Mr Sanjiv Agrawal, Partner and National Director, Valuation & Business Modelling services, Ernst & Young.

A brand valuation exercise in India is typically a more subjective exercise compared to a business valuation exercise in India, says Mr Sanjiv Agrawal, Partner and National Director, Valuation & Business Modelling services, Ernst & Young. This is primarily due to the limited availability of data required to apply the usual methods of brand valuation, he reasons, during the course of a recent e-mail interaction with Business Line.

Mr Agrawal has through his 20-year career conducted valuations for/of companies across various sectors, including metals, consumer goods and retailing, media and entertainment, software, telecom, and financial services.

Excerpts from the interview:

Isnt business valuation more sought after than brand valuation?

True. While M&A (merger and acquisition) transactions are on a historic high in India, they are mostly in businesses, not in brands. For example, Tata Teas purchase of Himalayan mineral water business, Maricos purchase of Niharika oil business and Reliance Industries purchase of Adani Retail are all transactions in businesses. However, many a time, the brand is the most important reason for a buyers interest in a business.

What are the common methods of brand valuation?

Some of the popular valuation methods internationally are the comparable transactions multiples method and the discounted cash-flow method based on computing NPV (net present value) of earnings attributable to brand from out of total earnings of a business.

And in India

These methods of brand valuation are not popular in India due to lack of comparable M&A transactions in brands in India. Also, isolating earnings attributable to a brand from out of total earnings of a business is not easy in the Indian circumstances.

Are there ways to isolate brand earnings?

For isolating earnings attributable to a brand, one of the most popular methods internationally is the royalty method. Even this methodology requires access to past empirical data about royalty rates charged for licensing brand names under similar circumstances.

However, in India such licensing deals are rare and even when an occasional deal in a comparable brand is done, the data about the royalty rate payable by the licensee is not made public.

So, how can one go about brand valuation?

Since no single method can be applied rigorously for brand valuation in India, analysts need to apply multiple methods and then take a balanced view based on results obtained from these methods.

Importantly, analysts have to be careful in valuing a brand. Equally, if not more importantly, analysts should also understand the cross-industry brand valuation dynamics.

It will help them in estimating royalty rates based on brand licensing transactions even in non-comparable industries. They can use such royalty rates after adjusting them for cross-industry brand value drivers and considering the empirical data on comparative profit margins. It is useful to remember that brands are useful in bestowing confidence to customers about certain positive features of the products quality.

Customers return the favour by buying a branded product to an unbranded product with similar apparent benefits. Thereby, customers assure the continuity and growth of the profitability of the business using the brand.

What factors, according to you, pull down importance (and, therefore, value) of a brand?

There are many. For example, brand is less important in industries where it is easy to verify product quality as in the case of asset management, financing, television broadcasting (to a lesser extent).

Also, in the case of the following situations:

Where intermediary experts give confidence about quality to the consumers of the product: pharmaceuticals/medical equipment (medical profession which gives confidence to the patients itself generates branding for itself for example, practising doctors and hospitals).

Where there is a standard rating system or regulatory assurance on quality star-rated hotels, and telecom service (to a lesser extent).

Where business activity is essentially reselling of branded products with or without some value addition retail, computers, and automobiles (to a lesser extent).

In the opposite, what factors emphasise the importance of brand?

Industries where:

Products are used for long duration consumer durables, capital goods, cement/paints, automobiles, realty, telecom service (to some extent until number portability is introduced; afterwards, brand importance will come down in the telecom services industry).

Bad products can affect consumers health adversely FMCG, medical services, pharmaceuticals (to some extent), realty, automobiles.

Can you give a few specific examples of brand valuation?

Let me give you a few specific examples of how an understanding of cross-industry brand dynamics can help analysts in estimating royalty rates for use in valuation analysis of a given brand.

If the available data shows that royalty rates for brand licensing in personal care segment of the FMCG industry are 5-6 per cent of sales turnover, the rates should usually be lower in the retailing industry.

If royalty rates for brand licensing in 5-star hotel category are in the 3-4 per cent range, the rates should be higher in the branded (but non-star rated) hotels category if profit margins are similar in both categories.

Once a reasonable royalty rate is estimated, the valuer can use the DCF method or the comparable multiples method to arrive at valuation of the brand.

D. MURALI