INTRODUCTION
EVA is a measurement tool design to strengthen companies return on capital investments. a study of best practices in EVA reveals that the metric can help reduce capital costs and improve gross revenues.
Effective decision making is an important organizational and management process which leads to overall effective and healthy performance of any business. Further effective and healthy performance of any business is measured by its positive financial performance. over the past years, global economic developments have shifted the efficiency equation from measurement by accounting by economic profits. there has been an emphasis on the effect of newly emerged intensely complex, competitive environment on the individual businesses and whole market as such. the organizations have learned to maintain and sustain competitive advantage in the commercial market by providing superior value to the customers.
From a commercial standpoint, ECONOMIC VALUE ADDED is the most successful performance metric used by companies and their consultants. Although much of its popularity is a result of able marketing and deployment by stern Stewart, owner of the trademark, the metric is justified by financial theory and consistent with valuation principles, which are important to any investor's analysis of a company
some analyst have called economic value added the key to creating corporate wealth. the metric which measures a company's net operating profit after taxes, focuses organizations on earning a target rate of return over and above the cost of capital. this target or" bogie" as its frequently called, is what the business considered the minimum amount of return necessary to generate positive value from a capital investment. Forecasts about how much income an asset is likely to generate.
Example- sales managers' estimates of how much revenue the purchases will create- help corporate decision making determine whether to buy the asset. the real value of EVA, proponents claim, lies in using it as a framework for a complete financial management and incentive compensation system. Yet most of corporate America views it as just another performance metric among many.
SCOPE
Different industries and economic sectors are in different stages of EVA development and application. Study shows that manufacturing firms accounted for 31%of the total organizations that have implemented EVA. Application of EVA in various industries at their various stages of development can be grouped into four classes as discussed below:
· Firms which have adopted the underlying principles and have embarked upon broad based implementation of these concepts.
· Firms, which have adopted various value based analytical concepts and techniques but have not gone for broader aspects of its implementation.
· Firms, which falsely focus themselves as value based enterprises but their actions, are quite contrary to the value based approach.
Firms that have not adopted EVA at any level of its functional development like agriculture, construction, financial services, food and other services organization and retailers etc.
RATIONALE
One of the most important purpose of any business to produce positive financial results which can be achieved mainly by the success of business in.
· Customer market: more and more people buy the products provided by the business organization. Organization is able to create a brand name, goodwill and an impression in customers mind.
· Capital market: funds for the organization are procured at minimum cost and funds of the organization are reinvested to generate maximum profit. The funds invested into the company by the shareholders are commercially utilized by the same to earn revenues greater and the cost of above funds. Cost of fund covers the risk the different borrowers undertake while investing in the company by foregoing investment in risk free government security.
Revenues generated by the firm should be greater than the cost of funds employed by it. In other words the expected future cash flows generated by the firm in the course of its business, discounted at its cost of capital, should yield a positive NPV.
CHAPTER 2
COMPANY PROFILE
INTRODUCTION OF THE ORGANIZATION
Rajasthan State Mines and Minerals limited (RSMML) is one of the leading and progressive undertakings of the Government of Rajasthan. It occupies a place of pride in production and marketing of non metallic minerals of India. RSMML is multi mineral and multi location enterprise engaged in mining of Rock Phosphate, Lignite, SMS grade Limestone and Gypsum. RSMML is not only the leader in Mining & Selling of Rock Phosphate, Gypsum across the country, but also global pioneer in technology in open cast mining and mineral beneficiation of Carbonate Rock Phosphate.
Besides minerals, RSMML has also forayed into Energy Sector and has setup 37.30 MW installed capacity Wind Power Project at Jaisalmer, Rajasthan.
Rajasthan State Mines & Minerals Limited (RSMML) is one of the premier public sector enterprises of the Government of Rajasthan, primarily engaged in mining and marketing of industrial minerals in the State. The very objective of the company is to achieve cost effective technological innovations in the mining of minerals and to diversify into mineral based downstream projects. Apart from the above, the Company is also aiming at long term fuel supply to lignite based power projects, apart from setting up wind energy farms at Jaisalmer. This company is professionally managed and remains focused towards increasing productivity and growth.
Amalgamation
Year 2003, witnessed completion of amalgamation of Rajasthan State Mineral Development Corporation Limited (RSMDC), another Rajasthan State Government PSU with Rajasthan State Mines & Minerals Limited (RSMML) was issued by the Department of Company Affairs, Government of India (Order No. S.O.207(E) dated 19th February 2003) under Section 396 of the Companies Act, 1956 and the same has come into effect from 20th February, 2003, the date of its publication in the Gazette of India (Extraordinary).
Strategic Business Units & Profit Centers
After amalgamation, the following four mineral based Strategic Business Units & Profit Centers (SBU & PC) namely Rock Phosphate, Lignite, Gypsum and Limestone have been set up as a part of corporate restructuring: -
Strategic Business Unit and Profit Centre – Rock phosphate at Udaipur.
Strategic Business Unit and Profit Centre – Gypsum at Bikaner
Strategic Business Unit and Profit Centre – Limestone at Jodhpur
Strategic Business Unit and Profit Centre – Lignite at Jaipur
Rock Phosphate continued its prime position in the business profile of the Company and catered to almost 94% of the indigenous demand during 2004-05 and 2005-06. The capacity of industrial beneficiation plant was increased from 1500 TPD to 3000 TPD and the production got streamlined in 2004-05. The production of lignite was streamlined at Giral and the company is gearing up fast for providing one million tonnes of lignite for the lignite based thermal power plant coming up at Giral under state owned Company, Rajasthan Vidyut Utpadan Nigam Ltd. Being pioneer in the lignite field, RSMML has ensured its strong presence in the lignite based power sector in Rajasthan. Dispatches of gypsum touched 2.88 million ton in 2005-06. Renewed emphasis on environmental management was stressed upon for the management of gypsum mines. Supply of SMS grade limestone to the steel plants of India touched the record level of 1.96 million tonnes in 2005-06.
In the year 2005-06, company has achieved the profit before tax Rs. 141.8 crores in comparison to profit before tax of Rs. 118.5 crores in 2004-05. The Company started a number of R&D activities to further strengthen its R&D activities. Generous contributions were made for creation of life saving medical infrastructure in 8 project districts. The dividend of Rs. 15,51,03,000/- was declared for the year 2005-06.
