and information technology sectors. The Godrej group has annual sales in excess of $1 billion, a workforce of approximately 18,000, and a strong diversified portfolio of products. As of 2007 the group had 20 major affiliate and subsidiary companies (see Exhibit 1). Godrej Consumer Products Ltd. (GCPL) is a major player in the Indian FMCG market with leadership in the personal care, hair care, and the fabric care categories. It is also one of the largest marketers of toilet soaps in the country with leading brands such as Cinthol, Godrej Fairglow and Godrej No.1. The Company has state-of-the-art manufacturing facilities at Malanpur (M.P.) Baddi (Himachal Pradesh) Guwahati (Assam) and Silvassa. Godrej Consumer Products Limited was formed as a result of the de-merger of Godrej Soaps Limited. A major player in the FMCG market with leadership in the personal, hair- care, fabric and household segments, it has over 950 employees with manufacturing facilities in Malanpur (MP) and Silvassa and Guwahati. The product range includes Colorsoft liquid hair color and Godrej liquid and Powder hair dyes, the Fairglow brand, India's first Fairness soap, the Liquid Detergent brand EZEE etc; In the initial year of operations of Godrej Consumer Products Limited (GCPL), the sales of GCPL brands increased by 9% from Rs. 406.6 crore in FY 2000-01
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Godrej completes EVA framework implementation to add shareholder value, News Release, Aug 29, 2001 This section is based on the information available on the companys website.

Electronic copy available at: http://ssrn.com/abstract=1354422

(as part of the Consumer Products Division of erstwhile Godrej Soaps Limited) to Rs. 442.9 crore in 2001-02. Exhibits 2 through 5 provide the financial details of GCPL. Winds of Change After liberalization, many multinationals started entering the Indian consumer durables and FMCG industry. Indian companies like Godrej came under intense pressure due to increased competition in all segments. After the dissolution of Godrej's joint venture with P&G in 1996, there was a lot of introspection within the group, which led to the realization that there was a need to change dramatically to achieve progress. Not only did a lot of managers walk out along with JV partners, the group did not attract enough talented people with the advent of MNCs in India. In 2000-01, an appraisal was conducted of all employees in which Adi Godrej, Chairman and Managing Director of GCPL, also participated. Adi Godrej commented, "My evaluation said that I'm too autocratic and not a good listener. People also felt that I do not encourage teamwork."3 The internal surveys on HRD climate and employee satisfaction reflected that young people in the organization felt underutilized, and uninvolved in strategic decision-making. Under the existing multi-step variable bonus plan, three levels of targets were outlined. A salesperson who had reached level I would never aspire to do more unless he was sure to touch level II, because he would not get any additional bonus for being midway. It would be more beneficial for him to report it in the next financial years' sales. The company's figures suffered as a result of such groupthink. There was clearly gap in communication between the management and the employees. Something needed to be done to ensure that the company was on track. SS Sapre, the previous Vice President Finance and Company Secretary added: A measure was needed that would align the interests of the employee, the company and the shareholder4 Moving Towards EVA Continuous discussions among the management led to the conclusion that a system of internal corporate governance was needed that guides all managers and employees and motivates them to work for the best interests of the company. In the early 1990s Stern Stewart and Co, New York, introduced the concept of economic valued added as a measure of performance. Loosely speaking, EVA is a sophisticated cousin of the residual income measure pioneered by General Motors. Stern Stewart works with clients around the world in implementing the EVA financial management system.
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www.openlearningworld.com http://www.etgmr.com/gmroct-dec2/art7_2.htm

EVA starts with the hypothesis that a company has not earned a profit as long as it does not cover the cost of capital consumed. Expressed as a formula, EVA = Net Operating Profit after Tax (weighted average of capital * net assets) Investors of major US corporations in the US were dissatisfied due to a popular belief that managers at top corporations are unduly focused on near term earnings and earnings per share, a measure that does not capture the shareholder value added. Further, academics like Professor Michael Porter, argued that US managers, due to pressure from Wall Street, due not invest adequately for the long run because of which US corporations are disadvantaged in the world markets. In response to these criticisms, Stern Stewart launched EVA and MVA (Market Valued Added) as performance metrics. Many US companies like Herman Miller, Coca Cola, and Hershey Foods embraced the EVA compensation system. Stern Stewart, often produced data to show that the introduction of EVA indeed results in increases in stock prices and accounting measures of performance like growth in sales, asset turnover etc. Competing consulting firms like Boston Consulting Group, however, produced evidence to prove that EVA is not correlated with stock returns. Following liberalization, Indian companies like Tata Steel, TCS and Dr. Reddy's laboratories started implementing EVA as a measure of performance. It is normal for companies in India, like their counterparts elsewhere, to appraise managers on the basis of book profits or EPS or some such measure. Academics argued that measures like EPS do not capture economic value in the sense that there need be no correlation between EPS and cash flows or stock prices and accounting measures can be manipulated by simply changing the accounting policies of the firm. Godrej considered another alternative- employee stock options that are supposed to align the interests of managers and shareholders but abandoned the idea because the stock market fluctuations had practically wiped out the value of the shares held by the employees of FMCG companies abroad5. After much debate and contemplation, the management decided to go ahead with EVA. Godrej Consumer Products Limited (GCPL) implemented EVA in the financial year 2001-02. Six group companies of Godrej (Godrej Consumer products, Godrej Sara Lee, Godrej Foods, Godrej Industries, Godrej properties and Godrej Agrovet) implemented EVA. This was facilitated by Stern Stewart & Company. GCPL implemented the EVA programme at all nonunionized levels. The program covered 2500 employees. The implementation involved various steps: EVA of various businesses was measured and the implications of the numbers understood. Targets on EVA improvement were then set over a three year time frame. An exhaustive manual was made about what each function could do to improve the EVA of the business. This was a detailed task involving the consultants, the functional heads and HR department.
In a stock option plan, an employee is given the right but not the obligation to purchase the companys stock at a specific price during a specified time in future. The employee stands to gain if he can purchase the stock at a lower price than the then prevailing market price.
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The project involved four overlapping phases6: Performance measurement: As a financial measure, EVA is simply the operating profit after tax, less a charge for the capital used in the business. The measurement phase involved tailoring the EVA definition for each Godrej business to ensure a simple yet robust financial performance measure. The 'weighted average cost of capital' for most Godrej businesses was set at 18 per cent after tax for FY 2001-2002. 'EVA centers' below the SBU level were also identified. An EVA center represented a separate business unit with its own balance sheet and income statement. EVA drivers were operational practices that improved EVA results. Examples of EVA drivers include profitable growth (e.g. acquisitions), operating efficiencies (e.g. reducing costs) and utilization of assets (e.g. reducing inventory). Management processes: This phase involved integrating value-based thinking into the various management processes, and developing the relevant tools and framework to guide management in its strategic, operating and financing decisions to improve business EVA. The analysis of the historical and forecast EVA trends, and the peer benchmarking of Godrej Sara Lee and Godrej Consumer Products Limited, showed that both are very strong EVA performers relative to other leading Indian FMCG companies. The strategic planning process was strengthened through value-based goal-setting techniques to better understand shareholders expectations and improved scenario planning. Sophisticated EVA-based capital investment tools were also developed. Motivation: For quite some time the Godrej Group had in place a variable compensation scheme linked to business performance. Previously, this was linked to sales and profit-before- tax (PBT) targets. A revised 'performance-linked variable remuneration' (PLVR) scheme was designed to reward management teams for improving their businesses' EVA relative to shareholders' expectations. As per Stern Stewarts recommended incentive architecture, the PLVR scheme has two key features to better align managerial behavior with shareholders interests:

