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Brand Valuation of

Airtel

A report
Submitted to
Prof. S. Govindrajan

In partial fulfilment of the requirements of the


course
Brand Management
On
19.09.08

By

Ankita Ghosh (b07006)


Pratik Gupta (b07027)
Raj Kumar Pari (b07030)
Yatharth Bhuwalka (b07050)
CONTENT

 Executive Summary

 Brand Valuation
• Need for Brand Valuation
• Different Models of Brand Valuation

 Price Premia Method


• Rationale
• Methodology
• Findings
• Recommendations

 Discounted Cash Flow Method


• Rationale
• Methodology
• Findings

 Book to Market Method


• Rationale
• Methodology
• Findings
EXECUTIVE SUMMARY
A brand is a name or a symbol - and it’s associated tangible and emotional
attributes - that is intended to identify the goods or services of one seller in order
to differentiate them from those of competitors. At the heart of a brand are
trademark rights. Brand designates a product or service as being different from
competitors' products and services by signaling certain key values specific to a
particular brand. It is the associations which consumers make with the brand that
establish an emotional and a rational 'pact' between the supplier and the
consumer.

Generally, brand valuation are often focused on balance sheet valuations, the
reality is that the majority of valuations are now actually carried out to assist
with brand management and strategy. Companies have recognized the
importance of brand guardianship and management as key to the successful
running of any business. Thus, the values associated with the product or service
is communicated through the brand to the consumer. Consumers no longer want
just a service or product but a relationship based on trust and familiarity. In
return businesses will enjoy an earnings stream secured by loyalty of customers
who have 'bought into' the brand. So brand valuation becomes so important in all
cases.

There are different methods to value a brand, like:


• Cost Based Approach
• Book to Market
• Discounted Cash Flow Method
• Price Premia Model
To measure the brand Airtel we would follow the Book to Market, Discounted
Cash Flow Method and Price Premia method.

Price Premia method: The brand value of Airtel will be tested, by whether or
not the consumers are ready to pay a premium for a pen introduced by Airtel. 50
respondents were interviewed as to know how much price they would pay for a
pen introduced by Airtel, Vodafone, BSNL, Reliance and Tata. Assuming that a
consumer uses 3 pens a month the market size and price premium of each brand
was calculated. It was found that the average price that the respondents were
willing to pay for a new pen was Rs.3.92. If, this same pen were to be introduced
by Airtel, they were ready to pay an average price of Rs. 9.064, which meant that
Airtel enjoyed a price premium of 131.22%. Vodafone commands the highest
premium among all the other brands. The market share of Airtel, in this category,
is Rs. 1359.6 and the value of Brand Airtel is Rs. 771.6.

It was found that Airtel was the leader in all categories of brand image and also
had the highest equity share. It is recommended that Airtel should work more on
building its brand. It should also differentiate its brand, to attract more
customers to pay higher premium.
The next model used is Discounting Cash Flow Method.

DCF method: The DCF method enables in calculating the Present Value (PV) of
the company. Bharti’s flagship brand is Airtel. Here, for the purpose of
calculating the value of the Brand Airtel, it becomes important to find out how
much of the value of the parent company, i.e. Bharti is contributed by its brand,
Airtel.

The overall customer base of Airtel crosses 7.17 crores. It has the highest market
share in the Indian mobile service provider industry. The Telecom Industry is
expected to grow at a CAGR of 26% till 2012. The group found out the PV of the
firm, Bharti. From there we found out the contribution made by the brand, Airtel,
by using the Brand Share Index from the Brand Equity Calculation stage.

Book to market: This model takes into account the Book Value of the company.
It also considers the Market Capitalization of the company, i.e. what is the
current market price if the company were to be sold today. The formula for
calculating book value is
• Book Value= Equity + Reserves and Surplus
• And, Market Capitalisation = No. of issued Shares* Share Price

It was calculated that the average share price of Airtel over the last one year was
Rs. 551. Also, not many shares were issued in 2007 as compared to 2006. The
value of the Brand Airtel as derived was Rs. 93052 crores. This has actually come
down since 2006.

