The BT-Stern Stewart study began with a universe of 800 companies in the manufacturing and services sector and 80 companies in the banking and financial (BFS) sector, taken from Centre for Monitoring Indian Economy (CMIE) and filtered by their average market capitalisation. Companies for which complete information was not available for two out of the past five years were excluded. Data on credit ratings and spreads came from CRISIL, ICRA, Care, and I- Sec.

To make the rankings more reflective of the latest market trends, we made some modifications this year. We calculated MVA using the average market capitalisation for January 2003 to capture the latest possible information as opposed to last year when we had used the December averages. Historical MVA was updated accordingly. The EVA was computed based on the ending capital of the respective financial year, to better capture the impact of mergers and acquisitions, excess cash held and other such factors.

RESEARCH & DEVELOPMENT: The after-tax R&D expenditure was included in capital and added back to NOPAT. The amount included in capital was amortised over five years. This does not apply to the BFS sector.

INTEREST: All interest expenses were added back to profits. The tax-benefits of interest were also removed, and the cash operating taxes were adjusted accordingly. This, too, does not apply to the BFS sector.

NON-INTEREST BEARING CURRENT LIABILITIES: NIBCLs were excluded from the capital in non-BFS companies.

CONSTRUCTION IN PROGRESS: Construction in progress was included in capital. It does not apply to the BFS sector.

NON-RECURRING INCOME AND EXPENDITURE: Non-recurring items were excluded from NOPAT, and capitalised after tax. Non-recurring expenditure was taken as addition to capital and non-recurring income as reduction.

ASSET GAINS: Gains or losses from BFS transactions were amortised to spread returns of assets over their lives.

CASH-OPERATING TAXES: Tax provision was restated to reflect taxes paid on operations. The tax-effects of financing and non-recurring items were eliminated.

REVALUATION RESERVE: This was excluded from capital.

The Calculations

NOPAT = (Profits After Tax + Non-Recurring Expenses + Revenue Expenditure On R&D + Interest Expense + Provision For Taxes) - Non-Recurring Income - R&D Amortisation - Cash Operating Taxes.

Cash Operating Taxes = (Provision For Taxes + Tax Benefit Of Non-Recurring Expenses + Tax Benefit Of Interest Expense - Tax On Non-Recurring Income).

Economic Capital = Net Fixed Assets + Investments + Current Assets - (NIBCLs + Miscellaneous Expenditure Not Written Off + Intangible Assets + Cumulative Non-Recurring Losses + Capitalised Expenditure On R&D) - Revaluation Reserve - Cumulative Non-Recurring Gains.

DEFINITIONS

MARKET VALUE ADDED: MVA is the value added in excess of economic capital employed. MVA = Market Value of the Firm - Economic Capital. For BFS sector, we calculate the value addition only on the equity capital and hence its MVA = Market Value of Equity - Economic Capital. Market value of the firm has been taken as the sum of book value of debt and the January 2003 average market capitalisation.

ECONOMIC VALUE ADDED: EVA is the net operating profit after tax, less the charge on economic capital employed. EVA = Net Operating Profits - (Weighted Average Cost of Capital x Total Capital Employed). For the current ranking exercise, capital charge has been applied on the ending economic capital. The economic value added for a BFS company is computed as follows: NOPAT - (Cost of Equity x Equity Capital).

WEIGHTED AVERAGE COST OF CAPITAL (WACC): This gives the return expected by the investors while Cost of Equity (CE) gives the expected return in the BFS sector. WACC = Post-tax Cost of Debt*(D/MV) +Cost of Equity*(E/MV), where, d, p and e are market values of debt and equity respectively.

The master ranking of companies was done on the basis of the MVA and not the EVA.