Firstly, it provides unlimited rewards to encourage outstanding performance. Secondly, it has a bonus banking mechanism to encourage consistent medium/long-term performance, as well as help with retaining star performers.

The new EVA-linked PLVR scheme would come into effect from March 2002. Training and communication: An extensive training program was undertaken for various managerial and officer levels. Over 500 employees were trained to ensure an appropriate understanding of how to manage for EVA, rather than PBT, outcomes by making appropriate decisions involving investments and/or trade-offs between the income statement and the balance sheet.

Godrej completes EVA framework implementation to add shareholder value, News release, Aug 29, 2001

To implement the system Stern Stewart worked closely with three key teams at Godrej: A steering committee comprising the top management, including Adi Godrej and Nadir Godrej as well as the business unit heads/ directors to make key policy decisions. An implementation team comprising C K Vaidya, executive director (corporate personnel), Godrej Industries Limited, S S Sapre, vice president (finance), Godrej Consumer Products Limited, and Dr S S Sindhu, general manager (personnel), Godrej Agrovet Limited to monitor overall project progress, ensure organization-wide coordination across the various business units and functions and achieve full knowledge transfer. Cross-functional working teams, which were formed at each SBU, to ensure that the outcome of the project was tailored to meet specific business requirements. The entire process was completed in 10 months. The time line diagram in Exhibit 6 shows the major activities involved in implementing EVA. EVA Calculations and Adjustments Economic Value Added (EVA) is an accounting based measure of operating performance. The period could be a month, quarter, half year or a year. The entity whose performance is being measured could be a division or the firm itself. EVA is the difference between accounting earnings with suitable adjustments for interest and some accounting methods and the cost of capital used to generate these earnings. EVA is calculated as: EVA = NOPAT (WACC * Net Assets) Where NOPAT = Net operating profit after tax = EBIT (1-T) Net assets = Adjusted book value of net capital at the beginning of the period. WACC = weighted average cost of capital = D/V (1-T) Kd + E/V Ke Where D = Market Value of firm's debt. E = Market value of equity = Number of shares * current market price. Convertible debt / preferred securities must be converted if in- the - money and options must be included if in- the - money V=D+E T = marginal tax rate Kd = marginal cost of borrowing long term after adjusting for offering discount issuance cost. and

Ke = cost of equity estimated by Capital Asset Pricing Model. Stern Stewart argued that EVA explicitly provides accountability for investor capital as managers are held responsible for both cost of capital and the amount of assets and this would align the interests of both shareholders and managers. Skeptics argued that there was nothing new or novel about EVA as residual income, as a measure of performance, has been around since the 1920s. Under the residual income method, an explicit cost of capital is specified for the investment center and is applied on the investment base to arrive at the capital charge .To illustrate, if the invested capital is $ 100,000 and EBIT is Rs 40,000, the residual income at a capital cost of 15 % would be: Residual income = EBIT (Cost of capital * Invested capital) = 40,000 (0.15 * 100,000) = Rs 25,000 To strengthen the correlation between short-term accounting income based on GAAP and changes in true economic value, Stern Stewart offered a list of accounting adjustments to transform accounting income into EVA. Stern Stewart and Co. considers about 250 accounting adjustments in moving to EVA. In defining and refining its EVA measure, Stern Stewart & Co has identified over 120 short- comings in conventional accounting. In addition to GAAP s inability to handle R&D and other corporate investments, Stern Stewart & Co has addressed performance measurement problems associated with accounting treatments of inventory costing and valuation, depreciation, revenue recognition, write off of bad debts, mandated investments in safety and environmental compliance, pension and post retirement medical expense, valuation of contingent liabilities and hedges, transfer pricing and overhead allocation, joint ventures and start ups , special issues of taxation , inflation and currency translation. Stern Stewart considers only 15-20 key issues and as few as 5 10 key adjustments are actually made in practice. Exhibits 7 (a) and (b) outline the calculation of Net Operating Profit after Tax and adjusted capital. EVA Incentive program The novelty of EVA is that it enabled companies to tie performance to compensation. Most other measures like stock returns or NPV or cash flow were not suitable for compensation purposes. GCPL always had a PBT-linked profit sharing plan. This was also an extension of performance based rewards. The training workshops made it clear that EVA was not only a more equitable system but also would reward much more handsomely on achievement of targets. EVA implementation was a step-by-step implementation for GCPL, designed for better acceptance from employees. In the first year, emphasis was on business and team performance alone. In the second year, a multiplication factor ranging from 0 to 1.2 was introduced in the compensation package to reflect individual performance.

