The Hindu Business Line : The right brand value

"It is by no means clear what the company's intellectual capital is, and even less so if we intend to value the company's brand and intellectual capital separately."

INFOSYS values brands using the brand-earnings-multiple model. Seen in the picture are Nandan Nilekani (left), CEO, Infosys and N. R. Narayana Murthy, Chief Mentor.

Brand valuation was recently in the news when Infosys valued its brand at Rs 23,000 crore. There are different methods of brand valuation, such as market value of company's shares, brand's replacement value, and present value of the company's free cash flow minus the assets employed multiplied by the required return.

About these and other methods, you can read in Pablo Fernández's paper titled `Valuation of brands and intellectual capital,' on http://ideas.repec.org. "In recent years, a lot has been said about the value of companies' intellectual capital. However, almost all of the studies on the subject are highly descriptive and a long way from obtaining a quantitative valuation," writes Fernández. "It is by no means clear what the company's intellectual capital is, and even less so if we intend to value the company's brand and intellectual capital separately."

Brand valuation could, broadly, be categorised into three types. One, valuation done as an academic exercise, and explained in the Notes to accounts. Ready examples are companies such as Infosys, Satyam and Rolta. Two, brand valuation done by appointing valuers, on the basis of which the balance sheet is adjusted for intangible assets and capital reserve, as in the case of Sintex, Kitply and Emami. And, three, brands actually paid for, as did Nirma and a subsidiary of Wipro.

Infy's multiple method

Take the case of Infy. The company informs that it values brand using "the generic brand-earnings-multiple model (given in the article on Valuation of Trademarks and Brand Names by Michael Birkin in the book Brand Valuation, edited by John Murphy."

In four bullet points, Infy explains its methodology, as follows:

Determine brand profits by eliminating the non-brand profits from the total profits of the company.

Re-state the historical profits at present-day values.

Provide for the remuneration of capital to be used for purposes other than promotion of the brand.

Adjust for taxes

Brand valuation as described above has no impact on the reported numbers, because the exercise is not part of the balance sheet. The key element in this is the multiple used for arriving at the valuation.

"Brand-strength multiple is a function of a multitude of factors such as leadership, stability, market, internationality, trend, support and protection," explains Infy. "These factors have been evaluated on a scale of 1 to 100 internally by us, based on the information available within," it adds. The flip side, as you can observe, is that for outside users, no further information is available about the multiple.

Brand valuation by valuers

Brand valuation, which forms part of the balance sheet, must have been paid for. Yet, some companies do a revaluation exercise, through appointed valuers. Please note that accounting standards of the Institute of Chartered Accountants of India do not permit recognition of such value in the books.

Take the case of Sintex Industries Ltd. Its 2005 annual report has a note that states: "In the year 2000-01, Sintex brand owned by the company had been valued by Deloitte Haskins & Sells, at a value as at the beginning of that year. The value has been accounted for in the books by debiting the Brand Value shown under the Fixed Assets and by creating Brand Valuation Reserve shown under Reserves and Surplus." The amount involved was Rs 165 crore.

Emami Ltd stated in its 2005 annual report that intangible assets had been valued as on March 31, 2005 by Ernst & Young at Rs 423 crore. This included Rs 265 crore for brands. "Based on the said valuation, the company's brands were accounted for in the books of accounts in the year 1999-2000. The resulting amount was credited to Revaluation Reserve," states Emami.

Kitply's annual report of 2004-2005 spoke of brand valuation done in June 2000 by Ernst & Young. "This has resulted in an increase in the book value of the brand by Rs 1,27,61,62,273 which was credited to Revaluation Reserve Account in that year," it states.

As you can appreciate, this form of accounting results in showing a higher gross net worth because of revaluation reserve, although tangible net worth (that is, gross net worth less intangible assets) is unaffected.

Brand values paid for

A company may purchase a brand from another company, in which case the valuation is on the basis of the amount actually paid. When a brand is paid for, it has also to be amortised (written off) over a period of time. Thus, while notional valuation does not impact the profit and loss account, brands actually paid for do.

For instance, Nirma Ltd acquired the `Nirma' and other brands from Nirma Industries Ltd through a demerger of Nirma Industries and a subsequent acquisition of the demerged entity by Nirma Ltd. Thus, effectively, there was a proper `purchase' of the brand; and the same is being amortised over a ten-year period.

Another example is of Wipro. In June 2004, a subsidiary of the company acquired a trademark/ brand named `Chandrika' for an aggregate consideration of Rs 238.00 million. "The subsidiary is entitled to use the trademark/ brand in manufacturing, selling and distributing products in India and other SAARC countries. Further, rights to use the brand in Nepal has been acquired at Rs 30 million," said the company.

"Pursuant to an agreement between the company and the subsidiary, the company is licensed to use the trademark/ brand `Chandrika.' The company has also entered into a non-compete agreement with the sellers of `Chandrika' brand, for which it has paid certain amount as up-front fee," is more from the annual report.

The company also spoke of "an annual non-compete fee computed as a specified percentage of the revenues from products sold under `Chandrika' trade-name, subject to a minimum annual payment." One learns that the upfront non-compete fee is amortised over the period of agreement and that the annual non-compete fee is recognised in the respective years.

"It's hard to build a brand, competitively, and tell people what you do as well," says Jay Chiat. Perhaps, telling people what brands are valued at is harder.

Madhu Dubhashi is the CEO of Global Data Services of India Ltd (GDSIL), Pune.

Do send in your queries, suggestions and feedback to brandline@thehindu.co.in

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