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 Model

Book to Market

Discounted Cash 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

  Unbranded

Airtel Vodafone BSNL Reliance

Tata

Average Price (Rs.)

3.92 9.064 9.62 5.78 6.346 6.44

Price Premium (Rs.)

  131.22%

145.41% 47.45% 61.89% 64.29%

Market Share and Value of each brand

  Unbranded Airtel Vodafone

BSNL Reliance

Tata

Market Size(Rs.) 588          

Market Share (Rs.)   1359.6 1443 867 951.9 966

Value of the brand (Rs.)

  771.6 855 279 363.9 378

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 R m = Expected Market ReturnR f = Risk free Returnβ = beta, sensitivity of stock to market changes

2007Rm 20%Beta 1.03Rf 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 debtThe values of interest and total debt are considered from the financials of the company.

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

Year PATGross Assets

Depreciation

Working Capital FCF

Discount Factor

Discounted 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

2011115714044 668175864 59314334 (1402277) 66086744 0.58 38244643

2012145799695 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

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

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 Share

Brand Equity Index

Share Quality Index

Airtel 68% 55 37.17%BSNL 4% 5 0.20%

Reliance 4% 1 0.04%

Vodafone 24% 15 3.60%

Hence,

Book To Market Model

Market Capitalisation = No. of issued Shares* Shares

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:

Findings:

Average Share Price (in Rs.) 551

  2007 2006

Book Value114132684000 73334324000

Market Capitalisation1044659720507

1043527496504

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

Value of the Brand930527036507

970193172504

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.