Adi Godrej gave four reasons why the group adopted EVA7: To improve capital efficiency and overall business performance To encourage greater owner-like and entrepreneurial behavior among employees To reduce the hockey-stick feature in corporate plans and budgets (i.e. to even out performance), and To avoid undesirable behaviors seen in the previous multi-step variable bonus plan. Sapre elaborated: The key factor was that employees would begin to think like owners. They would also start worrying about where the capital is employed and what returns are being generated from it, rather than sticking to just their own pay cheques and promotions. This mindset was crucial for the success of the company. EVA eliminated the problem of multi-step targets because it is a graph where incentives are plotted against the EVA earned and so every employee gets rewarded for the amount of work put in by him. EVA would make it possible to have bonus plans with no upside limits. Bonuses, whether meager or lavish, are earned by beating annually negotiated budgets. Under the old system, a manager's greatest incentive is to negotiate an easily achievable budget-and, because the bonus is capped, not to exceed it by too much for fear of raising expectations or damaging his or her credibility. EVA bonus targets, in contrast, would be automatically reset each year by formula. If EVA shot up, for example, the following year's bonus would be based on improvement above the new, higher level of EVA. Over the years, financial analysts have found conventional accounting to be misleading, under which most companies appear profitable while many in fact are not8. Exhibit 8 presents an excerpt from Sapres presentation explaining the merits of EVA. For each manager, a target EVA bonus was set. The payout of the target bonus depended on the performance of the relevant EVA center and EVA drivers, depending on how goals were weighted. The companys management set an EVA target and EVA performance interval for each EVA center. The EVA target is based on the expected improvement in EVA from one year to next. The EVA interval is the shortfall from target that eliminated the bonus altogether. The first step in calculating annual bonuses was to calculate the divisions actual EVA improvement over the previous year, adjusted for the expected EVA improvement goal and interval. The second step is to determine the bonus payout for the year. If EVA goals were fully achieved, the company would credit the full amount of the bonus to the bonus bank. Typically, executives would be paid 2/3rd of the bonus and the remaining 1/3rd was carried forward to the next year to provide a multi-year horizon for the bonus plan and even out fluctuations in bonus payments.
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Arundhati Dasgupta, Why Godrej is captivated by EVA, Indian Management, July 2002 Reeta Gupta, EVA at Godrej, General Management Review, n.d Mittal R K, Neena Sinha, Archana Singh, Challenges of Implementing Economic Value Added: A case study of Godrej Consumer products, Global Business Review, Vol. 9, No. 2, 287-298 (2008)

From this bank balance the manager was paid the target bonus plus the amount carried forward from the previous year. Likewise, a decline in EVA performance reduced the bonus payout for the year. But the surplus in the bonus bank would enable a manager to earn bonus in a year even if the bonus payout is negative in that year. Initial experience with EVA Since the launch of the EVA program during its fiscal year running from April 2001 through March 2002, all the businesses witnessed significant improvements in overall business performance, capital efficiency, and market share9. During the three-year period from 2001-02 through 2003-04, the management teams of these six businesses were rewarded using an EVAbased incentive plan with the classic Stern Stewart architecture. The plan effectively links rewards for each of the business to their cumulative three-year EVA improvement targetsand the targets are broken down into annual milestones that are set completely independently from the annual budgeting process. Among other important features, the incentive plan has no caps or floors on bonuses, and there is a bonus bank to ensure that performance improvements in any one year are sustained in future years. During fiscal years 2001-02 and 2002-03, four of the six major businesses exceeded their stretch EVA improvement targets. These stretch targets were derived based on forwardlooking expectations to justify market value estimates of these businesses. For these six businesses combined, the absolute level of EVA improved from a negative to a positive number and the rate of EVA improvement was also well ahead of that of the groups industry peers. In the years 1999-2001, just prior to the adoption of the EVA system, the groups year-on-year EVA growth was negative or quite low relative to that of its peers. But in fiscal 2002, its EVA increased by more than 1,000%, and it grew a further 80% in 2003. Over this same two-year period since implementing EVA, sales grew by 18% and pretax profits rose by 60% and the aggregate return on capital of the six businesses increased by 11 percentage points. Its efficiency in using working capital in particular improved dramatically: the net working capital to sales ratio, which was around 7% historically, dropped to 6% in fiscal 2002 and 14% in fiscal 2003. Once people realized that they were being charged for the use of capital by the EVA system, they quickly figured out how to operate with less of it. And the combination of increased capital efficiency and improved profitability meant that operating cash flow generation was so strong that the group was able to return significant cash to our shareholders in the form of buybacks. Exhibits 9 and 10 provide the inputs required and the results of EVA calculation for GCPL for 2001-02, 2006-07, and 2007-08. Exhibits 11 and 12 present the stock market performance of GCPL.

Adi Godrej, Creating Value at a Conglomerate: The case of the Godrej group, Journal of Applied Corporate Finance, Vol 16 No 1, Winter 2004

Exhibit 1: Major Companies, Lines of Business and Annual Sales for the Fiscal Year ended December 31, 2006 / March 31, 2007
1.

Godrej & Boyce Mfg. Co Ltd

Subsidiaries of Godrej & Boyce

2. 3. 4. 5. 6.

