Description
The objective of documentation is about brand valuation at infosys.
BRAND VALUATION AT INFOSYS
The strength of the invisible 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 hi-tech company. Hence, quite often, the search for the added value invariably leads us back to understanding, evaluating and enhancing the intangible assets of the business. From time to time, Infosys has used various models for evaluating assets off the balance sheet to bring certain advances in financial reporting form the realm of research to the notice of the shareholders. Such an exercise also helps the Infosys management in understanding the components that make up goodwill. The aim of such modelling is to lead the debate on the balance sheet of the next millennium. The Infosys management cautions the investors that these models are still the subject of debate among researchers, and using such models and data in predicting the future of Infosys, or any other company, is risky, and that the Infosys management is not responsible for any direct, indirect or consequential losses suffered by any person using these models or data. Valuing the brand The wave of brand acquisitions in late 1980s exposed the hidden value in highly branded companies and brought brand valuation to the fore. Examples are Nestle buying Rowntree, United Biscuits buying Keebler, etc. An Interbrand study of the acquisitions of 1980s shows that, whereas in 1981, net tangible assets represented 82% of the amount bid for the companies, by 1988 this had fallen to 56%. Thus, it is clear that companies are being acquired for their tangible assets and more for their intangible assets. 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 but 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 edition 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, service, advertising and marketing. It is integral to the quality of client experiences in dealing with the company and its services over a sustained period. Corporate brands and service brands are often perceived to be interchangeable. Both types of brands aim at the enhancement of confidence and the reduction of uncertainty in the quality of what the company offers. Therefore, companies rely heavily on the image and personality they create for their brands, to communicate these qualities to the marketplace. 1
For many businesses, brands have become critical for shareholder wealth creation. Global brands are still the most powerful and sustainable wealth creators in the business world and will continue to be so in the near future. The task of measuring brand value is a complex one. Several models are available for accomplishing this. The most widely used is the brand-earnings-multiple model. There are several variants of this model. For example, by using one of the brand valuation models, Interbrand, a brand consultancy firm, had valued Coca-Cola as the most valued brand in the world for the year 2002 at $69.6 billion, when its market cap was $117.8 billion, on the date of brand valuation. Thus, the brand valuation of Coca-Cola was around 59% of its market cap on the date of valuation. According to the study, due to the current economic climate, 49 of the100 and 7 of the top 10 in their list, fell in value this year. Not surprisingly, the study found that technology companies such as Microsoft, IBM, Intel and Nokia are part of the world’s 10 most valuable brands in 2002. (Source: www.businessweek.com) Goodwill is a nebulous accounting concept that is defined as the premium paid to tangible assets of a company. It is an umbrella concept that transcends components such as brand equity and human resources, and is the result of many corporate attributes including core competency, market leadership, copyrights, trademarks, brands, superior earning power, excellence in management, outstanding workforce, competition, longevity and so on. The management has adapted 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 and published by Business Books Limited, London) to value its corporate brand “Infosys”. The methodology followed for valuing the brand is given below: 1. Determine brand earnings To do this: 1. Determine brand profits by eliminating the non-brand profits from the total profits of the company 2. Restate the historical profits at present-day values 3. Provide for the remuneration of capital to be used of purposes other than promotion of the brand 4. Adjust for taxes 2. Determine the brand-strength or brand-earnings multiple Brand-strength multiple is a function of a multitude of factors such as leadership, stability, market, internationality, trend, support and protection. These factors have been evaluated on a scale of 1 to 100 internally by the Infosys management, based on the information available within the company.
2
3. Compute the brand value by multiplying the brand earnings with the multiple derived in step 2 above.
The computation of brand value is as follows: Year ended March 31 2003 2002 PBIT 1,158.93 943.39 Less: non-brand income Adjusted profit Inflation compound factor at 6% Present value of profits for the brand Weightage factor Three-year average weighted profits Remuneration of capital (5% of average capital employed) Brand-related profits Tax at 36.75% Brand earnings Multiple-applied Brand Value
Assumptions
2001 696.03 53.43 642.60 1.132 727.25 1
89.65 1,069.28 1,000 1,069.28 3 969.19
59.77 883.62 1,064 940.02 2
123.52 845.67 310.78 534.88 14.00 7,488.00
1. Total revenue excluding other income after adjusting for cost of earning such income is brand revenue, since this is an exercise to determine the brand value of Infosys as a company and not for any of its products or services. 2. Inflation is assumed at 6% per annum.
