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FINANCIAL EVALUATION OF BRAND EQUITY WITH REFERENCE TO

SELECT INDIAN AUTOMOBILE INDUSTRY

Dr.V.Shanmugasundaram1 S.N.Selvaraj

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ABSTRACT

In the vibrant situation of efficient market and with the increasing apprehension of

quality, brand and brand administration have become a principal component of the corporate

procedure. Brand is a peculiar name and a symbol, logo, trademark, package and design

intended to identify the goods or services of either seller or a group of seller and to

differentiate these goods and services from those of competitors and brand loyalty cognitive

adherence to the combination of characteristic of a branded product focusing on the

evaluation of brand. Evaluation of a firm in terms of financial performance to withstand

brand image has become imperative in the present environment of business. The potentiality

of a firm appears in its brand which is an index of strong and successful existence. The final

comparative value can then be used to guide brand management, so businesses can make

better, more informed decisions. There are three key aspects that contribute to the

assessment: the financial performance of the branded products or services, the role of brand

in the purchase decision process, and the strength of the brand. The paper articulates the

Inter-brand method for Brand Valuation to evaluate brand equity of selected automobile

companies in India.

Keywords: Financial Evaluation, Brand Equity, Cost Based, Inter-brand, Brand Image

Introduction

In the vibrant situation of efficient market and with the increasing apprehension of

quality, brand and brand administration have become a principal component of the corporate

procedure. Brand is a peculiar name and a symbol, logo, trademark, package and design

intended to identify the goods or services of either seller or a group of seller and to

differentiate these goods and services from those of competitors and brand loyalty cognitive

adherence to the combination of characteristic of a branded product focusing on the

evaluation of brand. Evaluation of a firm in terms of financial performance to sustain brand

image has become imperative in the present environment of business. The potentiality of a

1 HOD, Dept of Management Studies, ARM College of Engineering & Technology, Chennai

2 Assistant Professor, Dept of Management Studies, ARM College of Engineering & Technology, Chennai

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firm appears in its brand which is an index of strong and successful existence. There are

various methods developed for valuing brand equity. They are cost based approaches,

market-method and Inter-brand method. Inter-brand has been adjudged as widely used

method to ascertain brand strength and to arrive at brand value.

Major Automobile Manufacturers in India

There are many companies producing cars such as Maruti, Tata, Hyundai, Ford,

Honda, Toyota, Chevrolet etc. in the Indian market. The top leaders in this domain are

Maruti, Tata and Hyundai as these companies have high market share of 75 percent and

provide acknowledgement confidence, tangible values and status of the society to the

customers and to the value, utility, life, pride which proceeds towards giving a brand name to

its product. This study focuses only three companies such as Maruti Suzuki India Limited,

Tata Motors India Limited and Hyundai Motor India Limited.

Hit by adverse foreign exchange fluctuations and higher input costs, the country‘s

largest car maker Maruti Suzuki India Limited (MSIL) is looking at reducing its buying costs

by three percent every year to improve profit margins. To reduce exposure to Forex

fluctuations, the company may decide to cut down direct and indirect imports of their

products. These cost-cuts are followed to boost up the margins during the fiscal period.

Maruti Suzuki India Limited is the premier car company in India. Maruti Udyog Limited

(MUL) was established in February 1981. The company entered into collaboration with

Suzuki Motor Corporation of Japan to manufacture cars. Maruti is the highest volume car

manufacturer in Asia, outside Japan and Korea. Despite there being around 19 companies

now in the passenger car market in India, Maruti holds about 40% of the total market share.

Maruti Udyog holds about 40% of the total market share. Maruti Udyog Limited has

many unique service advantages for the customers. On 17th

September 2007, Maruti Udyog

was renamed as Suzuki India Limited. Both in terms of volume of vehicles sold and revenue

earned, the company is India‘s leading automobile manufacturer and the market leader in the

car segment. It has bagged the First Position in JD Power Customer Satisfaction Index for

the last consecutive ten years. The company has also ranked highest in the India Sales

Satisfaction Study. The models of Maruti Udyog Limited cars are Maruti 800, Maruti Alto,

Maruti Zen Classic, Maruti Esteem, Maruti Gypsy, Omni, Wagon R, Versa, Baleno, Swift,

Ritz, Sx4, Zen Estilo, Dzire, Grand Vitara, etc.

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Tata Motors Limited is India‘s largest automobile company with large revenues. It

ranks first in the category of commercial vehicles and the second largest in the passenger

vehicles, mid size car and utility vehicle segments. The company is the world‘s fifth largest

medium and heavy commercial vehicle manufacturer. Over 3.5 million Tata vehicles are

moving on Indian roads since 1954. The models of the company are Tata Indigo, Tata

Indica, Tata Sumo, Tata Safari, Tata Nano, Tata Vista, Tata Indigo Marina, etc.

