Indian firms get smart, see reward in brand valuation5 min read . Updated: 09 Nov 2009, 09:19 PM IST
Indian firms get smart, see reward in brand valuation
Indian firms get smart, see reward in brand valuation
A few weeks ago, Gitanjali Gems Ltd had valued its four flagship brands—Nakshatra, Asmi, Gili and D’damas—at Rs1,500 crore. It is just one of the many Indian firms that are building brands and seeking professional help to value them. The International Financial Reporting Standards (IFRS), which demands that companies declare their brand value, is expected to be adopted in India in 2011. But that’s just one reason why Indian firms are getting brand conscious.
Indian businesses are realizing that brands are fetching them rich financial rewards.
“The largest discretionary expense of a firm is increasingly diverted to marketing," says Unni Krishnan, managing director of the Indian unit of UK-based brand valuation agency Brand Finance Plc. “So, the largest expense is the strategic investment into the brand and questions are being raised as to what the return on investment for these huge expenses is. Currently, there are no answers to it, so chairmen especially find it a very compelling reason to hire us to evaluate."
Ramesh J. Thomas, president and chief knowledge officer of brand consultancy firm Equitor Management Consulting Pvt. Ltd, says chief executive officers (CEOs) and chief financial officers (CFOs) are getting increasingly involved in understanding the value of their brands.
“They know the brand is a business asset, it has a value and so it has influence on the enterprise and, therefore, performance. And, understanding it better can give you so much leverage, if you can put your money where the better leverage is," Thomas says.
The value of a brand plays a big role during mergers and acquisitions. So when a company acquires another firm, especially with the purpose of retaining the brand name, it may be willing to pay up to two-thirds of the entire deal amount solely for the brand.
And there are two ways of doing it, as Amol Rane, senior director at audit and consulting firm Deloitte Touche Tohmatsu, explains. “One is the royalty method, which works under the premise that since I own a brand, I am relieved from the burden of paying royalty to the brand on licence from somebody else. So the value of the brand is the royalty that I am saving upon. But it’s difficult to get reliable royalty rates from the public domain. So the more scientific method is the excess earning method. Basically, the business from the brand residing in its cash flow or earnings are base estimated and then from those profits, charges are taken from tangible and intangible assets, which have a play in the business. So ultimately, I am left with profits that are attributed to the brand...," Rane adds.
For Infosys Technologies Ltd—a Rs32,400 crore brand—which started reporting the results of brand valuation over a decade ago, the brand is the biggest draw for investors. It came in very handy in 1999, when the company listed on the Nasdaq and had to work hard at attracting funds. Today, Infosys is a global brand, and investments, clients as well as talent keeps flowing in. The value of the brand is monitored regularly and brand-building efforts are carried out in line with the performance of the brand. The company has, through conscious efforts, positioned itself as a trustworthy, high premium player, which will help greatly as it increases its focus on the consultation practice. Infosys is glad that consumers are willing to pay specifically for the brand, which in turn drives growth in revenues and profitability.
V. Balakrishnan, CFO of Infosys says, “If you have a strong brand, your access to the international market is higher, your ability to get premium pricing is higher and your ability to generate a larger proportion of growth in the market is higher."?According ?to him, 80% of corporate value in terms of market valuation can be attributed to brands. Taking the example of his company, Balakrishnan says, “In a company like Infosys, the physical asset of the company is very less compared to its market value. Valuing brand and putting it in the balance sheet will give a better picture to investors on the real strength and value of the company."
In April, one of the youngest brands in the country, the Indian Premier League (IPL) was valued by Brand Finance at $2 billion (Rs9,320 crore today). The management says while that’s welcome news, it would prefer IPL to be a profitable brand that survives the long haul. For individual team franchises, this valuation has helped them attract investment and scale up the business. IPL admits this valuation is only going to help rake in more money, especially when two new teams come up for grabs in January 2010. “If you look at the first eight owners, the reserve price for owning a franchisee at that point in time was $15 million for a period of 10 years. While we are still working the final numbers, the reserve price for the nineth and 10th franchise is certainly going to be multipliers of that reserve price that we had less than two years back," says Sundar Raman, CEO of IPL.
One of India’s oldest business groups, Godrej, is also evaluating the weight of its name. Godrej Properties Ltd will be the first company in India to announce its brand value when it launches an initial public offering in January. People familiar with the situation say the mother brand, which went through a revamp in 2008, is also looking for an agency to determine what 100- plus years of brand equity means in financial terms.
Ashutosh Tiwari, executive vice-president (strategic marketing) at Godrej Industries Ltd, says the real value of a valuation exercise is not restricted to the value of a brand. “I’m sure the value of Godrej as a brand will be stratospheric, given it reaches out to one-third of India. That can only give certain degree of comfort. The real utility of that exercise is if we can link up all our functions, our business decision-making to our consumer choices and brand choices in the marketplace," he adds.
Brand value is also being accepted as collateral these days, to raise funds from banks and financial institutions. The UB Group and Daawat brand of basmati rice are some examples. The Future Group, which will hive off its most profitable entity Big Bazaar into an individual subsidiary, also hopes the power of the retail chain’s brand will help it in getting more out of prospective investors. As more and more companies follow this trend, some brand experts believe India needs a slightly more scientific and stringent method of brand valuation. And this may be the right time for valuation firms to start working harder on their technique.
Storyboard airs on Tuesday at 7.00pm on CNBC-TV18.