Brand valuation

The strength of the invisible

From time-to-time, we have used various models for evaluating assets of the Balance Sheet to bring certain advances in financial reporting to the notice of our shareholders. The aim of such modeling is to lead the debate on the Balance Sheet of the next millennium. These models are still the subject of debate among researchers and using them data in projecting the future is risky. We are not responsible for any direct, indirect or consequential losses suffered by any person using these models or data.

A Balance Sheet discloses the financial position of a company. The financial position of an enterprise is influenced by the economic resources it controls, its financial structure, liquidity and solvency, and its capacity to adapt to changes in the environment. However, it is becoming increasingly clear that intangible assets have a significant role in defining the growth of a high-tech company.

Valuing the brand

The wave of brand acquisitions in the late 1980s exposed the hidden value of highly branded companies, and brought brand valuation to the fore. The values associated with a product or service are communicated to the consumer through the brand. Consumers no longer want just a product or service, they want a relationship based on trust and familiarity.

A brand is much more than a trademark or a logo. It is a 'trustmark’ – a promise of quality and authenticity that clients can rely on. Brand equity is the value addition provided to a product or a company by its brand name. It is the financial premium that a buyer is willing to pay for the brand over a generic or less worthy brand. Brand equity is not created overnight. It is the result of relentless pursuit of quality in manufacturing, selling, servicing, advertising and marketing. It is integral to the quality of client experiences in dealing with the company and its services over a period.

The fifth annual BRANDZ™ Top 100 Most Powerful Brands ranking published in cooperation with the Financial Times was announced in April 2010 by Millward Brown. According to the report, Google topped the ranking with a brand value of US $114 billion. The market capitalization of Google at that time was US 161.64 billion. Thus, 70.8% of market capitalization represented its brand value.The contribution of brand value in commanding price premiums and decreased cost of entry into new markets and categories is significant. Companies adapt strategic approaches and best practice methodologies to improve their brand value.

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Approach to brand valuation

The task of measuring brand value is a complex process. Several models are available for assessing brand value. The most widely used is the brand-earnings-multiple model. There are several variants of this model.

We have adapted the generic brand-earnings-multiple model (reference: 'Valuation of Trademarks and Brand Names’ by Michael Birkin in the book, Brand Valuation, edited by John Murphy and published by Business Books Limited, London) to value our corporate brand, ’Infosys'. The methodology followed for valuing our brand is as follows:

Brand-strength multiple is a function of several factors such as leadership, stability, market, internationality, trend, support and protection. We have evaluated these factors on a scale of 1 to 100 internally, based on the information available.

Brand valuation

in Rs. crore
  2010 2009 2008
Profit before interest and tax 7,899 6,907 5,344
Less : Non-brand income 849 426 634
Adjusted profit before tax 7,050 6,481 4,710
Inflation factor 1.000 1.040 1.081
Present value of brand profits 7,050 6,737 5,090
Weightage factor 3 2 1
Weighted average profits 6,619
Remuneration of capital 1,033
Brand-related profits 5,586
Tax 1,899
Brand earnings 3,687
Brand multiple 10.01
Brand value 36,907

Assumptions :

in Rs. crore
  2010 2009 2008
Brand value 36,907 32,345 31,863
Market capitalization 1,50,110 75,837 82,362
Brand value as a percentage of market capitalization (%) 24.6 42.7 38.7
Brand value / revenue (x) 1.62 1.49 1.91