Hyundai Motor India Limited (MHIL) was established in 1996 and is a wholly owned

subsidiary of South Korean multi national, Hyundai Motor Company. MHIL is the fastest

growing and the second largest car manufacturer in India and presently selling 30 variants of

passenger cars in six segments. The company has set up more than 70 dealer workshops that

are equipped with the latest technology, machinery and international quality press, body and

paint shops across the country, thereby providing a one-stop shop for a Hyundai customer.

Hyundai also has a fleet of 78 emergency road service cars that can provide emergency

service to all it customer anytime, anywhere. The models of Hyundai are Santro, Getz,

Accent, Elantra, Sonata, Tucson and Terracan. The new models of Hyundai Motors are

Verna, Getz next generation, Hyundai i10, i20, Santa Fe, etc.

Brand Valuation

Role of brand measures the portion of the decision to purchase that is attributable to

brand—this is exclusive of other aspects of the offer like price or feature. Conceptually, role

of brand reflects the portion of demand for a branded product or service that exceeds what the

demand would be for the same product or service if it were unbranded. In today‘s business

arena, brand valuation plays a key role. The intellectual properties of the business like

patents, copyrights, design, trademarks are getting greater importance. The valuation of such

intangible assets processes towards the brand valuation. It is most frequently used in some

sort of transaction including balance sheet. ―Brand valuation is the process of assigning

financial value of brand. As the brand value is the net present value (NPV) of the forecast

brand earnings, discounted by the brand discount rate (Inter-brand).

The value brand depends both on a good and a strong financial performance and the

result of owing powerful brand is the increased shareholders value‖. The brand value does

not depend only on the consumer‘s behavior, therefore, it is crucial to conceptualize brand

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value creation process and develop adequate quantity methods of measuring brand value. A

brand is an index of how strong a firm is. There are various methods which have been

proposed for valuating a brand. These include cost based method, market-based method,

royalty method, discounted cash flow method and inter-brand method. Inter-brand has also

proposed a procedure. It has based brand strength to arrive at brand valuation.

Cost Based Method: Typically, cost-based brand valuation methods take into

consideration the costs that have been incurred by the company to create the brand. These

methods are not forward looking. Rather, they look backwards into history. The cost-based

method is conceptually the least defensible. It is perhaps the weakest. In order to arrive at

the value of all costs including advertising, promotions, research and development, that have

gone into brand creating are added and converted into current prices. For instance, for an

imaginary brand like ‗Rootsa‘, Rs.50 crores was spent in brand building. According to cost

method, the brand‘s value would be 50 crores.

Market Based Method: Consider how various things are traded on the basis of market

price. For instance, if a Maruti 800 car is available for sale, how does one calculate its price?

The immediate point of reference that is taken for arriving at its value is the year of its

purchase and the price at which other cars are sold or bought with the same characteristics.

The price which is generally quoted is above, equal to or less than the average price of similar

models. Here, the value is determined by making a reference to the price of comparable

brands in recent transactions.

Royalty Method: In this method, the brand value is estimated by the royalty income

that a brand would generate if it is licensed out to another party. For instance, what would be

the brand value of Nescafe brand for Nestle? Or in other words, how much royalty would

Nestle have to pay to a third party if it did not have its own coffee brand and desired to use

Nescafe? The royalties in this method are added for a specific period in future and then added

and discounted to arrive at the net present value. This method of brand valuation is quite

popular among accounting firms. There are two important dimensions of this method: the

expected future sales or forecast sale and the royalty rate. Both these numbers need extreme

caution in it calculation. A wrong sales projection or incorrect royalty rate that is applied to

the sales may throw the whole brand valuation exercise out of gear. Therefore, while

calculating the royalty rate applicable to brand sales, a reference has to be made with

reference to the industry scenario, characteristics of comparative licensing arrangement,

nature of business, speculative or established etc.

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Discounted Cash Flow Method: This method takes the brand as an asset. ‗An asset is

something which is useful to the business because of its unique capability to generate

revenues or profits in future. The economic value of an asset to a great extend depends on

the revenue or profit stream which is associated with it. The discounted cash flow method of

branch valuation takes the brand as an asset.‖ It is to be observed that the brand ownership

brings cash flows or returns. The estimation of the return from brand ownership is what is

aimed at in this technique of brand valuation?

Inter Brand Method: This method of valuation is a kind of discounted cash flow

method. Historical earnings are not sufficient for valuing the brand because past earnings

may not provide authentic and reliable indication of a brand‘s future performance. Therefore,

this method relies on future cash flows which could be associated with the brand.

The Inter-brand procedure includes the following steps.

First, the percentage of revenues which could be accounted for by the brand from the

total earnings of the business is figured out.

Secondly, with the help of experts, projections are made about the net earnings of that

business.