RSMML today has broken away from its monopolistic moorings and welcomes competition. From a small backwaters company, it is now rated as a technologically advanced company and an innovator. It boasts of a highly trained and competent workforce and strong financial base. It has established itself as the most successful public sector company in Rajasthan.
The following four mineral based Strategic Business Units & Profit Centers (SBU & PC) namely Rock Phosphate, Lignite, Gypsum and Limestone have been set up as a part of corporate restructuring: -
Strategic Business Unit and Profit Centre – Rockphosphate at Udaipur.
Strategic Business Unit and Profit Centre – Gypsum at Bikaner
Strategic Business Unit and Profit Centre – Limestone at Jodhpur
Strategic Business Unit and Profit Centre – Lignite at Jaipur
Rock Phosphate continued its prime position in the business profile of the Company and catered to almost 94% of the indigenous demand during 2004-05 and 2005-06. The capacity of industrial beneficiation plant was increased from 1500 TPD to 3000 TPD and the production got streamlined in 2004-05. The production of lignite was streamlined at Giral and the company is gearing up fast for providing one million tonnes of lignite for the lignite based thermal power plant coming up at Giral under state owned Company, Rajasthan Vidyut Utpadan Nigam Ltd. Being pioneer in the lignite field, RSMML has ensured its strong presence in the lignite based power sector in Rajasthan. Dispatches of gypsum touched 2.88 million ton in 2005-06. Renewed emphasis on environmental management was stressed upon for the management of gypsum mines. Supply of SMS grade limestone to the steel plants of India touched the record level of 1.96 million tonnes in 2005-06.
In the year 2005-06, company has achieved the profit before tax Rs. 141.8 crores in comparison to profit before tax of Rs. 118.5 crores in 2004-05. The Company started a number of R&D activities to further strengthen its R&D activities. Generous contributions were made for creation of life saving medical infrastructure in 8 project districts. The dividend of Rs. 15,51,03,000/- was declared for the year 2005-06.
RSMML today has broken away from its monopolistic moorings and welcomes competition. From a small backwaters company, it is now rated as a technologically advanced company and an innovator. It boasts of a highly trained and competent workforce and strong financial base. It has established itself as the most successful public sector company in Rajasthan.
Board of Directors
1. Shri Anil Vaish, IAS – ChairmanChief Secretary to the Government of Rajasthan,Jaipur
2. Shri Rajiv Mehrishi, IASPrincipal Secretary to the Government of Rajasthan,Department of Finance,Jaipur
Shri Ashok Sampatram, IAS
3. Principal Secretary to the Government of Rajasthan,Department of Industries, Jaipur
4. Dr. Ashok Singhvi, IASSecretary to the Government of Rajasthan,Department of Mines,Jaipur
5. Shri G.L. VyasDirector, Department of Mines & Geology,Udaipur
6. Shri A.C. Wadhawan,Ex-CMD, Hindustan Zinc Ltd,New Delhi
7. Shri Rajat Kumar Mishra, IAS - Managing Director
Mining – Phosphate
The major activity of RSMML is the mining of Rock phosphate ore. It operates one of the largest and fully mechanised mines in the country at Jhamarkotra, 26 Kms. from Udaipur and Kanpur Group of Mines located 15 Kms. from Udaipur is upcoming as a second Rock phosphate complex in Rajasthan.
In India the economy being predominantly based on agriculture, the fertiliser production plays a pivotal role. Only about 35% to 40% of the requirement of raw material for phosphatic fertilser production are being met through indigenous sources and the rest is met through import in the form of rock phosphate, phosphoric acid & direct fertilisers. In such a situation Jhamarkotra plays an important role by contributing 68% of rock phosphate production of India
Mining – Lignite
The state of Rajasthan is endowed with large lignite deposits in the country after Tamilnadu & Gujarat. In the three districts of the state viz. Bikaner, Nagaur and Barmer, geological reserves of more than one billion tonnes have been confirmed so far by exploratory drilling. Beside, deep seated reserves of lignite suitable for underground lignite gasification also exists in the state. The state is also having lignite blocks suitable for development of Coal Bed Methane projects.
RSMML is a State Government Enterprise involved with the work of development of Lignite deposit for mercantile sale in cement, textile, brick kiln etc industries and for the ultimate end use of power generation by open cast mining or underground lignite gasification.
RSMML at present is operating two lignite mines one at Giral in district Barmer and another at Kasnau-Matasukh in district Nagaur
MATASUKH & KASNAU (NAGAUR)
Matasukh-Kasnau mines are situated near villages Kasnau & Matasukh of Nagaur district in the central Rajasthan, which is 42 Km from district head quarter. The commercial production of Lignite from these mines, was commenced from November 2003 with envisaged capacity of 12,00,000 MT per year. These mines are located in central part of Rajasthan, thus having better accessibility to markets in Uttar Pradesh, Haryana and Punjab. Lignite of these mines has added advantage of low sulphur and ash contents.
LIGNITE & ITS APPLICATIONS
Lignite, a premature variety of coal is a dark brown to black combustible mineral formed over millions of years by the partial decomposition of plant material subject to increased pressure and temperature in an airless atmosphere. In simple terms, lignite is a brown coal. In its natural form, lignite is porus, light in weight and contains a high percentage of moisture and volatile matters as compared to Fixed Carbon. Because of this, its transportation, over long distances is uneconomical. Therefore, this fuel is ideally suitable for running Lignite based power generation plant located close to pit head.
Mining Lime Stone
SANU LIMESTONE UNIT, JAISLAMER
High quality Limestone is a technological necessity for Steel Plants with the basic oxygen furnance technology where it is used as a flux. After the closure of limestone quarries at Dehradun by the historic judgment of the Hon’ble Supreme Court the limestone from Jaisalmer found enormous importance in thev Steel Industry. It was the recommendation of the technical team constituted by Govt. of India in the year 1986 after assessing the various limestone deposits available in the country that the low silica limestone available from Jaisalmer is the best suited for use in the Steel Industry. Based on the recommendation mining of Limestone was commenced by the company since 1988 for supply to different Steel Plants from their mines at Sanu. Jaisalmer limestone is best suitable for use in Steel Industry because of low silica and high decrepitation index. Hence the total production is dispatched to various Steel Plants of SAIL and TISCO. The company is the largest producer & supplier of steel grade limestone in the country.