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3.
5% of the average capital employed is used for purposes other than promotion of the brand. 4. Tax rate is at 36.75% 5. The earnings multiple is based on the ranking of Infosys against the industry average based on certain parameters (exercise undertaken internally and based on available information). 6. The figures above are based on Indian GAAP financial statements. Thus it is interesting to note that while Infosys has a market capitalization of Rs. 26,847 crore as on March 31, 2003, the value of the “Infosys” brand alone is estimated at Rs. 7,488 crore. The corresponding figures for market capitalization and brand value of Infosys as on March 31, 2002 and March 31, 2001 were Rs. 24,654 crore and Rs 7,257 crore and Rs. 26,926 crore and Rs. 5,376 crore, respectively. Balance Sheet (including intangible assets) as at March 31, 2003 Sources of Funds Shareholders’ funds Share Capital Reserves and surplus Capital reserves Revenue Reserves Application of Funds Fixed assets Tangible assets – at cost Less Depreciation Net block Add: Capital work-in-progress Intangible assets 33.12 17,905.03 2,827.53 20,765.68
1,273.31 577.15 696.16 76.56 772.72
Brand equity
Human Resources Investments
7,488.00
10,417.03 33.20 36.81 512.14 1,336.23 872.78 2,721.15 315.25 387.98 2,017.92 20,765.68
Deferred tax assets Current assets, loans and advances
Sundry debtors Cash and bank balances Loans and advances Less: Current liabilities Provisions Net current assets
4
Note: This balance sheet is provided for the purpose of information only. The management accepts no responsibility for any direct, indirect or consequential losses or damages suffered by any person relying on the same. 2. Capital reserves include the value of the “Infosys” brand and human resources 3. The figures above are based on India GAAP financial statements. ______________________________________________________________________ This is an internal document of Infosys company, which is used for discussion in the Brand management class, TAPMI, Manipal. 1.
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doc_401729657.doc
The objective of documentation is about brand valuation at infosys.
BRAND VALUATION AT INFOSYS
The strength of the invisible 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 hi-tech company. Hence, quite often, the search for the added value invariably leads us back to understanding, evaluating and enhancing the intangible assets of the business. From time to time, Infosys has used various models for evaluating assets off the balance sheet to bring certain advances in financial reporting form the realm of research to the notice of the shareholders. Such an exercise also helps the Infosys management in understanding the components that make up goodwill. The aim of such modelling is to lead the debate on the balance sheet of the next millennium. The Infosys management cautions the investors that these models are still the subject of debate among researchers, and using such models and data in predicting the future of Infosys, or any other company, is risky, and that the Infosys management is not responsible for any direct, indirect or consequential losses suffered by any person using these models or data. Valuing the brand The wave of brand acquisitions in late 1980s exposed the hidden value in highly branded companies and brought brand valuation to the fore. Examples are Nestle buying Rowntree, United Biscuits buying Keebler, etc. An Interbrand study of the acquisitions of 1980s shows that, whereas in 1981, net tangible assets represented 82% of the amount bid for the companies, by 1988 this had fallen to 56%. Thus, it is clear that companies are being acquired for their tangible assets and more for their intangible assets. 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 but 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 edition 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, service, advertising and marketing. It is integral to the quality of client experiences in dealing with the company and its services over a sustained period. Corporate brands and service brands are often perceived to be interchangeable. Both types of brands aim at the enhancement of confidence and the reduction of uncertainty in the quality of what the company offers. Therefore, companies rely heavily on the image and personality they create for their brands, to communicate these qualities to the marketplace. 1
