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 the 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 business 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 ‘trust mark’ – 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 the 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 sixth annual BRANDZ™ Top 100 Most Valuable Global Brands ranking published in conjunction with Bloomberg and Kantar Worldpanel was announced in 2011 by Millward Brown. According to the report, Apple topped the ranking with a brand value of US$ 153.3 billion. The market capitalization of Apple as on 31st March 2011 was US$ 322.26 billion. Thus, 47.6% 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 adopt strategic approaches and best practice methodologies to improve their brand value.
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 :
- Determine brand profits by eliminating the non-brand profits from the total profits
- Restate 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
- Determine the brand-strength or brand-earnings multiple.
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 
crore
2011 |
2010 |
2009 |
|
Profit before interest and tax |
9,313 |
7,900 |
6,894 |
Less : Non-brand income |
1,090 |
891 |
426 |
Adjusted profit before tax |
8,223 |
7,009 |
6,468 |
Inflation factor |
1.000 |
1.103 |
1.217 |
Present value of brand profits |
8,223 |
7,732 |
7,871 |
Weightage factor |
3 |
2 |
1 |
Weighted average profits |
8,001 |
– |
– |
Remuneration of capital |
1,284 |
– |
– |
Brand-related profits |
6,717 |
– |
– |
Tax |
2,231 |
– |
– |
Brand earnings |
4,486 |
– |
– |
Brand multiple |
9.03 |
– |
– |
Brand value |
40,509 |
– |
– |
Assumptions
- The figures above are based on IFRS financial statements.
- Brand revenue is total revenue excluding other income after adjusting for cost of earning such income, since this is an exercise to determine our brand value as a Company and not for any of our products or services.
- Inflation is assumed at 9.35% per annum; 5% of the average capital employed is used for purposes other than promotion of the brand and tax rate is at 33.22%.
- The earnings multiple is based on our ranking against the industry average based on certain parameters (exercise undertaken internally and based on available information).
in crore
2011 |
2010 |
2009 |
|
Brand value |
40,509 |
36,907 |
32,345 |
Market capitalization |
1,86,100 |
1,50,110 |
75,837 |
Brand value as a percentage of market capitalization (%) |
21.8 |
24.6 |
42.7 |
Brand value / revenue (x) |
1.47 |
1.62 |
1.49 |