It takes a downturn to tell a great company from a good one. While the good company will devise strategies to retain marketshare and protect profits, the great one will actually take marketshare away from its weaker competitors and fatten its bottomline. What makes the difference? As in nature, it's the (corporate) DNA. Good companies have systems and processes that ensure consistent growth-but only as long as there are no sudden upheavals in the competitive topography. Great companies, on the other hand, not just anticipate disruptions, but manage to turn the new situation to their advantage.

Want proof? Take a look at this year's study of India's biggest wealth creators. Eight of the top 10 companies-their ranking is based on market value added, which is the difference between the capital invested in a company and its market valuation-had positive EVAs (economic value added), which is the economic profit that remains after deducting the cost of all the capital employed (both debt and equity) in the business to generate the operating profits. (If all this sounds complicated, take a look at the simplified methodology elsewhere in the issue.)

In fact, seven of these companies had actually improved their EVA over the previous year-despite a bad year.

Hindustan Lever, for example, has been growing at just 3 to 4 per cent in the last two years. And of the three that didn't show an improvement (Reliance, Ranbaxy and Satyam), the pharma major actually reported an increase in its MVA. Why? Because investors believe that the long-term investment Ranbaxy is making in, say, its foreign subsidiaries is vital to its survival in the new pharma regime beginning 2005.

But just why are MVA and EVA better measures of a company's performance? Because both focus on capital efficiency, instead of mere absolute numbers. For example, MVA tells us how much wealth has been created or destroyed by a company relative to original investment. Therefore, the company with the highest market capitalisation need not necessarily be the biggest wealth creator. A caveat is in order, though. While MVA is a better measure of wealth creation over the long term, it does suffer from the vagaries of stockmarkets. Which is why for sustainable wealth creation, companies should focus on improving their business' fundamental economic performance-something that EVA captures.

This year's survey indicates a correction in MVA. Seven out of the top 10 have a lower MVA than they had last year. The drop, however, is not so much a reflection of the companies' future performance as a correction in investors' own irrational exuberance. The MVA per unit of capital in it (See Sectoral Wealth Creation) has plumetted from 28.5 to 3.5. The worst affected sectors-no surprises here-are it, FMCG and pharma, although they are still MVA positive. Some new industries, including banking and finance, petroleum, capital goods and cement, join the wealth creating club. However, media and telecom, textiles and paper, conglomerates, metals, and services have racked up negative MVAs.

What should cheer investors is the fact that overall India Inc. (read: the top 500 companies and the top 50 banks and financial services companies in terms of market value added in January 2003) remains a wealth creator, with a positive MVA of around Rs 1,40,000 crore (See Inching Back Up). More importantly, the MVA trend seems to be improving in the wake of the technology and telecom tumble world wide. While India Inc's current MVA is a far cry from the Rs 4,74,921 crore of January 2000, it is almost 50 per cent more than that of January 2002. What's notable about the turnaround is that, unlike in 2000, the rise in MVA is linked to fundamental performance of the sectors.

And fundamentals is about net profits right? Not quite. A better way of looking at this would be to examine the efficiency with which capital is being utilised. Take, for example, Mahanagar Telephone Nigam Ltd. At Rs 1,301 crore in net profits in 2001-02, it is the sixth most profitable company in India. But its EVA rank? An abysmal 498! Similarly, BHEL raked in Rs 468 crore in earnings last year, but it has a negative EVA of Rs 327 crore and stands at number 486 on the EVA scale.

TURNAROUND STORY Tata Engineering soars from 469 to 13 on the MVA list.

Tata Engineering's Ratan Tata: Back in the reckoning The automotive giant's is one of the most spectacular turnaround stories this year. From a bottom-scraping rank of 469 last year, Tata Engineering has risen as the 13th biggest wealth creator in this year's survey. Reason: last year its MVA was a negative Rs 795 crore. This year it stands at Rs 2716 crore-an addition of Rs 3511 crore. And although its EVA is negative, it has improved dramatically-from a negative of Rs 1149 crore to a negative Rs 507 crore. Dalal Street has more than welcomed this turnaround, pushing its stock price to Rs 159-a 16 per cent gain, compared to the Sensex's 11 per cent slide in the last one year. The good news is that the turnaround story is likely to continue in the new fiscal. Personally driven by group Chairman Ratan Tata, Tata Engineering has drawn up aggressive export plans. It has already tied up exports of its multi-purpose vehicle Safari and other pick up trucks to the UK, Ireland and China. Its performance on the domestic front is revving up, besides which the lower interest rate structure is helping it to reduce its interest cost as well. "We have reduced total borrowings by Rs 300 crore during the first nine months," says P.P. Kadle, ed (Finance and Corporate Affairs), Tata Engineering. All these have helped the company to show a net profit of Rs 162.54 crore during the first 9 months of the current year, compared to a net loss of Rs 53.73 crore during the same period last year. And the rating agencies are more than happy to acknowledge the changes in its fortunes with rating upgrades. For example, Standard & Poor's has revised its rating from bb- to bb (stable). There are similar rating upgrades from CRISIL (from AA- to AA) and ICRA (from LAA- to LAA) as well. The challenge for Tata and his men is to move the company higher up on the MVA list. -Narendra Nathan

In such a scenario, one would imagine that precious capital flows to the wealth creating companies. The fact: It doesn't always. Only about a quarter of the incremental capital invested over the last five years has gone to companies that have utilised this additional capital to create more EVA. What it means is that expensive and scarce capital, instead of being allocated to wealth creating opportunities, is getting destroyed.

The worst culprits are the public sector units. The listed PSUs use more than a third of the capital employed in the markets, but destroy six paise of wealth for every rupee invested in them. To make matters worse, they have continued to grow their capital base by 30 per cent over the past five years. Only seven PSUs-BHEL, BEL, ONGC, BPCL, HPCL, EIL, and Nalco-create any wealth, and it can be argued that in the case of the last four it was disinvestment expectations that boosted value.

Already in the US and other markets, there is a debate over what companies that do not utilise funds effectively should do: keep it (underutilised) or return it to shareholders, so that it may be deployed more efficiently elsewhere. Perhaps a greater awareness of the true cost of shareholder capital is needed before this can happen. And unfortunately, the dividend distribution tax proposed in this year's budget may actually discourage companies from paying out dividends and thereby reducing idle capital.

The wealth creation rules, however, have become much more straightforward-it's linked to sustained improvements in EVA. Not incidentally, then, the companies that outperformed their sectors on the fundamentals created greater wealth for their shareholders. For example, Godrej Consumer Products Ltd (GCPL) has outperformed the FMCG sector on fundamentals (its EVA has changed 133 per cent over January 2002) and this has resulted in better wealth creation for its shareholders, who got a 50 per cent increase in the MVA compared to the sector's negative 19 per cent.

Tejpavan Gandhok (right) is Country Manager, Stern Stewart, and Sanjay Kulkarni (middle) and Anurag Dwivedi are Vice President at Stern Stewart's Mumbai office.

This message is driven home even better by Infosys, whose compounded annual growth rate in EVA over the last five years works out to a staggering 122 per cent compared to the sector's negative 37 per cent. Small wonder then, its five-year MVA CAGR stands at 47 per cent versus the industry's 22 per cent.

For CEOs and CFOs, the message from the study is simple. If you focus on the fundamentals, shareholder wealth creation will automatically follow. And those who ignore this basic rule of wealth creation, will do so at the cost of their shareholders.