The Brand Value of Airtel as found out by using the different models are as
follows:
Price Premia Book to Discounted Cash
Model Market Flow

Brand Value (Rs) 771.6 53056 Crores 93052 Crores

Brand Valuation
What is a Brand?
A brand is a collection of images and ideas representing an economic producer; more
specifically, it refers to the descriptive verbal attributes and concrete symbols such
as a name, logo, slogan, and design scheme that convey the essence of a company,
product or service. Brand recognition and other reactions are created by the
accumulation of experiences with the specific product or service, both directly
relating to its use, and through the influence of advertising, design, and media
commentary. A brand is a symbolic embodiment of all the information connected to
a company, product or service. A brand serves to create associations and
expectations among products made by a producer. A brand often includes an explicit
logo, fonts, colour schemes, symbols and sound which may be developed to
represent implicit values, ideas, and even personality. The key objective is to create
a relationship of trust. A brand is a future generator of cash flow.

Brand Valuation:
There is now widespread acceptance that brands play an important role in
generating and sustaining the financial performance of businesses. With high levels
of competition and excess capacity in virtually every industry, strong brands help
companies differentiate themselves in the market and communicate why their
products and services are uniquely able to satisfy customer needs. In an
environment in which the functional differences between products and services have
been narrowed to the point of near invisibility by the adoption of Total Quality
Management, brands provide the basis for establishing meaningful differences
between apparently similar offers. Competitive advantage now depends on being
able to satisfy not just the functional requirements of your customers, but also their
more intangible needs. It means understanding not just what your products can do
for them, but also what they can mean to them.
The past 20 years have witnessed a dramatic shift in the sources of value creation
from tangible assets (such as property, plant, equipment and inventory) to intangible
assets (such as skilled employees, patents, business systems and brands). This is
reflected in the growing divergence between the net asset value of companies and
their market capitalisation.

There are a number of recognised methods for valuing trademarks or brands as


defined here. We can look at historic costs – what did it cost to create? In the case of
a brand one can look at what it cost to design, register, and promote the trademarks
and associated rights. Alternatively, one can address what they might cost to
replace. Both the historic cost method and the replacement cost method are
subjective but we are often asked to value this way because courts may want to
know what a brand might cost to create. It is also possible to consider market value,
though frequently there is no market value for intangibles, particularly trademarks
and brands. Generally speaking, therefore, the most productive approach to brand
valuation is to employ an economic use valuation method, of which there are a
number. First there is the price premium or gross margin approach that considers
price premiums or superior margins versus a generic business as the metric for
quantifying the value that the brand contributes. However, the rise of private label
means that it is often hard to identify a generic against which the price or margin
differential should be measured.

Ten years ago Interbrand conducted the first ever brand valuation for Rank Hovis
McDougal. This exercise succeeded in putting the worth of the company's brands as
a figure on the balance sheet. RHM's management wanted this information to fight a
hostile takeover bid. With the brand value information, the RHM board was able to go
back to investors and argue that the bid was too low, and eventually repel it.

It was the wave of brand acquisitions in the late 1980's that exposed the hidden
value in highly branded companies and brought brand valuation to the fore. Some of
these acquisitions included Nestlé buying Rowntree, United Biscuits buying and later
selling Keebler, Grand Metropolitan buying Pillsbury and DANONE buying Nabisco's
European businesses. All these acquisitions were at high multiple price tags.

The amount being paid for the acquisition of a strongly branded company was
increasingly higher than the value of the company's net tangible assets. This
resulted in huge levels of 'goodwill' arising on acquisition. This 'goodwill' actually
disguised a mix of intangible assets - brands, copyrights, patents, customer loyalty,
distribution contracts, staff knowledge, etc.

An Interbrand study of acquisitions in the 1980s showed that, whereas in 1981 net
tangible assets represented 82% (on average) of the amount bid for companies, by
1988 this had fallen to just 56%. It became clear that companies were being
acquired less for their tangible assets and more for their intangible assets.

Why are Brands Valued?


Although public perceptions of brand valuation are often focused on balance sheet
valuations, the reality is that the majority of valuations are now actually carried out
to assist with brand management and strategy. Companies are increasingly
recognising the importance of brand guardianship and management as key to the
successful running of any business.

The values associated with the product or service is communicated through the
brand to the consumer. Consumers no longer want just a service or product but a
relationship based on trust and familiarity. In return businesses will enjoy an
earnings stream secured by loyalty of customers who have 'bought into' the brand.

The Methods of Brand Valuation undertaken by the Group:


There are various methods of valuing a brand. Some of the more popular ones are:
 Cost Based Approach: This approach takes into account all the costs involved
in building the brand. All these expenses are added to arrive at the value of
the brand.

