Discussing finance minister P. Chidambaram’s latest budget with former Rajya Sabha MP Pritish Nandy is akin to stirring a hornet’s nest. The founder and director of Pritish Nandy Communications, who has produced films such as Pyaar Ke Side Effects, wonders why the finance minister chose to ignore the Indian entertainment industry, pegged at more than Rs22,200 crore by KPMG in a recent report. Not one to give up easily, Nandy is working towards creating an entity that is seen as a “business of serious merit and value”, with or without Chidambaram’s help. And getting a valuation for brand PNC is a step in that direction. “Otherwise people will never understand the real value of the business we have created,” he says.
PNC recently joined the ranks of the Tata Group, Air Deccan, Godrej Consumer Products Ltd, Bajaj Hindusthan and the Cholayil Group, who believe strong brands will play a key role in driving growth and value for the company and its stakeholders. This is an important consideration, says Unni Krishnan, the India country manager for Brand Finance, a London-based independent brand consultancy focused on management and valuation of brands. “A very high proportion—over 70%—of many Indian companies’ value is locked into intangibles such as brands, patents, technology and intellectual property. These are seldom reflected in balance sheets,” he adds. The number came to light in a recent study conducted by Brand Finance.
Indian companies, in fact, are gradually waking up to the strength of their intangible assets such as brands. A case in point is that of Indian Hotels Company Ltd (IHC), one of India’s largest hotel chains and owner of Taj Hotels. The company recently exited management contracts in three international hotels, as the properties were “not in line” with its image as a luxury brand. While the termination has come at a cost, company CFO Anil Goel says, “It’s a small price to pay for protecting the company’s brand value.” The group recently acquired the 80-year-old Landmark Hotel in Boston as part of its global expansion plans, and did not want any “sub-standard” alliances to dilute its brand equity in the global market.
Brand valuation is a common practice in the West. In India, however, it has yet to take root. One of the recent triggers for some companies going in for getting a price tag for their brands seems to be the spate of mergers and acquisitions, where a strong brand fetches better valuations. “Deal makers do look at the strengths of the brands during M&As. A brand that is likely to bring in superior profits and help create an incremental value for the business will, obviously, get its investors a premium over the book value,” says Pankaj Karma, partner and head, M&A, Grant Thornton, an audit firm. M&A experts say that brands played an important role in determining final valuations in recent acquisitions such as Hutch-Essar by Vodafone and MTR Foods by Orkla. According to a person close to the deal in which pharma major Wockhardt bought Dumex India, the owner of Farex and Protinex, from Royal Numico NV of the Netherlands, over 80% of the valuation was on account of the strength of the two brands.
Besides M&As, companies are also realizing that the power of brands could be harnessed to drive growth and in some cases, even raise funds. Fast moving consumer goods company, Marico Industries, was able to raise Rs200 crore for the acquisition of Nihar, a competing hair-oil brand from the Hindustan Unilever stable, on the strength of its own brand portfolio. “Citibank offered to give us a loan to buy Nihar, using our brand value as the collateral. However, they also took the company’s credit rating, performance and cash flow into consideration,” says Chaitanya Deshpande, head, corporate finance, Marico.
The company eventually raised the money through internal accrual and unsecured loans.
Godrej Beverages and Foods, which is present in categories such as tea, edible oils, tomato puree, fruit drinks and bakery fats, decided to unlock the potential of its brands such as Nutrine, Jumpin fruit drinks, Sofit Soymilk, and Cooklite by carrying out a valuation. “The primary motive (of initiating a valuation), was to evolve a metric for the measurement of growth in brand value,” says A. Mahendran, director, Godrej Beverages & Foods. “One of the objectives is to identify brand triggers and ensure that the company is putting its resources behind them,” he says. The company is planning periodic valuations so as to assess and chart the growth of its brands. Godrej Consumer Products has also decided to follow suit and is in the process of getting some of its major brands, such as Cinthol soap, Godrej hair dye, Godrej No.1 soap, FairGlow soap and Ezee liquid fabric wash, valued.
Banks such as ICICI Bank do offer loans against brands as collateral. “In sectors such as FMCG, pharmaceuticals and textiles that boast of high-value brands, we are open to taking the value of the brand into consideration while giving loans,” said a senior official from ICICI Bank, speaking on the condition of anonymity.
With brands being able to get a number against their name for the first time, companies are beginning to treat them as fixed assets. “The fundamental issue here is to address the management of brands as corporate assets,” says Krishnan, who helps companies value brands in a scientific manner and zero in on crucial factors contributing to brand growth, which would subsequently drive growth and market value for the company as well. Whether it’s identifying chinks in areas such as product innovation, distribution, manufacturing, brand awareness or unlocking brand potential, the valuation helps companies “put things in perspective”.
Experts say this is necessary at a time when differences between products and services have been narrowed to the point of near invisibility. “Brands provide the basis for establishing meaningful differences between apparently similar offers,” says David Haigh, CEO, Brand Finance.
A new focus on brand building is also making a lot of companies realize that branding is not just about advertising. “Companies are increasingly moving from brand awareness to brand building. Today, brands have to deliver on several counts, whether it’s on the product, packaging, experience or even internally, to the employees working in that company,” says Sanjeev Malhotra, director of the Mumbai-based Alia Group. It is important for a company to look at all the factors and communicate a clear message, he adds. Take the example of Indian Airlines, which spent a sizeable amount on its rebranding exercise (it changed its name to Indian). According to experts, despite huge ad spends, the exercise failed to make a mark as the airline did not concentrate on crucial factors such as improving service and employee attitude, which were integral to the brand.
Such failures notwithstanding, India Inc. is latching on to the concept of brand valuation to realize the real value of its business assets.
(Rana Rosen contributed to this story)