This high grade, low silica, hard compact limestone is available in Khuiyala formation of Eocene age of Tertiary period. The company have around 20.00 square KM area near village Sanu at a distance of 56 Km from Jaisalmer on Jaisalmer – Ramgarh road & is well connected with all weather tar road maintained by Border Road Organization. The total mineral reserves under the areas held with the company are167 Million Tonnes of S.M.S grade limestone & 2153 Million Tonnes of Cement grade limestone. Company has enhanced its mineral reserve status by applying few more areas in the same belt.
LIMESTONE UNIT, GOTAN
Limestone Unit, Gotan is located near Village Gotan District Nagaur of the State Rajasthan. It is 90 kms. from Jodhpur. It is well connected with rail link on Jodhpur-Jaipur Broad Gauge Line.
The limestone deposits of Gotan are a part of the famous Sojat-Bilara-Nagaur limestone belt of Vindhyan Supergroups. Mining of limestone at Gotan was started by company in the year 1974.The company has three leases in the name of Gotan-I, Gotan-II & Basani with total area 4915.18 hects covering mines of Heera, Sawai,Sona, Dhanappa, Kerli, Keria, Ganthiyala & Pawani. These mines are around 10 KM from Gotan. The limestone deposit of Sawai-Heera & Sona mines of Basni lease are considered to be the best available deposit in the entire Sojat-Bilara-Nagaur belt. The deposit contains very low silica, high calcium and moderate decrepitation index. All the grades of limestone is produced from these mines & supplied to steel plant, chemical plant, white & gray cement plant & local kilns of limestone.
Mining is carried out by mechanized two bench opencast mining method, deploying HEMM and deep hole blasting. Sizing & loading is carried out by manual means. The company is planning to commission its own sizing & screening plant at mines of the capacity 40 TPH during current financial year 2005-06. The different size products are dispatched FOR mines as well as by rail from Gotan Railway sidings (BG).
Customers
· M/s Shree Ram Vinyl & Chemicals, Kota
· M/s Grasim Ind. Ltd.,
· M/s J. K. White Cement Works
· M/s Indian Iron & steel company Ltd- Burnpur
· M/s ACC Ltd, Lakheri
Mining – Gypsum
We are the country’s leading producer of natural Gypsum and Selenite producing about 1.0 million tonnes per year. These are mined in the heart of the Thar desert areas where the working conditions are very harsh. The deposits are shallow and scattered over large areas. Most of the land is owned by private cultivators.
The mining of Gypsum of purity of +70% CaSO4, 2H2O is a co-operative effort between the land owners and RSMML. The farmers gives up his gypsum bearing land to RSMML in return for an assured share of profits. After mining, the Company improves the land condition and returns back to the farmer for cultivation.
Beneficiation
Looking to the scarce rock phosphate resources in India, RSMML has put continuous effort for utilization of its low grade ore resources, which are abundant at Jhamarkotra but require beneficiation before its utilization by fertiliser industries as raw material. Intensive research was carried out for ten years and a breakthrough in processing technology was achieved when this LGO was enriched to produce a very high-grade concentrate (+34%P2O5), rated as equal to or better than any naturally occurring ore. From reserves conservation point of view RSMML has put up a beneficiation plant for processing of 9 Lacs MT of low-grade ore per annum0
Wind Power
With a view of diversification activities and to protect environment degradation, RSMML has entered into wind power generation business in 2001. RSMML has commissioned 14x350Kw wind energy turbine on 70 mtr. high lattice towers at Badabagh area of Jaisalmer. The wind farm at Badagarh was expanded with additional 14x350Kw WET's in May 2002. In 2004, RSMML has commissioned 4x1250Kw WETs in Pohra Village of Jaisalmer. 6x1250 Kw (7.5 MW) was added in March 2006. In current fiscal year 25x600 KW (15 MW) wind farm is installed at Bharmsar- Pohra at Jaisalmer. Now the total wind farm capacity of RSMML is 37.3 MW. Annual Generation of grid quality power is now 665 lacs Kwh from echo friendly windpower. Further Company is in process of setting additional 15 MW windpower in 2007.
Bio Deisel
The vision of Hon’ble Chief Minister, Rajasthan, Smt. Vasundhara Raje for developing the vast degraded waste-land of Rajasthan as a viable resource for generating renewable energy by cultivating Jetropha curcas (Ratanjot), inspired RSMML management to explore the possibility of putting up a Jetropha based bio-diesel pilot plant in Jhamarkotra Rock Phosphate project, Udaipur, as a part of company’s continuing quest for better environment management.
Udaipur division is naturally endowed with wild Jetropha groves with pockets, yielding good quality seeds. However, to encourage farmers to plant Jetropha on large scale, confidence about getting reasonable price and assured market, need to be built up. RSMML management adopted a strategy of end product driven growth, in which farmers will directly feel the marketability and quality of the end product, i.e. superior bio-diesel used in mining machinery (thereby creating a strong and permanent demand) which would encourage them to plant more trees. Being critically dependent on seed price, better production economies of bio-diesel can only be achieved if seeds are available aplenty at a support price remunerative to the supplier villager.
RSMML and other mining companies consume huge quantity of fossil fuel for mining operations. Partial replacement of such petro-oil by bio-diesel will open up effective rural employment on a major scale and will also help in reducing pollution.
Plantation of Jetropha will also take care of greening of mined out land in the leases of the companies.
Management of RSMML was aware that Central Salt & Marine Chemicals Research Institute, Bhavnagar, Gujarat, (A CSIR Laboratory), in association with Daimler Chrysler had carried out a road test of bio-diesel, derived from Jetropha by using one E-220 CDI Mercedes car in April, 2004. The test was reported to be a success. Shri R.K.Mishra, IAS, MD, RSMML visited CSMCRI in April 2004 and formulated the project after discussion with Director, CSMCRI. 3000 kg of wild Jetropha seeds from Udaipur were sent to CSMCRI laboratory for producing bio-diesel
RSMML also used 368 litres of neat bio-diesel for running a 850 HP HEMM (85T BEML make dump truck) for 4.7 hours on a test mode. Again, the performance exceeded expectation. The company also arranged for the testing of bio-diesel so received from CSMCRI at Bharat Earth Movers Ltd., Bangalore (a Central PSU) for an independent evaluation. BEML submitted a detailed report based on short run testing of the sample sent by RSMML and concluded that the results were satisfactory.
Research by Daimler Chrysler shows that, though heat value of bio-diesel is 15% less than HSD, yet there is minor reduction in mileage.