 Book to Market: This method is ideal for single brand companies like Airtel,
Vodafone, etc. In this method the book value of the company is deducted from
its market capitalisation, to arrive at the value of the intangible asset, i.e. the
brand.

 Discounted Cash Flow Method: In this method, the cash flows are estimated
and discounted to come at the Present Value of the firm.

 Price Premia Model: This model helps to assess how much premium a
particular brand can charge from the consumers. This is more applicable to
products, which are more like commodities.
The group chose the Price Premia Model, the DCF model and the Book to
Market Method to come to an approximate valuation of Brand Airtel. Each of the
three models and the methodology adopted is dealt with in details below:

Price Premia Model


Rationale:
The group decided to value the brand Airtel by using the Price Premia Model. The
group decided to test Airtel’s brand value in a category where the offerings are not
very highly differentiated, and has a higher level of brand parity. The group chose
PENS as one such category. Although there are brands available in this category, it is
still a product that is purchased on impulse. Also for this reason, the group focussed
on low priced pens which are more or less a commodity. Here, the brand value of
Airtel will be tested, whether or not the consumers are ready to pay a premium for a
pen introduced by Airtel.

Methodology:
The group interviewed 50 respondents. The respondents were asked the question
that, how much they would pay for a new pen introduced in the market. They were
also asked how much they would pay, if that same pen were to be introduced by
Airtel, Vodafone, Reliance, BSNL, and Tata.

The respondents gave different prices for all the brands. The average price for each
brand was taken. The group took an assumption that the consumers buy 3 pens in a
month. This way the market size of pens as a category was calculated. Also, the
premium that each brand enjoyed was calculated by deducting the average price
that the respondents said they would pay for an unbranded pen from the average
price that the respondents were ready to pay for each brand of pens. Similarly, the
market size of each brand of pens was calculated. This was done by adding the price
premium percentage that each brand enjoyed to the market size of the pen, as a
category, on a whole.

Findings:

Price Premium commanded by each brand


Unbrande Airtel Vodafone BSNL Relianc Tata
d e
Average Price 3.92 9.064 9.62 5.78 6.346 6.44
(Rs.)
Price Premium 131.22% 145.41% 47.45% 61.89% 64.29%
(Rs.)

Market Share and Value of each brand

Unbranded Airtel Vodafon BSNL Relianc Tata


e e
Market Size(Rs.) 588
Market Share (Rs.) 1359.6 1443 867 951.9 966
Value of the brand 771.6 855 279 363.9 378
(Rs.)
Assumptions

No. of pens bought in a month by a consumer 3

The group found out that the average price that the respondents were willing to pay
for a new pen was Rs.3.92. If, this same pen were to be introduced by Airtel, they
were ready to pay an average price of Rs. 9.064, which meant that Airtel enjoyed a
price premium of 131.22%. Vodafone commands the highest premium among all the
other brands.

Also, the market share of Airtel, in this category, is Rs. 1359.6 and the value of Brand
Airtel is Rs. 771.6. Vodafone has the highest market share and brand value followed
by Tata, Reliance and BSNL.

Recommendations:
In the Brand Image part, the group found out that Airtel was the leader in almost all
the four categories, i.e. Differentiation, Relevance, Esteem and Knowledge. Also,
Airtel has the highest Equity Share, as seen in the Brand Equity Measurement. Here
Vodafone takes over in spite of being second in the previous two stages, i.e. Brand
Image and Brand Equity.
Airtel should work more on building its brand. This also holds true in the light of the
exponential boom that the telecom industry is set to face and the heightened
competition there in the market. It should also look at further differentiating its
brand, so that the consumers clearly see a difference and are ready to pay a higher
premium for it.

The Discounted Cash Flow Method


The discounted cash flow (or DCF) approach describes a method of valuing a project,
company, or asset using the concepts of the time value of money. All future cash
flows are estimated and discounted to give them a present value. From the DCF
method we have tried to arrive at the present value of Bharti Airtel and from the
present value of the company we will attribute a share to brand value, which will be
the earnings from the brand value and derive the brand value of Brand Airtel.

Rationale
Discounted cash flow method helps us at arriving at the present value of the future
cash flows. From the DCF method we have tried to arrive at the present value of
Bharti Airtel and from the present value of the company we will attribute a share to
brand value, which will be the earnings from the brand value and derive the brand
value of Brand Airtel. The rationale behind using this method is that it helps at
arriving at comparatively a precise value of Brand Airtel.