Thirdly, earning due intangible factors is found out. This is done by deducting a

charge for the ownership of tangible assets.

Their contribution to the earnings is deducted. The residual is earnings generated by

intangible assets like patents brand etc. The final step is to identify the earnings of intangible

assets. The issue is something like this: when we buy groceries from a store, is the earning to

the store due to brand name or its physical location which provides convenience to

customers. Inter-brand‘s method looks at the ongoing investment and management of the

brand as a business asset. This means that our method takes into account all the many ways in

which a brand touches and benefits its organization -- from attracting and retaining talent to

delivering on customer expectations. The final value can then be used to guide brand

management, so businesses can make better, more informed decisions.

Brand Strength

Brand strength measures the ability of the brand to secure the delivery of expected

future earnings. Brand strength is reported on a 0 to 100 scale, where 100 are perfect, based

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on an evaluation across 10 dimensions of brand activation. Performance in these dimensions

is judged relative to other brands in the industry, and in the case of exceptional brands,

relative to other world-class brands. The brand strength inversely determines, through a

proprietary algorithm, a discount rate. That rate is used to discount branded earnings back to

a present value based on the likelihood that the brand will be able to withstand challenges and

deliver the expected earnings.

Brand Equity Evaluation

Brand value is the net present value of future earnings generated by the brand alone.

The Inter-brand method is based on three economic functions of the brand: (a) cost synergies,

(b) demand generation and (c) secured future demand (thereby reduce operative and financial

risk). The brand evaluation process consists of the following five significant factors.

Segmentation

Financial Analysis

Demand Analysis

Brand Strength Analysis

Net Present Value

Some brands are strong and some brands are weak. Strong brands signify strength

and certainty in future earnings. In weak brands, future earnings tend to be shrouded with

uncertainties. The final step in the Inter-brand valuation method is to calculate the brand

strength. These brand strength factors are:

1. Market Characteristics – Brands in growing markets are better and stronger than

declining or trend based markets.

2. Stability – Established and familiar brands tend to be stronger and enjoy customer

loyalty.

3. Leadership – Leading brands in the product category are stronger. They are better

positioned to influence the market they operate in.

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4. Internationality – This signifies a brand‘s acceptance in other markets. Widely

accepted brands can always offset misfortune in one market with gains in the other

markets.

5. Trend – What is brand‘s performance over time? Consistent brands exhibit their

relevance to customers.

6. Support – How consistently has the brand been supported by the company? It is not a

matter of one time investment in the brand, rather quality and consistency of

investments made in the brand matter.

7. Protection – Protected brands are stronger. Brand protection is brand strength.

These seven dimensions of brand strength criteria are not equally weighted. Rather, a total

score is divided amongst these dimensions on the basis of their importance.

Methodology

It is an analytical study based on secondary information disclosed by the selected car

manufacturing units. Among the several models of competing Brand Equity, Inter-brand

method is widely adopted. Hence, the researchers used the Inter-brand method for computing

Brand Equity of the selected car manufacturing units. It is based up on the application of

brand strength assessment because they require a complete and comprehensive brand analysis

and then to balance that valuation against the other less comprehensive methods to set final

brand value. Financial performance measures an organization‘s raw financial return to the

investors. But for brand equity valuation, the concept of economic profit has been used

which is a concept akin to EVA. The study period was considered from 2009-2013.

For the purpose of rankings, the capital charge rate is set by the industry weighted

average cost of capital (WACC). The financial performance is analyzed for a five-year

forecast and for a terminal value. The terminal value represents the brand‘s expected

performance beyond the forecast period. The economic profit that is calculated is then

multiplied against the role of brand to determine the branded earnings that contribute to the

total valuation.

Analysis and Discussion

Brand Equity has been valued by adding Discount Brand earnings and Terminal Brand

Value. The basic assumptions laid down for adopting this model are:

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(a) The average annual growth rate of the car industry 3%

(b) The Weighted Average Cost of Capital 15%

(c) The Capital charged @ 7%

(d) Terminal Value = CF/(r–g)n

Table 1

Valuation of Maruti Suzuki Brand

Rs. in Crore

Particulars 2009 2010 2011 2012 2013

NOPAT 1201.0 1577.2 1748.1 1230.9 2522.6

Capital Employed 5579.5 7559.5 9408.8 10144.2 12783.1

Capital Charged @ 7% 390.6 529.2 658.6 710.1 894.8

Intangible Earnings 810.4 1048.0 1089.5 520.8 1627.8

Role of Branding Index @ 79%

Brand Earnings 640.2 828.0 860.7 411.4 1285.9

Brand Discount rate @ 15% 96.0 124.2 129.1 61.7 192.9

Discounted Brand Earnings 544.2 703.8 731.6 349.7 1093.0

NPV of Discounted Brand Earnings 3422.3

NPV of Terminal Brand Value 10101.4

Brand Value 13523.7 Source: www.marutisuzuki.com [NOPAT – Net Operating Profit after Tax; NPV – Net Present Value]