The board of RSMML approved to set up a pilot bio-diesel plant with 1 TPD seed processing capacity (260-270 Lt. Bio diesel per day) to evaluate the economics of operation and to get familiar with the technology
RSMML has already consumed 2350 Kg. (valued at Rs. 24/Kg.) of soap in the rock phosphate beneficiation plant. The oil cake will be sold in the market for production of bio-fertilizers. There are already several commercial enquiries for oil cakes received by the Company. Glycerin and Potassium Sulphate are high value by-products, which will be sold after considerable accumulation.
Taking into account all factors, the cost of production of high quality bio-diesel is around Rs. 27.50, at a cost of Rs. 7/- per Kg. of seed.
RSMML has also distributed 2.5 lakhs saplings of Jatropha plant procured from Forest Department in all Panchayat Samities of district Udaipur, free of cost.
RSMML has ambitious plans to enter into large scale plantation of high yielding variety of Jatropha Curcas in association with Biodiesel Authority of Rajasthan, Forest Department and local village Panchayats.
The pilot plant has given enough exposure in terms of production methods, quality of bio-diesel, its test in real time and dynamics of production economics. RSMML’s experience will be helpful for Government to decentralize production of high quality bio-diesel synchronized with local collection of wild seeds in a number of tribal panchayats.
ENVIRIONMENT AND SAFETY
As a responsible corporate citizen, RSMML accords equal importance to ecological and social sectors. The company is concerned about not only the economic bottom-line reflected by the impressive performance on all quarters and higher profitability but also the benefits and impacts of our operations, processes and products on the environment and the health and safety of our employees and the community.
M/s National Safety Council (NSC), Mumbai was engaged by the company to carry out the safety audit of all the SBUs during the year 2005-06.
A Comprehensive energy audit of all the units of the company has been carried out by Petroleum Conservation Research Association (PCRA).
RSMML has constructed a huge dam of 200 mcft. fresh water storage capacity on Jhamari river, which has helped in recharging the regional water table.
Extensive afforestation /planatation work is being done in and around all mines.
The Industrial Beneficiation Plant is "Zero discharge plant". The waste water is treated at acid water treatment plant, resulting in an saving of about 1.5 million CuM of fresh water.
Regular monitoring and control of different environmental parameters i.e. air, water, dust, noise and heat etc.
Installation of dust extraction system at crushing and screening plant and at Central Gypsum Grinding Unit, Rawla, Bikaner.
The mined out area is being back filled simultaneously to reclaim the land.
Sajjan Niwas Garden established in 1883 has been adopted by RSMML and is being restored to its pristine glory.
Company has a safety and health policy. Company follows statutory requirements as per Mines Act 1952. Every year Safety week celebrated at different units under the aegis of Director General of Mines Safety (DGMS).
A well equipped vocational training center at Phosphate SBU caters to need of various training regarding safety and occupational health for the employees.
RESEARCH AND DEVELOPMENT
The company has developed the organic fertilizer called Phosphate Rich Organic Manure (PROM) by using high grade rock phosphate with farm yard waste and other organic matter. The field trials conducted through the different agricultural universities in the country have shown that the agronomic efficacy of this new P-fertilizer is higher than that of the complex phosphatic fertilizers available in the market today. ‘PROM’ is suitable to neutral and alkaline soils, which will prove to be a boon to the Indian farmers. In the long run, this product will be a winner as it has significant price advantage vis-à-vis the other chemical fertilizers. Commercialization of the PROM technology will help utilization of waste and also help in conservation of the mineral rock phosphate as PROM shows good residual effect.
The company has put a major thrust on the R&D activities in the recent past and several new R&D projects have been taken up.
· Research project taken up for development of fused Ca-Mg phosphate to utilize the vast reserves of low-grade ore of rock phosphate.
· Converting tailing rejects of IBP to Direct Application Fertilizer for Magnesium deficient soils.
Research project taken up for possible commercial production of Bio-Diesel from Jetropha plant
· Beneficiation of low grade gypsum for producing high grade 80% + material for cement industry.
· R&D efforts on apatite mineral to be used in jewelry and decoration. (moving towards
value added product)
· Company has started a Training and Consultancy Center at Jaipur, Rajasthan.
SOCIAL RESPONSIBILITY
As a responsible corporate entity committed to discharge its social obligations, RSMML has been contributing generously towards the development of the areas located near its mining sites and other areas of operation.
· These contributions have been in the areas of –
o Medical & Health Care
o Drinking water
o Education
o Environment
o Development of village infrastructure
· The Company has been providing medical, educational and other facilities to the villages situated around its mines.
o To improve the medical infrastructure of Udaipur region, which is predominantly a tribal district, RSMML has contributed Rs. 3.05 crores for establishment of Cardio-Thoracic Surgery Centre and Neo-Natal Special Care Unit at the M.B. Government Hospital, Udaipur
· A Contribution of Rs. 2.888 crores has been made to the Chief Minister Fund for development of Medical and Health infrastructure facilities in project districts.
· The contribution has been made to Medical colleges / District Hospitals at Udaipur, Bikaner, Jodhpur, Barmer, Sri Ganganagar, Jaisalmer, Hanumangarh and Nagaur.
· Memorandum of Understanding has also been entered with Government of Rajasthan for utilization of these funds.
· Medical Camps are being regularly organized in the villages around the mine location and project areas of the company where free check-up and medicines are provided.
· RSMML has provided land for the project for setting up a 100 bedded multi super specialty hospital at Udaipur under a JV arrangement with M/s American International Health Management Limited, Udaipur. Total capital investment on the hospital envisaged – Rs. 200 millions.
Other works for development of village infrastructure include:
· Contribution to Panchayats for schools.
· Improvement in village Goshalas.
According high priority to fulfill its social responsibilities, the company regularly takes up works related to socio-economic development along with environment restoration and management in the areas where the company has major mining operations and other business activities
Supply of Potable Water
· Supplying 7 million liters per day of potable water from Jhamarkotra mines to city of Udaipur since 1994-95.
· Recently company has commenced supply of 6 million liters per day of potable water from Kanpur mines in addition to the present supply of 7 million liters per day. With this, RSMML caters to the potable water needs of more than 2 lacs people of the water starved Udaipur City.
· Supply of potable water from Jhamarkotra mines to 7 nearby villages on a permanent basis since last 8 years.