For many businesses, brands have become critical for shareholder wealth creation. Global brands are still the most powerful and sustainable wealth creators in the business world and will continue to be so in the near future. The task of measuring brand value is a complex one. Several models are available for accomplishing this. The most widely used is the brand-earnings-multiple model. There are several variants of this model. For example, by using one of the brand valuation models, Interbrand, a brand consultancy firm, had valued Coca-Cola as the most valued brand in the world for the year 2002 at $69.6 billion, when its market cap was $117.8 billion, on the date of brand valuation. Thus, the brand valuation of Coca-Cola was around 59% of its market cap on the date of valuation. According to the study, due to the current economic climate, 49 of the100 and 7 of the top 10 in their list, fell in value this year. Not surprisingly, the study found that technology companies such as Microsoft, IBM, Intel and Nokia are part of the world’s 10 most valuable brands in 2002. (Source: www.businessweek.com) Goodwill is a nebulous accounting concept that is defined as the premium paid to tangible assets of a company. It is an umbrella concept that transcends components such as brand equity and human resources, and is the result of many corporate attributes including core competency, market leadership, copyrights, trademarks, brands, superior earning power, excellence in management, outstanding workforce, competition, longevity and so on. The management has adapted 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 and published by Business Books Limited, London) to value its corporate brand “Infosys”. The methodology followed for valuing the brand is given below: 1. Determine brand earnings To do this: 1. Determine brand profits by eliminating the non-brand profits from the total profits of the company 2. Restate the historical profits at present-day values 3. Provide for the remuneration of capital to be used of purposes other than promotion of the brand 4. Adjust for taxes 2. Determine the brand-strength or brand-earnings multiple Brand-strength multiple is a function of a multitude of factors such as leadership, stability, market, internationality, trend, support and protection. These factors have been evaluated on a scale of 1 to 100 internally by the Infosys management, based on the information available within the company.
2
3. Compute the brand value by multiplying the brand earnings with the multiple derived in step 2 above.
The computation of brand value is as follows: Year ended March 31 2003 2002 PBIT 1,158.93 943.39 Less: non-brand income Adjusted profit Inflation compound factor at 6% Present value of profits for the brand Weightage factor Three-year average weighted profits Remuneration of capital (5% of average capital employed) Brand-related profits Tax at 36.75% Brand earnings Multiple-applied Brand Value
Assumptions
2001 696.03 53.43 642.60 1.132 727.25 1
89.65 1,069.28 1,000 1,069.28 3 969.19
59.77 883.62 1,064 940.02 2
123.52 845.67 310.78 534.88 14.00 7,488.00
1. Total revenue excluding other income after adjusting for cost of earning such income is brand revenue, since this is an exercise to determine the brand value of Infosys as a company and not for any of its products or services. 2. Inflation is assumed at 6% per annum.
3
3.
5% of the average capital employed is used for purposes other than promotion of the brand. 4. Tax rate is at 36.75% 5. The earnings multiple is based on the ranking of Infosys against the industry average based on certain parameters (exercise undertaken internally and based on available information). 6. The figures above are based on Indian GAAP financial statements. Thus it is interesting to note that while Infosys has a market capitalization of Rs. 26,847 crore as on March 31, 2003, the value of the “Infosys” brand alone is estimated at Rs. 7,488 crore. The corresponding figures for market capitalization and brand value of Infosys as on March 31, 2002 and March 31, 2001 were Rs. 24,654 crore and Rs 7,257 crore and Rs. 26,926 crore and Rs. 5,376 crore, respectively. Balance Sheet (including intangible assets) as at March 31, 2003 Sources of Funds Shareholders’ funds Share Capital Reserves and surplus Capital reserves Revenue Reserves Application of Funds Fixed assets Tangible assets – at cost Less Depreciation Net block Add: Capital work-in-progress Intangible assets 33.12 17,905.03 2,827.53 20,765.68
1,273.31 577.15 696.16 76.56 772.72
Brand equity
Human Resources Investments
7,488.00
10,417.03 33.20 36.81 512.14 1,336.23 872.78 2,721.15 315.25 387.98 2,017.92 20,765.68
Deferred tax assets Current assets, loans and advances
Sundry debtors Cash and bank balances Loans and advances Less: Current liabilities Provisions Net current assets
4
Note: This balance sheet is provided for the purpose of information only. The management accepts no responsibility for any direct, indirect or consequential losses or damages suffered by any person relying on the same. 2. Capital reserves include the value of the “Infosys” brand and human resources 3. The figures above are based on India GAAP financial statements. ______________________________________________________________________ This is an internal document of Infosys company, which is used for discussion in the Brand management class, TAPMI, Manipal. 1.
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doc_401729657.doc