Godrej Industries Ltd Godrej Commodities Ltd Godrej Infotech Ltd Godrej (Malaysia) SDN. BHD., Malaysia Godrej (Singapore) Pte. Ltd., Singapore

Major Subsidiaries of Godrej Industries

7. 8. 9. 10. 11. 12.

Godrej Agrovet Ltd Goldmohur Foods & Feeds Ltd Godrej Properties Ltd Godrej HiCare Ltd Godrej International Ltd Godrej Global Mid EAST FZE., Sharjah, UAE

Major Affiliates
13. 14. 15. 16. 17. 18. 19. 20.

Godrej Consumer products Ltd Godrej Sara Lee Ltd Geometric Ltd Godrej EFACEC Automation & Robotics Ltd Godrej Hershey Foods and Beverages Ltd Mercury Mfg Co Ltd, SEZ, Chennai Godrej & Khimji (Middle East) LLC, Oman Godrej (Vietnam) Co Ltd

Source: Company

Exhibit 2: Financial Summary

Mar 2002 Rs. Crore Total income Sales Income from financial services Total expenses Raw material expenses Power, fuel & water charges Compensation to employees Indirect taxes Selling & distribution expenses Other operational exp. of indl. enterprises Other oper. exp. of non-fin. service enterprises PBDITA PBDTA PBT PAT Net worth Paid up equity capital (net of forfeited capital) Reserves & surplus Total borrowings Current liabilities & provisions Total assets Gross fixed assets Net fixed assets Investments Current assets Loans & advances Growth (%) Total income Total expenses PBDITA PAT Net worth Total assets

Mar 2003

Mar 2004

Mar 2005

Mar 2006

Mar 2007

522.6 520.48 0.95 469.41 132.17 10.93 22.16 60.05 84.95 0 0 75.13 72.62 63.23 41.98 53.18 23.65 29.53 22.49 99.16 178.57 145.98 93.52 2.46 76.44 5 Error Error Error Error Error 59423.3333

535.09 533.03 0.88 484.57 152.37 11.16 25.5 62.16 81.81 0 0 79.72 78.77 69.78 53.28 45.56 23.06 22.5 17.85 98.66 168.45 149.02 87.82 4 74.9 0 2.38997321 3.22958608 6.10941036 26.9175798 -14.328695 5.66724534

550.89 548.6 0.46 494.96 171.47 11.46 25.55 63.64 76.25 0 0 86.83 86.01 76.61 64.86 42.36 22.74 19.62 24.22 114.49 189.53 172.98 104.01 0 84.66 0 2.9527743 2.14416906 8.9187155 21.7342342 -7.023705 12.5140991

614.05 603.46 0.9 539.26 278.65 16.43 32.9 48.7 89.41 0 0 109.31 107.94 97.28 89.59 49.85 22.64 27.21 6.13 140.59 205.52 180.55 101.43 0 103.08 0 11.4650838 8.9502182 25.8896695 38.1282763 17.6817753 8.4366591

701.48 692.26 1.08 592.74 304.11 20.99 43.15 43.3 99.48 0 0 145.04 142.55 131.77 121.2 76.16 22.58 53.58 4.87 163.21 252.22 166.28 79.91 50.01 120.95 0 14.2382542 9.91729407 32.6868539 35.2829557 52.778335 22.7228494

818.64 799.42 1.97 710.7 384.22 23.94 40.5 46.06 115.67 0 0 167.86 161.83 149.34 132.16 110.91 22.58 88.33 112.86 222.38 455.41 283.45 187.93 71.79 194.4 0 16.7018304 19.9007997 15.7335907 9.04290429 45.6276261 80.5606217

Source: Public Databases

Exhibit continued Profitability ratios (%) PBDITA Net of P&E/Total income net of P&E PAT Net of P&E/Total income net of P&E PAT Net of P&E/Avg. net worth PAT/Avg. net worth PAT Net of P&E/Avg. total assets PAT/Avg. total assets Liquidity ratios (times) Current ratio Debt to equity ratio Interest cover Debtors (days) Creditors (days) Efficiency ratios (times) Total income / Avg. total assets Total income / Compensation to employees