· Adequate potable water supply is ensured through a permanent pipeline & 75000 liters capacity GLR in each village.
Medical & Health
· Full Fledged dispensaries at Mine site and Corporate Office;
· Managed by Qualified Doctors and paramedical staff
· Regular annual Monitoring of Occupational Health
· Health facilities extended to employees dependents at mine site
· Company also extends medical facility to village population in & around mine
site
· Recently, comprehensive health check up, covering all the 2200 employees, has
been conducted with the help of National Institute of Miners’ Health, Nagpur,
India.
CHAPTER 3
CONCEPTUAL FRAMEWORK
THEOROTICAL BACKGROUND OF EVA
BENNET STEWART shows us a method measuring the value of a company in any given year with a concept he calls ECONOMIC VALUE ADDED or EVA. EVA is basically the difference between the operating profit and the cost of capital employed. Any year that a company is in business and generates more operating profit than its capital charge, it is creating economic value. By discounting this spread, taking the present values of all future EVA's at the rate of the cost of capital employed, you get the cumulative present value of all future EVA's. Add this to the current capital and you derive the value of a company.
EVA incorporates a thinking about financial structures that also facilitates a better understanding of the mechanics in a balance sheet and P&L . Pure cash flow analysis will miss crucial opportunities by disregarding companies with negative cash flows. most impottantly, EVA gives you a very handy set of tools to understand and question management's action and value its progress year by year.
EVA is a managerial accounting concept that considers how well a business is performing by, among other things, deducting the firm's capital costs from its profits. what is left is known as eva, as opposed to the familier accounting profit that on corporate income statements and some believe this better suggests how well the company is using capital to build economic value.
Managers, in turn, use this information to deploy corporate resource in ways that enhance economic value.
Economic value based strategic planning techniques, which tie business level competitive strategies to the corporation's stock price, have achieved increasing recognition among financial managers. these models evaluate business strategies in terms of their ability to create value for the shareholders and attempt to ensure that business level competitive strategies are related to the fundamental objective of maximizing the return to the company's shareholders.
Interest in economic value creation is intertwined with a number of other popular management practices and trends related to competitive strategy and information technology. Specifically, improved access to detailed operational data has corporate executives to focus on very precise value related targets, be they cost, be they cost reduction, new investment or other resource allocation decisions. A supporting trend has been the popularity of so called activity- based costing and activity based management, which juxtapose the value of each step in a manufacturing or service process with its costs. this information, coupled with overall strategic objectives, allows companies to focus on activities that create the most value and conversely. to avoid devoting inordinate amounts of resources to activities that produce little value. such efforts are by no means synonymous with economic profit, but like it, they are concerned with maximizing returns on resources and can in fact lead to greater economic profit.
However there is no single definition of what constitutes economic profit or how it should be figured; for large corporations, in particular, it remains somewhat of an abstraction that cannot be computed as easily as, say net income. Perhaps the best known technique is economic value added, which was developed by the consulting firm Stern Stewart & co. indeed, Stern Stewart has claimed a trademark on the acronym, prompting other agencies to devise new names like "economic value management" for essentially the same methods. According to the EVA approach, managers should be evaluated by the economic returns they generate for shareholders. Strategies that are expected to create the greatest sustainable competitive advantage are those that also generate the largest value for the firm's shareholders. Only investments providing positive economic return should be undertaken. Positive economic returns are generated when the returns on an investment are greater than the market cost of capital. the market cost of capital reflects what the business could earn on an investment of similar risk.
ECONOMIC VALUE ADDED (EVA) ASSUMPTIONS:
(1) It is assumed that when changing any of the variable (NOPAT), capital investment or cost of capital, the remaining variables remain unchanged.
(2) In the calculation of the change in the earning before interest and tax(EBIT) required to achieve the change in NOPAT as predicted by the model, the income tax rate is assumed to be constant. The income tax rate is equal to the income tax divided by EBIT.
(3) The variables that can be controlled for the EVA model are the NOPAT, capital investments(c), and cost of capital (coc). By altering these variables, improvements in EVA can be obtained.
EFFECTIVE STRATEGIC DECISIONS FOR GENERATING EVA
.Establish a clear, unambiguous, definite objective statement, which focuses on generating positive EVA for the firm.
Tapping the various capital resources economically & deciding as to what kind & amount of resources will act as competitive winners for the firm. Key resources are emphasized upon as they act as key contributors to generation of value.
Analysis of present scenario and forecasting the estimation of future environment of financial markets in which the company can procure funds and reinvests itself.
Maximization and protection of returns.
Exhaustive and genuine marketing research to control, estimate and exploit the customer preferences.
Developing the competitive edge for the firm.
Efforts should be taken by the firm to outperform the market.
Overlapping the objectives so the management with that of the investors. Thus the each strategic business decision made by them should focus on value creation achievement.
All business decisions should finally rest on one principle- there should be a trade off between cost of activities & the profits these activities generate.
Create a favorable work environment and work culture for achievement of EVA objectives.
BETTER MEASURE OF FINANCIAL PERFORMANCE
Financial decision making for long has been based on traditional accounting information. For long the financial decision makers estimates & determine the performance of the organization by measuring its profits. These profits are calculated from accounting transactions of the firm for a financial year. Besides financial ratios and other indicators like ROI etc. are also used to indicate the profitability of the firm but as these traditional ratios, profits related to historical earnings they fail to give true picture of the firm in real & futuristic terms. The real picture is that market price of any security issued in the primary market & traded in secondary market is determined by investors & the potential investors perception & expectations of firms securities future earnings. Investors assess the value of any firm on the basis of NPV the firm generates.
Accounting transactions reveal accounting profits. These profits have two major demerits:
. Accounting profits do not add back depreciation. Depreciation is a non cash expense, which is tax deductible hence accounting profits are tax should add back depreciation to give a real picture of profit.
SIGNIFICANCE OF EVA
The financial innovative technique of Eva is an example of restructuring the traditional economic rationally approach of management decision makers. Term Eva is a registered trademark of stern & stewart &co. It is already understood that business should earn sufficient profits to cover its cost of capital & earn an extra to grow & sustain itself.
According to TULLY:
“EVA is equal to after tax operating profit minus cost of capital”.
Where PAT exceeds cost of capital, positive Eva is created. Where cost of capital exceeds PAT, negative is incurred. Positive Eva is creates economic value for the firm while negative Eva destroy it.