Discounted Cash Flow Valuation Method

Crucial Assumption and Explanation


Sales Growth
Overall customer base of Airtel crosses 7.17 crore. It has the highest market share in
the Indian mobile service provider industry; we have assumed that Airtel will grow at
the same rate as the industry grows as it is the largest player in the mobile service
provider industry.

Today, there are more than 225 million telecom subscribers in India. Every month, 6-
7 million new subscribers are added. Upcoming services such as 3G and WiMax will
help to further augment the growth rate.

Furthermore, the Indian economy is slated to sustain its 7-9 per cent growth rate in
the near future. This is supported by the political stability that the country is
experiencing currently. India’s demographic outlook makes it one of the largest
markets in the world. A conducive business environment is also created by a
favourable regulatory regime.

There exists enormous business potential for telecom companies on account of the
country’s low teledensity, which is close to 19 per cent presently. The Indian telecom
industry is growing at the fastest pace in the world and India is projected to be the
second largest telecom market globally by 2010.
The CAGR of the mobile service providers is expected to grow at a CAGR of 26% y-o-
y from 2007 till 2012 (source: Economic times). From CAGR of 26% we expected that
the sales of Airtel will grow at the rate of 26%.

Terminal Growth Rate


We have made are cash flows till the year 2012 then we have planned to take out
the terminal value of the company, for this we will need a terminal growth rate. We
have assumed that the industry will grow at 20 for the next 5 years after 2012 and
then it will grow at 17% for the next 5 years after the 10 years it will grow at rate of
14% for the coming 10 years on that basis we have taken a growth rate of 16.25%
for the company. This figure is based on the assumption that the growth will decline
after a certain point of time; the terminal value is derived by the weighted average
of growth in the periods.

Derivation of the Free Cash Flow


• Net Sales are obtained by multiplying the sales of 2006-07 by the CAGR till
2012 which is 26%. We arrive at the sales for the 5 years.
• Profit After Tax - from the previous year balance sheet we found out the ratio
of PAT to Sales, we found out that Airtel enjoys a 25-26% Profit Margin. Therefore
we obtained the PAT by multiplying the profit margin of 25.8% on sales.

• Gross Assets – we know the figure of Gross Assets to sale for 2007; we keep
this ratio constant and multiply it sales.

• Depreciation –was 9% on the assets for the year 2007, we have kept this
figure to constant till 2012, for obtaining depreciation.

• Working capital is obtained by multiplying net sales with WC/SALES. We know


WC/SALES for 2007 is taken at average of -31.26%. We have kept it constant till
2012. Airtel enjoy a negative working capital which means that its current
liabilities are more than its current assets. This has been a feature for the last
four years.

Thus we can now easily obtain our free cash flow. We have obtained PAT,
depreciation, working capital and capital expenditure.

Therefore: FREE CASH FLOW = PAT + DEPRECIATION - CAPITAL EXPENDITURE -


CHANGE IN WORKING CAPITAL.

• Discount factor is 1/1+ WACC. Weighted average cost of capital.

Derivation of WACC

Cost of Equity (Re)

CAPM = R m + β (R m – R f)

Where,
CAPM = Cost of capital, Re
Rm = Expected Market Return
Rf = Risk free Return
β = beta, sensitivity of stock to market changes

2007
Rm 20%
Beta 1.03
Rf 6%
CAPM 20.42%
One year closing price data for Airtel as well as market were regressed to arrive at
beta values. Expected market return was assumed based on prevalent market
conditions. Risk free rate was considered based on the returns offered by the
government securities.

Cost of Debt

Cost of Debt = Interest Paid / Average debt


The values of interest and total debt are considered from the financials of the
company.

2007
Cost of Debt 5.58%
Interest paid 2820714
Debt for that Year 53108052
Debt for Previous Year 47962908
Average Debt 50535480

WACC is calculated by multiplying the cost of each capital component by its


proportional weight and then summing: Where:

Re = cost of equity
Rd = cost of debt
E = market value of the firm's equity
D = market value of the firm's debt
V=E+D
E/V = percentage of financing that is equity
D/V = percentage of financing that is debt
TC = corporate tax rate
Assumption TC = 30%
We have taken the Re at market value where as the Rd at Book value. The WACC for
2006-07 comes to 20% which is the represents the discounting rate of the DCF.

• Growth has been kept at 16.25% after 2012. This is on the basis of the
assumption on the terminal growth rate.

• Terminal value is: {FCF (1+G)/ (WACC-G} *discount factor.

