Value creation, in simple terms, means achieving an output that significantly exceeds the inputs. In more technical terms, value is created when the market value of a business is greater than its book value. The book value represents the historical investments made in the business. If the market value, or enterprise value, is higher, then value has been created. The opposite of this is value destruction, which, naturally, no one wants.

Value creation is best understood in this context. It can vary in scale—small or large—and can be measured in monetary terms such as rupees, crores, or thousands of crores, and so on. Alternatively, it can be expressed in percentage terms as the internal rate of return (IRR). For instance, if you invest ₹100 over five years and it grows to (say) ₹1,500, the IRR reflects the value added or created. This means value is created if it is significantly higher than the cost of capital.

While this financial definition is important, value creation is equally about adding value to all stakeholders of a business. It is not just a hard-nosed financial metric but also considers the end consumers of the product or service, the resellers and trade channels selling those offerings, the employees delivering them, and the broader environment, including the planet, as part of the ESG (Environmental, Social, and Governance) perspective.

In this sense, value creation is a holistic and all-encompassing concept, making it an essential metric for businesses in today’s world.

I have had the privilege of working on two start-ups within the overall umbrella of larger corporates. The first one was setting up the ice cream business in Hindustan Unilever, which was one of my first roles after my training period. I seized the opportunity to be the second employee in the ice cream business, following my mentor. This involved setting up a new greenfield factory, importing all the machinery, and handling all the business planning. Since ice creams were reserved for the small-scale sector at the time, we launched “frozen desserts” as a way to achieve our objectives legally, although we couldn’t call them ice creams.

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During the period from 1992 to 1993, we set up the factory and launched the Walls brand as Unilever’s ice cream brand in India. It was officially launched in 1994 and was very successful, creating a lot of brand value. Later, Levers acquired several other brands in the market, including Kwality, Milkfood, and Cadbury’s Dollops, among others. However, the original brand launch itself was a significant value addition, becoming a big hit in Bombay before achieving a wider national rollout.

This brings me to the point about lessons. The biggest outsized value creation I have seen in my working life typically comes from what I call intangible assets. It could be a brand that feeds people’s aspirations, encouraging them to pay a profit margin. By producing and distributing the product effectively and efficiently, you can create significant top-line and bottom-line growth, which ultimately generates value. The second example is intellectual property. This includes things like software and other intangible assets. For example, in industries like music and videos, as seen with companies like Saregama, intellectual property can be a major driver of value creation.

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The second anecdote I would share is my experience at HCL Technologies. Starting in 2016, we successfully built a large software business, demonstrating the immense potential of intellectual property in driving value creation. We called it Products and Platforms—software products and platforms—and this was a business where HCL invested $3.5 billion. In today’s currency, that amounts to roughly ₹30,000 crores. This investment was made over a couple of years.

What stands out here is that acquisitions are not always value-creating; they can sometimes destroy value. This happens when a large upfront payment is made to the seller based on certain calculations, and if those targets are not achieved, it results in value destruction. However, in this case, we delivered an unlevered IRR of over 25% in rupee terms, which is exceptionally attractive. At a scale of ₹30,000 crores in today’s terms, a 25% IRR is indeed quite remarkable.

The lesson from this experience is that while intellectual property is a significant driver of value creation, all stakeholders must share in the value created. This is exactly what happened in this case. The seller of most of these assets, IBM, realised good value from the sale to HCL. The employees who transitioned to HCL with these products were highly satisfied in their new roles, as reflected in an attrition rate of less than 5%. Additionally, the users of the products, the supply chain partners, the resellers, and everyone involved were very happy with what we delivered.

This reinforces the idea that value creation is not just a financial outcome; it must benefit all stakeholders involved.

The third anecdote relates to shareholder value creation at HCL Tech from 2018 to 2024. I was thrown this challenge at my very first Board Meeting, where I presented as CFO. At that time, the multiples were lower than those of peers like TCS, Infosys, and Wipro.

Over a two-year period, we engaged in extensive learning, research, and discussions with various experts before devising a plan, which we then executed over the next two to three years—with stellar results. We refocused the company’s energies on achieving the fastest organic growth among peers (without outsized investments) and on improving the Return on Invested Capital (ROIC). Additionally, we enhanced our cash flow ratios, increased our dividend payout ratio, and introduced RSUs/ESOPs for the leadership to better align their incentives and targets with those of the shareholders.

It is gratifying to note that, as a result, HCL Tech shares now trade at roughly the same multiple as bellwethers TCS and Infosys!

The lesson to remember here is that it does take time to create sustained shareholder value over multiple years.

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