Thus firms positive Eva are making rational decisions& those with negative Eva are destroying capital & are in trouble. Many companies worldwide have adopted this approach such as QUAKER,OATS,AT&T, CSX, COCA COLA, BPL, etc. have even incorporated it into their mission statement.
COMPUTATION OF EVA
Stewart has used NOPAT( net operating profit after taxes) as a basis for calculating Eva. it is computed by taking the spread between the rate of return on capital & cost of capital & than multiplying it by the economic book value of the capital committed to the business. However many adjustments are required to convert accounting profits to economic measures of profits used in EVA.
STEPS IN INVOLVED IN COMPUTATION OF EVA
EVA is a financial measure that has received a lot of coverage along the style pf ' better than return on investment'.
EVA = Net operating profit after taxes - ( capital x cost of capital)
The ' cost of capital' comes from the weighted average of equity and debt.
EVA is thus net operating profit minus an appropriate charge for the opportunity cost of all capital invested in an enterprise. As such, EVA aims to estimate the true "economic profit", or the amount by which earnings exceed or fall short of the required minimum rate of return that shareholders and lenders could get by investing in other companies of comparable risk.
NOPAT: (Net operating profit after tax)
NOPAT is an operating performance measurement after taking account of taxation but before financing cost.( interest is excluded). NOPAT requires further adjustments for non cash accounting entries. These adjustments are known as equity equivalents, which are applied in the calculation of NOPAT. Equity equivalents adjust reported earnings to show true economic earnings. NOPAT provides a more realistic measurement of the actual cash yield generated from recurring business activities.
NOPAT is EBIT adjusted for the impact of taxation. The purpose of this is to arrive at taxation on operating income, which is then deducted from EBIT. Interest is totally excluded, as the concept of separating finance from operations must be taken into account.
COST OF CAPITAL
The cost of capital is the combined rate of return required by both lenders and shareholders. It is the minimum acceptable return on economic investments as a cut off rate required for value creation. The cost of capital has four primary applications.
As the discount rate to bring projected free cash flows to its present value.
As the capital charge rate for calculating economic profit (or economic value added).
As a hurdle rate for assessing return on capital employed.
As a minimum target rate for accepting new projects.
The cost of capital is all about the trade off between risk and reward. The greater the risk the greater the required return and the cost of capital.
In short, the cost of capital is the return on capital required to have sufficient funds to pay interest after tax on debt & provide an acceptable return on equity.
COST OF DEBT
The after tax rate the business would have to pay in the current market to obtain new long term debt capital.
COST OF EQUITY
This component of cost of capital is more abstract as it is based upon alternative investment yield of comparable risk. The leading question is how much compensation do investors require over and above the return provided by government bonds to compensate them for bearing the risk.
EVA AND MANAGERIAL PERFORMANCES
Firms compete with each other for getting the scarce capital from the shareholders. To be able to get the capital, firm must perform better than those of the competitor. It must earn more than that earned by similar risk seekers. If it can achieve this objective it has created value for the shareholders and its stock price will command a higher premium in the market. In using the eva system employees on how the capital is being used on the cash flows generated to it. EVA makes managers care about managing assets as well as income, and helps them properly assess the trade off between the two. EVA forces managers to focus on value creating activities rather than wasting time and energy on playing with the accounting principles. EVA based bonus system is based on performance of employees and managers and they rewarded for increasing EVA relative to target and they are penalized for falling short. There is no upper limit of bonus. Incentive of employees and managers increase as they keep on increasing EVA relative to target. The EVA is target to set for every year on the basis of a standard acceptable formula. At the beginning of each year, the list of participating employees for the EVA bonus plan is disclosed along with the formula for calculating bonus on the basis of EVA. The formula is so transparent that each eligible employee can calculate his or her bonus without waiting for the authority to announce. The success of EVA lies only when it is linked with compensation plan. EVA would be effective only when the corporate decision makers and even rank and file officers get bonus linked to improvement in EVA.
EVA as a performance measure in corporate world:-
EVA might in some occasions give somewhat misleading signals of the true value added to shareholders. In spite of this fact EVA has become a very popular performance measure, perhaps because applying it has some powerful impacts on organizational behavior.
Unlike conventional profitability measures EVA helps the management and also other employees to understand the cost of equity capital. At least in big public companies, which do not have a strong owner, shareholders have often been conceived as a free source of funds. Similarly, business unit managers often seem to think that they have the right to invest all the retained earnings that their business unit has accumulated although the group would have better investment opportunities elsewhere. EVA might change the attitude in the sense because it emphasize on the requirement to earn sufficient return on all capital employed.
At best EVA can approach to view business, Perhaps the biggest benefit of this approach is to get the employees and managers to think and act like shareholders. It emphasize that that in order to justify investments in the long run they have to produce at least a return that covers the cost of capital. In other case the shareholders would be better off investing elsewhere. This approach includes that the organization tries to operate without lazy or excess capital and it is understood that the ultimate aim of the firm is to create shareholders value by enlarging the product of positive spread (between return and cost of capital) multiplied with the capital employed.
Than it would have been without the bonus system. With well designed bonus plan, the higher the bonus that are paid and better it is for the shareholders. EVA bonus paid is far from a cost to shareholders because it is often a share in the discretionary value created.
STEPS IN IMPLEMENTING EVA
The implementation of EVA is a four step process which includes:
Measurement
Management system
Motivation
Mind set
MEASUREMENT :- Any company that wishes to implement EVA should
institutionalize the process of measuring the metric, regularly. This
measurement should be carried out after carried out the prescribed
accounting adjustments.
MANAGEMENT
SYSTEM The company should be willing to align its management system to the EVA process. The Eva based management system is the basis on which the company should take decision related to the choice of strategy, capital allocation, merger and acquisition, divesting business and goal setting.
MOTIVATION The companies should decide to to implement EVA only if they are prepared to implement the incentive plan that goes with it. An EVA based incentive system, however, encourages managers to operate in such a way as to maximize the EVA, not just of the operations they oversee but of the company as whole.
MIND-SET The effective implementation of EVA necessitates a change in the culture and mind set of the company. All constituents of the organization need to be taught to focus on one objective –maximizing EVA. This singular focus leaves no room for ambiguity and also it is not difficult for employees to know just what action of their will create EVA and what will destroy it.
CHAPTER 4
RESEARCH METHEDOLOGY
Definition of Research:
"Research is an organized and systematic way of finding answers to questions."
