The Hindu Business Line : How the valuation was done

IN setting out to value India's top value creating brands, the primary requirement was that brands should belong to companies that are listed on the Bombay Stock Exchange, which is why brands like Hutch, Sahara India and Jet Airways did not come into the consideration set.

We have excluded holding companies that own a portfolio of branded businesses, as it is not possible to identify the revenue streams of individual brands by scrutinising the annual reports and other publicly available information. Hence, companies such as Hindustan Lever and ITC, which have several branded businesses, have been excluded. However, companies marketing several brands under a consumer-facing master brand were included for ranking - Tata Motors with sub-brands like Indica and Sumo, i-flex with Flexcube.

Our valuations have therefore included master branded businesses and in most cases, mono-branded businesses. Brand Finance's methodology values brands in a way that is similar to how analysts value other assets. The economic use method values brands on the basis of how much they are likely to earn in the future. Then the projected profits are discounted to a present value, based on the likelihood that those earnings will actually materialise. Brand Finance's valuations have used `relief from royalty' methodology - an intuitive approach that assumes that a company does not own its brand name, and then calculates how much it would have to pay to license it from a third party. The present value of the streams of royalty (hypothetical) represents the value of the brand.

We used the "relief from royalty" methodology for two reasons. Firstly, it is the valuation methodology that is favoured by the tax authorities and the courts because it calculates brand values by reference to documented, third-party transactions; and secondly, because it can be performed on the basis of publicly available financial information.

Only public data was used — the data that the brand-owning companies publish about themselves (in annual reports, analysts briefings, press articles, syndicated market research and such). There was no access to private data or to senior management interviews as there would be in a formal valuation. Moreover, the brands were looked at without further segmentation so we tried to assess Infosys as a whole whereas valuing it formally would have entailed aggregating it from a series of perhaps 30 segments separated by product type and by geography.

The brand value or trademark value is the value of the asset at a certain point of time, computed by adopting this methodology. This, in fact, is the value that the brand is creating for their owners today from its current economic use. It is not an attempt to estimate the cost of replacing it, nor does it represent what has been expended to create it.

The methodology for Brand Finance's league tables follows a four-step process:

1. Obtain brand-specific financial and revenue data

2. Establish royalty rate for each brand

- Calculate brand strength score

- Determine royalty rate range

3. Calculate future royalty income stream

4. Discount future royalty stream to a net present value = brand value

The Brand Strength Index score demonstrates how strong or weak the brand is. Brand Finance has scored each brand relative to its key competitors with reference to a number of different business and brand attributes. Each competitor is scored out of 10 on each attribute. The attributes are then weighted according to their importance and an overall score out of 100 is calculated for each company. The resultant score for each brand is then applied to the royalty range to pinpoint the royalty rate figure. A score of 100 would result in a top-of-range royalty rate and the reverse for a score of zero.

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