Table 2

Valuation of Hyundai Motors Brand

Rs. in Crore

Particulars 2009 2010 2011 2012 2013

NOPAT 411.0 530.4 471.4 519.2 197.6

Capital Employed 1967.5 2602.7 4455.5 6198.5 7347.3

Capital Charged @ 7% 137.7 182.2 311.9 433.9 514.3

Intangible Earnings 273.2 348.2 159.5 85.3 −316.8

Role of Branding Index @ 79%

Brand Earnings 215.9 275.0 126.0 67.4 −250.2

Brand Discount rate @ 15% 32.4 41.3 18.9 10.1 −37.5

Discounted Brand Earnings 183.5 233.8 107.1 57.3 −212.7

NPV of Discounted Brand Earnings 369.0

NPV of Terminal Brand Value 2598.1

Brand Value 2967.1 Source: www.hyundaimotors.com [NOPAT – Net Operating Profit after Tax; NPV – Net Present Value]

Further, this model helps the management to review the brand decisions on a

return –on –assets basis which tries to link investment made on a brand to the increments in

brand value over a reasonable period of time. Brand Equity valuation using the Inter-brand

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model, reveals the management the disparities between its assumptions and the market

realities pertaining to the brand and also brings the management closer to its consumers and

helps them more responsive to market needs. The cumulative effect of brand value over the

period of last five years has been computed and shows as brand equity of the car unit. When

comparing the results of Brand Equity value of three car units, Maruti has got the highest

value followed by Hyundai and Tata Motors.

Table 3

Valuation of Tata Motors Brand

Rs. in Crore

Particulars 2009 2010 2011 2012 2013

NOPAT 1544.1 1932.4 2049.2 1026.7 2262.4

Capital Employed 8532 10961.4 14235.4 25790 31907.2

Capital Charged @ 7% 597.2 767.3 996.5 1805.3 2233.5

Intangible Earnings 946.8 1165.1 1052.7 −778.6 28.9

Role of Branding Index @ 79%

Brand Earnings 748.0 920.5 831.6 −615.1 22.8

Brand Discount rate @ 15% 112.2 138.1 124.7 −92.3 3.4

Discounted Brand Earnings 635.8 782.4 706.9 −522.9 19.4

NPV of Discounted Brand Earnings 1621.6

NPV of Terminal Brand Value 10754.1

Brand Value 12375.7 Source: www.tatamotors.com [NOPAT – Net Operating Profit after Tax; NPV – Net Present Value]

Conclusion

As global competition becomes tougher and many competitive advantages, such as

technology become more short-term, the brand‘s contribution to shareholder value will

increase. The brand is one of the few assets that can provide long-term competitive

advantage. Despite the commercial importance of brands, the management of them still lags

behind that of their tangible counterparts. Even though measurement has become the mantra

of modern management, it is astonishing how few agreed systems and processes exist to

manage the brand asset. As the importance of intangibles to companies increases, managers

will want to install more value based brand management systems that can align the

management of the brand asset with that of other corporate assets.

The researchers have concluded that brands are one of the most valuable assets of a

company. The financial value is one of the factors which can increase the value of brand

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equity of an organization. Elements that are included in the valuation of brand equity are

changing market share, profit margins, consumer recognition of logos, consumers'

perceptions of quality, etc. The paper highlights the evolving requisite for attaining brand

equity for all types of industries which is used for the selected car companies in India. The

continuous promotion of brand value will formulate the unit to capitalize its brand and gain

Brand Equity. As per the analysis the result displays that Maruti Company is able to

maintain its brand equity constantly followed by Tata Motors.

References

1. ―The Best Global Brands‖, BusinessWeek, 6 August, 2002.ir Kin Michael (1996),

2. ―Brand Valuation‖ in Don Cowley, Understanding brands, NY, Kogan, page185.

3. Business week (2005), the 100 Top Brands, Interbrand citigroup, August 6, 52.

4. Interbrand, Brand Valuation, March 2003, p. 3.

5. PIMS (Profit Impact of Marketing Strategy), ―Evidence on the contribution of

branded consumer business to economic growth,‖ PIMS Europe, London, September

1998.

6. Harsh and Verma (2008), Brand Management, Excel Publication, ND

7. Kevin Lane Keller (2005), Strategic Brand Management, Prentice Hall, NJ

8. Murphy John M (1990), Brand Strategy Camb, England, Director Books.

9. Interbrand (2004), Brand Valuation, April 8.

10. www.interbrand.com

11. www.marutisuzuki.com

12. www.hyundaimotors.com

13. www.tatamotors.com