SYSTEMATIC because there is a definite set of procedures and steps which you will follow. there are certain things in the research process that are always done in order to get the most accurate results.
ORGANIZED in that there is a structure or method in going about doing research. It is a planned procedure, not a spontaneous one. it is focused and limited to a specific scope.
FINDING ANSWER is the end of all research whether it is the answer to a hypothesis or even a simple question, research is successful when we find answers. Sometimes the answer is no but still it is an answer.
QUESTIONS are central to research. if there is no question then the answer is of no use. Research is focused on relevant, useful and important questions. Without a que., research has no focus, drive or purpose.
OBJECTIVES OF RESEARCH
Taking the system requirements into account. My study covers the following must identify the objective of research:
. Comparative analysis of EVA of past 5 years of the organization.
. to prove EVA as one of the efficient system of internal control in the organization.
RESEARCH DESIGN
Research design constitutes the blue print for the collection, measurement and analysis of data. As such the design includes an outline of what the researcher will do from writing the hypothesis and its operational implications to the final analysis of data.
DATA COLLECTION
For research we need two type of data:
PRIMARY DATA : The data which are collected from the field under the control and supervision of an investigator. This type of data is generally collected for the first time.
In my research there is no requirement of primary data.
SECONDARY DATA: If data are collected from journals, magazines, annual reports of companies, etc. then such data are called as secondary data.
In order to achieve my objectives secondary data are utilized for the purpose of doing various calculations. In each of these source of data, the process of data collection has already be done by the respective organization.
In secondary data i needed the financial data of the company. So the sources of data collection for the purpose of my research are:
. Annual report of the organization
. Balance sheet of the organization
.Profit and loss account
.Website of the organization
DATA ANALYSIS
Working and calculations :
1. Cost of Equity (Ke) = Dividend +Growth Rate
(Market Price- Floatation cost)
2. Market Price = Share holders Fund
No. of Shares
3. Dividend = Amount available for dividend
No. of Shares
4. Floatation cost = Issue of Expenses
No. of Shares
5. Growth rate = Current year sales – previous year sales x 100
Previous year sales
6. Cost of debts (Kd) = Interest (1-tax) + Redeemable value- Net proceed
No. of years
(Redeemable value + Net proceed )
2
7. Weighted Average cost of capital = Products x 100
Amount
8. Economic Value Added = Net operating profit after tax – (Capital x Weighted
Average cost of capital)
9. Reserve and surplus = Interest (1- tax) (1-Before tax)
Market price
2007
Cost of equity = 1 + 2.3%
[46.72 -.005]
= 1 + 2.3%
46.715
= 4.44%
Market price = 775515000+ 3878256909
775515000
= 4653771909
775515000
= 46.72
Dividend = 77551500
77551500
= 1
Flotation cost = 350500
75280212
= .005
Growth rate = [5308819416 – 5186145188] x 100
5186145188
= 2.3%
Cost of debt = 110000[ 1 - .3366] + [1000000 – 994444] / 6
[ 1000000 +994444] /2
= 7.41
Kd = 105000[ 1- .3366] +[ 1000000 – 994444] / 7
[1000000 + 994444]/2
= 7.06
Unsecured loans = 4%
Reserves & surplus = 9.28%
WEIGHTED AVERAGE COST OF CAPITAL [WACC]
Particular
Amount
Cost of capital
Product
Equity
775515000
4.44%
34432866
Debenture
99999800
7. 41%
7409985.18
Debenture
85714400
7.06%
6051436.64
Reserves & surplus
3878256909
9.28%
359902241.15
Unsecured loans
132904368
4%
5316174.72
TOTAL
4972390477
413076704.04
Weighted average cost of capital = Product x100
Amount
= 413076704.04 x 100
4972390477
= 8.30%
Net profit after tax = 1030324448
Add debenture [Application = 23663714
Money for debenture]
TOTAL = 1053988162
Economic value added
= 1053988162 – [4972390477 x 8.30%]
= 1053988162 – 412708409.59
= 1012779752.412006
1. Cost of Equity (Ke) = 2 + 5%
(46.70-.005)
= 2 + 5%
46.695
= 9.28%
2. Market Price = 775515000+284555554
775515000
= 3621070562
775515000
= 46.70
3. Dividend = 155103000
775515000
= 2.00
4. Floatation cost = 350500
775515000
= 0.005
5. Growth Rate = 51186145188- 4968818150 x 100
4968818150
= 5 %
6. Cost of Debts (Kd) = 110000 (1- 0.3366) + (1000000- 994444)
6
(1000000+994444)
2
= 7.41%
(ii) Kd = 105000 (1- 0.3366) + (1000000- 994444)
7
(1000000+994444)
2
= 7.06%
iii . Unsecured Loan = 4%
iv . Reserve and Surplus = 9.28%
Weighted Average Cost of Capital (WACC)
Particular Amount Cost of Capital Product
Equity 775515000 9.28% 71967792
Debenture 133333200 7.41% 9879990.12
Debenture 114285800 7.06% 8068577.48
Reserve and surplus 2845555564 9.28% 264067556.3
Unsecured Loans 132904368 4% 5316174.72
4001593932 359300090.60
Weighted Average cost of Capital = 359300090.60 x 100
4001593932
= 9%
Economic value Added
= 980647900- (4001593932 x 9%)
= 980647900 – 360143453.80
= 620504446.20
2005
1. Cost of Equity (Ke) = 2.06 + 11%
(37.86-0.005)
= 2.06 + 11%
37.856
= 9.28%
2. Market Price = 75280212+284555554
75280212
= 2849881657
75280212
= 37.86
3. Dividend = 155103000
75280212
= 2.06
4. Floatation cost = 350500
75280212
= 0.005
5. Growth Rate = 51186145188- 4968818150 x 100
4968818150
= 5 %
6. Cost of Debts (Kd) = 110000 (1- 0.3659) + (1000000- 994444)
6
(1000000+994444)
2
= 7.09%
(ii) Kd = 105000 (1- 0.3656) + (1000000- 994444)
7
(1000000+994444)
2
= 6.76%
iii . Unsecured Loan = 4%
iv . Reserve and Surplus = 20.44%
Weighted Average Cost of Capital (WACC)
Particular Amount Cost of Capital Product
Equity 75280212 20.44% 158515266
Debenture 16666600 7.09% 11816661.94