• We know our DCF and discount factor. Therefore we get our discounted DCF.

• In the end we do: Discounted DCF + TERMINAL VALUE- DEBT.

• FINALLY, we derive the present value of the company.

(All fig in Rs, 000’)

Gross Depreciat Working Discount Discount


Year PAT Assets ion Capital FCF Factor ed DCF
2007 46013712 265099314 23533010 (5563555)
2008 57846147 334025135 29651592 (7010079) 33037161 1.00 33037161
2009 72886145 420871670 37361006 (8832700) 41626823 0.83 34689019
2010 91836543 530298305 47074868 (1112922) 52449797 0.69 36423470
11571404
2011 4 668175864 59314334 (1402277) 66086744 0.58 38244643
14579969
2012 5 841901589 74736061 (1766874) 83269298 0.48 40156876

Discounted DCF (Rs 000’) 182551171


Terminal Value (Rs 000’) 1244863161

Total PV (Rs Cr) 142741

Value of Share (Rs) 752.88

We have managed to take out the present value of the firm from the DCF method
now we will multiply it with the Share Quality Index to find the value of the firm.

We found out the Share Quality Index while finding the Brand Equity of Airtel by the
share tier method. Share Quality Index is true value or equity of the brand in the
marketplace.

Share Quality Index can be found by multiplying the Market Share of Airtel into the
Brand Equity Index of Airtel.
The market share from our survey for Airtel is 68%; we found this out by the total
number of respondents buying Airtel and the amount they spend on mobile usage
per month.

The Brand Equity Index gives us the contribution of loyal customer. From our
question to the respondent, will they continue with the brand which they purchase
we have found out the loyalty contribution and we know on which grid of the quality
and price grid are each of the respondents.

After this exercise we assign weights to the top grid and all the grids Q1P1 has better
weights that Q1P2, these weights are assigned from 5 to 1, 5 being the highest. Now
we know the weights for each grid, we multiply the loyal customers with these
weights. We find out the total of the loyal customers into the weights for the grids,
the total of this gives us the brand equity index for each brand. From the BEI share
we can find the share quality index which is the true value or equity of the brand in
the marketplace. Share quality index can be found by multiplying the brand equity
index into the market share. We find that Airtel has a share quality index of 37.17%.

Brands Market Brand Equity Share Quality


Share Index Index
Airtel 68% 55 37.17%
BSNL 4% 5 0.20%
Reliance 4% 1 0.04%
Vodafone 24% 15 3.60%

Hence,

The Brand Value of Airtel = PV of Airtel * Share Quality Index

Therefore Rs. 142741 Cr * 37.17% = Rs 53056 Cr

The Brand Value of Airtel Stands at Rs 53056 Cr


Book To Market Model
Rationale:
The Book To Market Model has assumed importance due to the Merger & Acquisition
deals which happen regularly these days. This model takes into account the Book
Value of the company. It also considers the Market Capitalisation of the company, i.e.
what is the current market price if the company were to be sold today. The
difference between the Market Capitalisation of a company and its Book Value is
assigned to Intangible Assets. For, a single brand company, this incremental
difference is the value of the Brand.

Methodology:
The group calculated the book value of the company, i.e. Bharti. This was done by
adding the Reserves and Surplus for the year 2007-08 and the Equity of the
company.
The formula for calculating the Book Value is given below:

Book Value= Equity + Reserves and Surplus

The group also calculated the Market Capitalisation of Bharti. This was done by
multiplying the total number of Issued Shares into the average Share Price of Bharti
over the last one year. This data was obtained from secondary sources. The formula
for deriving Market Capitalisation is given below:

Market Capitalisation = No. of issued Shares*


Shares

Findings:

Average Share Price (in Rs.) 551

2007 2006
Equity 18959342000 18938793000
Reserves & Surplus 95173342000 54395531000
No. of shares 1895934157 1893879304

2007 2006
11413268400
Book Value 0 73334324000
10446597205 10435274965
Market Capitalisation 07 04

93052703650 97019317250
Value of the Brand 7 4
Value of the Brand (in
Rs.Cr) 93052 97019
The average share price of Airtel over the last one year was Rs. 551. Also, not many
shares were issued in 2007 as compared to 2006. However there has been a major
increase in the Reserves and Surplus of the company. It is on an expansion mode
and hence is consolidating its surplus. The value of the Brand Airtel as derived was
Rs. 93052 crores. This has actually come down since 2006.