14.3761959 8.03291236 157.878902 157.878902 46.9391178 46.9391178

14.9750509 10.0338261 108.750253 107.919789 30.9434615 30.7071639

15.7037118 11.7082219 146.451319 147.543221 35.9684899 36.2366613

16.8726314 13.6233317 179.329791 194.317319 41.8579927 45.356284

20.4528885 17.0447885 189.238949 192.365685 52.0950758 52.9558265

19.0456638 14.6037079 125.48244 141.294703 33.1727032 37.3528539

0.72855509 0.42290335 26.1912351 8.21544536 63.4145497

0.7453478 0.39179104 74.8842105 16.0919648 64.7852154

0.68351364 0.57176582 93.8414634 12.5082027 71.2215976

0.70525452 0.12296891 66.9635036 5.92446061 92.6605735

0.72196025 0.06394433 53.1285141 3.2610941 79.9443484

0.82223068 1.01758182 23.3134328 3.85354382 99.1821824

5.84989086 23.5830325

3.08391447 20.9839216

3.07776971 21.5612524

3.10872042 18.6641337

3.06497138 16.2567787

2.31375154 20.2133333

Source: Public Databases

Exhibit 3: Consolidated Income Statement Rs. Crore

Mar 2002 Mar 2003 Mar 2004 Mar 2005 Mar 2006 Mar 2007

Total income Sales Industrial sales Income from non-financial services Income from financial services Interest Dividends Treasury operations Other income Prior period income & extraordinary income Change in stock Total expenses Raw material expenses Packaging expenses Purchase of finished goods Power, fuel & water charges Compensation to employees Indirect taxes Royalties, technical know-how fees, etc. Lease rent & other rent Repairs & maintenance Insurance premium paid Outsourced mfg. jobs (incl. job works, etc.) Outsourced professional jobs Directors' fees Selling & distribution expenses Travel expenses Communication expenses Printing & stationery expenses Miscellaneous expenses Fee based financial service expenses Treasury operations expenses Total provisions Write-offs Less: Expenses capitalised Less: DRE & expenses charged to others Prior period & extraordinary expenses Interest paid Financial charges on instruments 522.6 520.48 352.71 167.77 0.95 0.5 0.45 0 1.17 0 -11.21 469.41 132.17 24.28 59.01 10.93 22.16 60.05 0 0.79 2.19 0.56 18.97 0 0 84.95 3.84 0 0 13.51 2.49 0 0 0.36 0 0 0 2.51 0 535.09 533.03 352.76 180.27 0.88 0.38 0 0.5 1.18 0 2.76 484.57 152.37 35.6 40.14 11.16 25.5 62.16 0 0.99 1.42 0.64 21.66 0 0 81.81 4.76 0 0 16.85 2.14 0.27 0.2 0.05 0 0 0.41 0.95 0 550.89 548.6 372.12 176.48 0.46 0.14 0.05 0.27 0.81 1.02 8.93 494.96 171.47 41.3 33.99 11.46 25.55 63.64 0 1.13 1.4 0.71 20.6 0.34 0 76.25 4.95 0 0 16.8 1.74 0 0 1.12 0 0 0.54 0.82 0 614.05 603.46 603.46 0 0.9 0.64 0.25 0.01 2.54 7.15 14.8 539.26 278.65 0 15.27 16.43 32.9 48.7 0 1.53 1.87 0.95 6.13 0.35 0 89.41 5.26 0 0 20.07 1.73 0 0 0.05 0 0 0.24 1.37 0 701.48 692.26 691.92 0.34 1.08 0.4 0.03 0.65 6.17 1.97 12.46 592.74 304.11 0 16.05 20.99 43.15 43.3 0 1.89 2.06 1.26 8.41 0.44 0 99.48 6.53 0 0 19.25 1.96 0 0 0.02 0 0 0 2.49 0 818.64 799.42 796.66 2.76 1.97 1.74 0 0.23 2.31 14.94 24.22 710.7 384.22 0 12.13 23.94 40.5 46.06 0 3.98 2.2 1.49 12.46 0.49 0 115.67 8.32 0 0 19.9 1.56 1.92 0 0.01 0 0 0.15 6.03 0

Source: Public Databases

Exhibit continued Expenses incurred on raising deposits/debts Depreciation Amortization Provision for direct taxes PAT PBDITA PBDTA PBT Source: Public Databases 0 9.39 0 21.25 41.98 75.13 72.62 63.23 0 8.99 0 16.5 53.28 79.72 78.77 69.78 0 9.4 0 11.75 64.86 86.83 86.01 76.61 0 10.66 0 7.69 89.59 109.31 107.94 97.28 0 10.78 0 10.57 121.2 145.04 142.55 131.77 0 12.49 0 17.18 132.16 167.86 161.83 149.34

Exhibit 4: BALANCE SHEET CONSOLIDATED - Godrej Consumer Products Ltd. (Rs in Cr.) 200803 SOURCES OF FUNDS : Share Capital Reserves Total Total Shareholders Funds Minority Interest Secured Loans Unsecured Loans Total Debt Total Liabilities APPLICATION OF FUNDS : Gross Block Less: Accumulated Depreciation Less: Impairment of Assets Net Block Lease Adjustment Capital Work in Progress Investments Current Assets, Loans & Advances Inventories Sundry Debtors Cash and Bank Loans and Advances Total Current Assets Less : Current Liabilities and Provisions Current Liabilities Provisions Total Current Liabilities Net Current Assets Miscellaneous Expenses not written off Deferred Tax Assets Deferred Tax Liability Net Deferred Tax Total Assets Contingent Liabilities Source: Public Databases 22.58 148.98 171.56 0 92.1 95 187.1 358.66 389.28 125.35 0 263.93 0 71.58 0.01 191.56 50.95 42.59 66.77 351.87 290.45 32.24 322.69 29.18 2.87 1.83 10.74 -8.91 358.66 209.24 200703 22.58 99.41 121.99 0 108.61 65 173.61 295.6 358.48 110.52 0 247.96 0 39.81 0.01 135.24 48.32 47.49 46.48 277.53 252 9.73 261.73 15.8 0 1.37 9.35 -7.98 295.6 45.92 200603 22.58 56.1 78.68 0 68.72 0 68.72 147.4 262.22 99.18 0 163.04 0 7.06 1.01 100.46 30.33 26.34 14.28 171.41 178.74 9.81 188.55 -17.14 0 1.41 7.98 -6.57 147.4 36.34

Exhibit 5: Key Ratios Summary

2008 Key Ratios Debt-Equity Ratio Long Term Debt-Equity Ratio Current Ratio Turnover Ratios Fixed Assets Inventory Debtors Interest Cover Ratio PBIDTM (%) PBITM (%) PBDTM (%) CPM (%) APATM (%) ROCE (%) RONW (%) 0.95 0.85 0.85 2007 0.63 0.53 0.75 2006 0.09 0.01 0.68 2005 0.33 0.17 0.66 2004 0.48 0.35 0.68 2003 0.41 0.33 0.74 2002 0.43 0.32 0.76 2001 30 30 0

3.61 6.51 83.46 17.3 21.28 19.57 20.14 17.84 16.13 71 113.33

3.96 7.77 97.63 20.04 20.66 19.09 19.71 18.16 16.59 99.82 141.31

4.08 8.56 118.28 30.57 21.17 19.61 20.53 19.07 17.52 198.12 192.38

3.45 9.81 65.49 31.24 17.82 16.05 17.3 16.03 14.26 158.05 186.66

3.44 12.68 31.25 30.92 16.14 14.43 15.67 13.53 11.82 121.79 147.51

3.62 15.68 24.41 23.67 15.41 13.72 14.83 11.74 10.05 105.21 108.51

7.14 33.97 47.73 13.64 14.91 13.11 13.95 9.87 8.06 180.1 157.84

0 0 0 0 0 0 0 0 0 0 0

Asset utilization ratios

Mar 2002 Total income / Avg. total assets Total income / Compensation to employees Sales / Avg. GFA (excl. reval. & WIP) Sales /Avg. net fixed assets Mar 2003 Mar 2004 Mar 2005 Mar 2006 Mar 2007