Debenture 142857200 6.76% 9657146.72
Reserve and surplus 2074366657 20.44% 424000544.56
Unsecured Loans 169008864 4% 6760354.56
3378414321 613749973.70
Weighted Average cost of Capital = 613749973.70 x 100
3378414321
= 18%
Economic value Added
= 831344812- (3378414321 x 18%)
= 831344812– 608114577.70
= 223230234.30
2004
1. Cost of Equity (Ke) = 2. + 11%
(33.40-0.005)
= 2 + 11%
33.395
= 17%
2. Market Price = 2252637880
67441500
= 33.40
3. Dividend = 134883000
67441500
= 2
4. Growth Rate = 51186145188- 4968818150 x 100
4968818150
= 5 %
5. Cost of Debts (Kd) = 110000 (1- 0.3570) + (1000000- 994444)
6
(1000000+994444)
2
= 7.20%
(ii) Kd = 105000 (1- 0.3570) + (1000000- 994444)
7
(1000000+994444)
2
= 6.85%
iii . Unsecured Loan = 4%
iv . Reserve and Surplus = 17%
Weighted Average Cost of Capital (WACC)
Particular Amount Cost of Capital Product
Equity 674415000 17% 114650550
Debenture 200000000 7.20% 14400000
Debenture 171428572 6.85% 11742857.18
Reserve and surplus 477122880 17% 251110889.60
Unsecured Loans 191634198 4% 47665367.92
3764600650 442584664.60
Weighted Average cost of Capital = 442584664.60 x 100
3764600650
= 11.76%
Economic value Added
= 338158975- (3364600650 x 11.76%)
= 338158975-442717036.40
= (104557061.40)
2003
1. Cost of Equity (Ke) = .54 + 14%
(32.44-.005)
= .54 + 14%
32.435
= 15.66%
2. Market Price = 2018352508
62227085
= 32.44
3. Dividend = 33720750
62227085
= 0.54
5. Growth Rate = 51186145188- 4968818150 x 100
4968818150
= 5 %
6. Cost of Debts (Kd) = 110000 (1- 0.3675) + (1000000- 994444)
6
(1000000+994444)
2
= 7.00%
(ii) Kd = 105000 (1- 0.3675) + (1000000- 994444)
7
(1000000+994444)
2
= 6.74%
iii . Unsecured Loan = 4%
iv . Reserve and Surplus = 15.66%
Weighted Average Cost of Capital (WACC)
Particular Amount Cost of Capital Product
Equity 674415000 15.66% 105613389
Debenture 200000000 7.00% 14000000
Debenture 200000000 6.74% 13480000
Reserve and surplus 1343937508 15.66% 210460613.70
Secured Loan 156960179 6% 9417610.74
Unsecured Loans 1269992064 4% 50799682.56
3895304751 406771295.90
Weighted Average cost of Capital = 406771295.90 x 100
3895304751
= 10.44%
Economic value Added
= 263922265- (3895304751 x 10.44%)
= 263922265– 406669816
= (142747551)
TABLE 1.1
YEAR
Ke (%)
WACC (%)
NOPAT (Rs. Crore)
EVA (Rs. Crore)
2002-03
15.66
10.44
26.39
(14.20)
2003-04
17.00
11.76
33.81
(10.45)
2004-05
20.44
18.00
83.13
22.32
2005-06
9.28
9.00
98.06
62.05
2006-07
4.44
8.30
105.40
101.28
Above table represent the cost of equity , weighted average cost of capital, NOPAT and EVA for 5 years .
In the year 2003 cost of equity is 15.66% , WACC is 10.44%, NOPAT is 26.39crore and EVA is 14.20 crore, which is negative
In the year 2004 cost of equity 17% , WACC 11.76%, NOPAT 33.81crore and EVA is 10.45 crore, which is negative.
In the year 2005 cost of equity is 20.44%, WACC is 18%, NOPAT is 83.13crore and EVA is 22.32 crore , which is positive .
In the year 2006 cost of equity is 9.28%, WACC is 9.00%, NOPAT is 98.06crore and EVA is 62.05 crore , which is positive.
In the year 2007 cost of equity is 4.44% , WACC 8.30 %, NOPAT is 105.40 crore and EVA is 101.28 crore.
CHAPTER 5
FINDINGS , CONCLUSION AND LIMITATIONS OF THE STUDY
FINDINGS
• The company had negative EVA in the year 2002-03 & 2003-04 and increase NOPAT from the year 2002-03 to 2003-04 but it had not actually added to the share holder wealth.
• In the year 2004-05 the company had positive EVA in 22.32 crore and NOPAT 83.13 crore which shows that a company had given true and fair consideration to its share holders there by increasing their wealth.
• In the year 2005-06 & 2006-07 the co. had positive EVA of 62.05 crore and 101.25 crores NOPAT of Rs. 98.06 crores and 105.4 crores which shows a remarkable achievement in satisfying its shareholders.
• Following are the main reasons behind such an increment of EVA in year 2006-07 over 2005-06:
a. They have not declared any dividend in the current financial year.
b. And also they have not taken any term-loans so they haven’t paid any interest.
CONCLUSION
EVA as one of the best performance measurement and controlling tool is fairly simple but still measures well the ultimate aim of the company.
It reveals the actual financial performance of the company that is increase or decrease in the shareholders wealth.
.As shown in table 1.1 the company is having increasing NOPAT but negative EVA which means despite of increase in its profits the company is not adding anything the shareholders wealth.
So RSMML should adopt this method of calculating EVA because if shareholders wealth is increasing it will increase their faith in the company thereby resulting an increase in the market value of the company.
SUGGESSIONS
. In order to improve EVA the company should increase its revenue from the assets already in business without investing new capital.
.The company should invest additional capital and built the business so long as its expected return on new investments the cost of capital.
.The company should release capital from existing operations by selling assets that are worth more to others.
.The company must incorporate EVA in its decision making process.
LIMITATIONS
As RSMML is a semi government organization and it has to follow certain rules and regulations, my suggessions to calculate the EVA of suggessions to calculate the EVA of the company every year may not be adopted by in its routinepractices.
.Since RSMML is not calculating .EVA presently,its staff and other officials arei in aware of the benefit of so EVA it is a difficult to create awareness about EVA amongst the staff and implement this new method of measuring the actual financial performance of the company.
BIBLIOGRAPHY
Kishore , Ravi M., 2006, Financial Management
Khan and Jain, 2005, Financial Management
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