5.84989086 23.5830325 7.14503398 11.1308811

3.08391447 20.9839216 3.61744147 5.87879122

3.07776971 21.5612524 3.44122444 5.7196476

3.10872042 18.6641337 3.45110374 5.8748053

3.06497138 16.2567787 4.08280499 7.63493989

2.31375154 20.2133333 3.96872363 5.96938471

Valuation Ratios
200803 21.15 18.58 18.9 16.97 3.05 200703 27.8 29.95 25.17 20.72 4.17 200603 37.2 53.8 33.89 27.91 5.92 200503 22.81 35.19 20.03 16.3 2.91 200403 15.97 21.97 13.75 10.63 1.7 200303 11.54 13.21 9.85 7.45 1.13 200203 9.25 7.09 7.52 5.01 0.72 200103 0 0 0 0 0

Price Earning (P/E) Price to Book Value ( P/BV) Price/Cash EPS (P/CEPS) EV/EBIDTA Market Cap/Sales

Source: Capitaline

Exhibit 5 continued Structure of Current Assets

Mar 2002 Cash to current liabilities Cash to avg. cost of sales Quick ratio Current ratio Current ratio (incl. mktbl. securites) Debt to equity ratio Interest cover Interest incidence (%) Structure of current assets Inventories Sundry debtors (outstanding less than six months) Sundry debtors (outstanding over six months) Bills receivable Acccured income, lease rent & other receivables Expenses paid in advance Deposits Sale of investments & other receivables Cash & bank balance Structure of current assets (%) Inventories Sundry debtors (outstanding less than six months) Sundry debtors (outstanding over six months) Bills receivable Acccured income, lease rent & other receivables Expenses paid in advance Deposits Sale of investments & other receivables Cash & bank balance Net working capital Net working capital (as per cost of sales method) Mar 2003 Mar 2004 Mar 2005 Mar 2006 Mar 2007

0.10236371 8.32522777 0.38000381 0.72855509 0.75667175 0.42290335 26.1912351 22.0272049

0.07115136 5.53042023 0.33475968 0.7453478 0.78515275 0.39179104 74.8842105 4.70996529

0.1127079 10.7278354 0.25851768 0.68351364 0.68351364 0.57176582 93.8414634 3.8982648

0.06130268 6.36871726 0.14443076 0.70525452 0.70525452 0.12296891 66.9635036 9.02800659

0.08189578 8.7936363 0.14982391 0.72196025 0.72792933 0.06394433 53.1285141 45.2727273

0.09190881 11.8043339 0.28782303 0.82223068 0.82223068 1.01758182 23.3134328 10.2437781

30.64 21.81 0 0 7.32 0.19 5.74 0 10.74

37.34 21.86 0 0 4.63 0 3.92 0 7.15

49.17 13.25 0 0 4.81 0.3 3.17 0 13.96

73.8 5.18 0 0 6.97 0 8.17 0 8.96

87.88 6.52 0 0 4.86 0 7.97 0 13.72

117.23 9.8 0 0 36.52 0.34 8.78 0 21.73

40.0837258 28.5321821 0 0 9.57613815 0.24856096 7.50915751 0 14.0502355 -28.48 38.9587596

49.8531375 29.1855808 0 0 6.18157543 0 5.23364486 0 9.54606142 -25.59 0.44075625

58.0793763 15.6508386 0 0 5.68154973 0.35435861 3.74438932 0 16.4894874 -39.2 2.36610766

71.5948778 5.02522313 0 0 6.76173846 0 7.92588281 0 8.69227784 -43.08 34.0977185

72.6581232 5.3906573 0 0 4.01818933 0 6.58949979 0 11.3435304 -46.58 5.61335821

60.3034979 5.04115226 0 0 18.7860082 0.17489712 4.51646091 0 11.1779835 -42.03 37.1279541

Source: Capitaline

Exhibit 5 continued
Profitability ratios (%)

Mar 2002 PBDITA/Total income PBDTA/Total income PBIT/Total income PBT/Total income PAT/Total income Cash profit/Total income PBDITA Net of P&E/Total income Net of P&E PBDTA Net of P&E/Total income Net of P&E PBIT Net of P&E/Total income Net of P&E PBT Net of P&E/Total income Net of P&E PAT Net of P&E/Total income Net of P&E Cash profit Net of P&E/Total income Net of P&E PBDITA Net of PE&OI/Sales PBDTA Net of PE&OI/Sales PBIT Net of PE&OI/Sales PBT Net of PE&OI/Sales PAT Net of PE&OI/Sales Cash profit Net of PE&OI/Sales PAT Net of PE&OI/Net sales

Mar 2003

Mar 2004

Mar 2005

Mar 2006

Mar 2007

14.3761959 13.8959051 12.5794106 12.0991198 8.03291236 9.898584 14.3761959 13.8959051 12.5794106 12.0991198 8.03291236 9.898584 14.4347525 13.9525054 12.6306486 12.1484015 8.06563172 9.93890255 9.11756402

14.8984283 14.7208881 13.2183371 13.0407969 9.95720346 11.6989665 14.9750509 14.7975107 13.2949597 13.1174195 10.0338261 11.7232615 15.032925 14.8546986 13.3463407 13.1681144 10.0726038 11.7685684 11.4022979

15.7617673 15.6129173 14.0554376 13.9065875 11.7736753 13.501788 15.7037118 15.5545856 13.9942168 13.8450907 11.7082219 13.6214014 15.7400656 15.5905942 14.0266132 13.8771418 11.7353263 13.6529347 13.2753217

17.801482 17.5783731 16.065467 15.8423581 14.5900171 15.6843905 16.8726314 16.6468941 15.1161641 14.8904268 13.6233317 15.3880376 16.9688132 16.741789 15.2023332 14.9753091 13.700991 15.4757565 14.9037422

20.6762844 20.3213206 19.1395336 18.7845698 17.2777556 18.5593317 20.4528885 20.096925 18.9118097 18.5558462 17.0447885 18.4014524 20.6670904 20.307399 19.109872 18.7501806 17.2232976 18.5941698 18.3724729

20.5047396 19.7681521 18.9790384 18.2424509 16.1438483 17.0832112 19.0456638 18.2953838 17.4916013 16.7413214 14.6037079 16.1590146 19.147632 18.3933352 17.5852493 16.8309524 14.6818944 16.245528 15.579537

Exhibit 5 continued
Return ratios (%)
Mar 2002 Mar 2003 Mar 2004 Mar 2005 Mar 2006 Mar 2007

On Net worth
PBIT Net of P&E/Avg. net worth PAT Net of P&E/Avg. net worth PAT/Avg. net worth Cash profit/Avg. net worth 247.235803 157.878902 157.878902 194.546822 144.095605 108.750253 107.919789 126.79765 175.045496 146.451319 147.543221 169.199272 198.980588 179.329791 194.317319 208.892745 209.967463 189.238949 192.365685 206.634394 150.29668 125.48244 141.294703 149.516224

On Capital Employed
PBIT Net of P&E/Avg. capital employed PBIT/Avg. capital employed PAT Net of P&E/Avg. capital employed PAT/Avg. capital employed 187.801743 187.801743 119.925725 119.925725 108.205947 107.582326 81.6640049 81.0403833 129.55636 130.364509 108.392962 109.201111 170.488757 183.330236 153.651738 166.493217 208.134047 211.23348 187.586532 190.685966 98.1601089 108.487239 81.953706 92.2808365

On Total Assets
PBIT Net of P&E/Avg. total assets PBIT/Avg. total assets PAT Net of P&E/Avg. total assets PAT/Avg. total assets 73.5058981 73.5058981 46.9391178 46.9391178 41.0005187 40.7642211 30.9434615 30.7071639 42.9912286 43.2594 35.9684899 36.2366613 46.4447538 49.9430452 41.8579927 45.356284 57.801372 58.6621226 52.0950758 52.9558265 39.7326286 43.9127793 33.1727032 37.3528539

On GFA
PBIT Net of P&E/Avg. GFA (excl. reval. & WIP) PBIT/Avg. GFA (excl. reval. & WIP) PAT Net of P&E/Avg. GFA (excl. reval. & WIP) PAT/Avg. GFA (excl. reval. & WIP) 90.2464136 90.2464136 57.6292127 57.6292127 48.2796064 48.0013573 36.4370546 36.1588056 48.2687241 48.5698156 40.3838916 40.6849831 52.464829 56.4165618 47.2835411 51.2352739 78.0218808 79.1837457 70.3193654 71.4812303 69.7909944 77.1334955 58.2683811 65.6108822

Source: Capitaline

Exhibit 5 continued
Working cycle & turnover ratios
Mar 2002 Mar 2003 Mar 2004 Mar 2005 Mar 2006 Mar 2007

Working cycle (days)

Raw material cycle WIP cycle Finished goods cycle Debtors Gross working capital cycle Creditors Net working capital cycle 17.0193353 2.87602872 5.10443434 8.21544536 33.2152437 63.4145497 30.1993061 18.117889 40.1937687 44.4285105 7.28795658 32.1659041 6.23670892 10.6315561 16.0919648 65.1261339 64.7852154 0.3409185 9.19830969 20.0804255 22.6821277 3.73833369 34.2836161 9.50524816 13.1062488 12.5082027 69.4033158 71.2215976 1.81828178 8.57993495 25.2643617 29.1808511 3.59856217 34.5089718 7.99603113 19.9946447 5.92446061 68.4241083 92.6605735 24.2364652 10.5769596 52.4257274 61.6089842 3.89867269 38.4971721 8.67845994 25.9098212 3.2610941 76.3465474 79.9443484 3.59780106 9.4812159 92.0743735 111.925627 5.33183573 33.6766696 13.7268328 27.7562099 3.85354382 79.0132562 99.1821824 20.1689263 10.8383639 79.6101896 94.7180095 6.80977603

Turnover ratios (times)

Raw material turnover Finished goods turnover Debtors turnover Creditors turnover

Source: Capitaline

Exhibit 6: EVA Implementation Time Line Diagram Oct 00 Jul 01

Exhibit 7 (a): Calculating Net operating profit After Tax (NOPAT) NOPAT is calculated by deducting cash taxes from EBIT and adding the value of non- cash items like goodwill amortization and LIFO charges. Depreciation is deducted to arrive at EBIT because depreciation is a real economic cost. To arrive at NOPAT: Net operating profits Add Add Add Add Add Deduct increase in bad debt reserve increase in LIFO reserve Amortization of good will Increase in capitalized R&D other operating Income Cash operating taxes

where cash operating tax is defined as provision for income taxes less the increase in the deferred income tax reserve, plus the tax saved by unusual loss (gain), plus the tax saved by deducting interest expense. That is, NOPAT = Net Sales - Cost of sales - SG&A + Goodwill amortization - Deferred taxes + Tax shield from interest expense - Taxes on interest income. Exhibit 7 (b): Calculating Invested Capital The Capital charge is to be applied on the economic book value of cash invested in business activities. To arrive at invested capital: Total Assets Less: Non-interest bearing current liabilities Less: Marketable securities and construction in progress Add: Present value of non-capitalized leases Add: Equity equivalent reserves10

10

LIFO reserve is added to inventories, bad debt reserves are added to receivables, the cumulative amortization of goodwill is added back to goodwill, R&D expense is capitalized as a long term asset and smoothly depreciated over 5 years

Exhibit 8: Excerpt from Sapres presentation explaining the merits of EVA s Improve Capital Efficiency and overall business performance Encourage Greater owner Like and Entrepreneurial behavior Reduce Hockey-stick feature in our plans and budgets stick Avoid undesirable behaviors in previous multi step variable bonus plan multi-step

Exhibit 8 continued: EVA Incentives: Pay Bonuses for meeting EVA expectations Unlimited upside potential, but with corresponding downside risk Bonuses are decoupled from budgets Bonus banking system

Exhibit 9: Godrej Consumer products Financial Data for EVA calculation, 2001-2002 (Rs cr unless stated) PBT Interest NOPBT Cash Operating Tax on PBT Cash operating tax on interest NOPAT MRP Beta Risk Free Rate E/V Pre Tax cost of borrowing Tax rate Average Capital Employed 63.2 2.5 65.7 15.4 0.9 49.4 10% 0.63 11.5% 0.96 14% 35% 107.05

Exhibit 10: Calculation of EVA for GCPL in 2007 and 2008 Calculation of NOPAT (Rs crore) 2007-08 Profit before tax (PBT) Interest (incl. forex fluctuation) Profit on sale of Fixed Asset Net operating Profit before tax Cash operating tax on PBT Cash operating tax on interest Tax Adjustments Net operating Profit after tax (NOPAT) Calculation of WACC 169.2 8.8 178.0 (19.3) (3.0) 155.7 2006-07 134.4 5.8 0.1 140.3 (15.8) (1.9) 4.8 127.4

2007-08 Leverage beta () Market risk premium (P) Equity risk premium (Px) Risk free return (r) Cost of equity {r+ (Px)} Equity/market value (e) Wt. Cost of equity [{r+(P)}e Pretax cost of borrowing (I) Retention rate (1-tax rate) Debt/market value (d) Wt. Cost of debt {I(1-t)d} WACC 0.68 8% 5.4% 7.57% 13.0% 0.97

2006-07 0.68 8% 5.4% 6.96% 12.4% 0.95

12.7% 11.8% 8.6% 8% 5.7% 5.3% 0.03 0.05 0.2% 0.3% 12.8% 12.1%

EVA Generated by GCPL (Rs crore)

2007-08 2006-07

2007-08 155.7 (23.2) 132.5

2006-07 127.4 (16.7) 110.7

NOPAT Capital Charge EVA

Source: Godrej (Economic Value Added) Annual Report Exhibit 11: Stock Price History of GCPL, 2006-08

Date range From To

First closing price (Rs.)

Last closing price

Mean closing price Returns (%) 8.53484046 3.47365533 15.1510217 2.0361991 7.03991131 -5.7326014 4.70289164 3.79128499 2.84513417 2.12978369 4.86229174 2.23848861 -0.5643739 0.56757716 3.39375758 4.90159673 12.7787611 4.26136364 7.39587388 16.0142511 17.4140183 6.95199934 4.75998386 5.34499448 2.42557883

Excess returns COSPI

Mean returns

1/6/2006 3/7/2006 1/8/2006 1/9/2006 3/10/2006 1/11/2006 1/12/2006 2/1/2007 1/2/2007 1/3/2007 2/4/2007 3/5/2007 1/6/2007 2/7/2007 1/8/2007 3/9/2007 1/10/2007 1/11/2007 3/12/2007 1/1/2008 1/2/2008 3/3/2008 1/4/2008 2/5/2008 2/6/2008

30/06/2006 31/07/2006 31/08/2006 29/09/2006 31/10/2006 30/11/2006 29/12/2006 31/01/2007 28/02/2007 30/03/2007 30/04/2007 31/05/2007 29/06/2007 31/07/2007 31/08/2007 28/09/2007 31/10/2007 30/11/2007 31/12/2007 31/01/2008 29/02/2008 31/03/2008 30/04/2008 30/05/2008 13/06/2008

170.36605 157.63521 152.54781 174.55203 176.13259 168.67436 156.77084 148.67052 151.78223 148.71991 141.31108 136.56943 138.39694 136.56943 133.95165 135.03827 136.47065 121.40603 130.00027 138.64391 113.60206 133.11198 123.55 132.75 130.65

157.86982 151.6711 174.65082 178.20706 165.66144 155.43725 148.12721 152.77007 148.42356 145.26246 138.19938 140.02689 139.23661 138.44634 133.01319 139.53297 121.70238 126.88856 136.27308 113.45388 133.21076 123.95 129.85 136.05 132.75

155.0652 160.35413 168.95837 167.1926 172.63315 158.57366 152.97752 151.74272 149.64537 141.86381 151.70567 139.98455 133.18724 136.36288 135.68262 137.61161 124.12484 124.7849 135.70637 123.08321 116.56324 131.31022 126.1875 134.9475 132.795

-4.06621 -3.164486 5.2300696 -4.681337 -11.99874 -11.27106 -5.663764 0.2466696 5.6339682 -3.101572 -12.5226 -3.807942 -2.796565 -5.372467 -2.473556 -9.548549 -32.97551 4.3554298 -4.434094 4.0052705 17.361309 5.7659285 -6.605361 11.816089 5.7991992

-0.28079 -0.14686 0.65618 0.115284 -0.33985 -0.25622 -0.22726 0.196321 -0.13945 -0.07439 -0.1806 0.112876 -0.01597 -0.01969 -0.1404 0.24432 -0.60298 0.214813 0.455861 -0.67742 0.793147 -0.38105 0.235776 0.279628 -0.22724

Source: Capitaline

Exhibit 12: 5 Year Stock Price History of GCPL