Brand Conscious

Gitanjali Gems has just announced that it has undertaken a major brand valuation exercise for the valuation of its top four brands, namely, Gili, Nakshatra, D’damas and Asmi. The evaluation was done by Brand Finance, a UK-based firm specialising in marketing and brand valuation. Together, these four brands have been valued at a whopping Rs1,502 crore. How should we interpret this data?

Companies are known to have a penchant for glorifying brand values and brandishing them in front of customers and shareholders. This exercise might make some sense to the company management, but the relevance for its shareholders is questionable. Gitanjali Gems Limited is the latest to have undertaken what is essentially an exercise in futility.
 
Apparently, Gitanjali’s motive behind this exercise was to identify the demand drivers for its brands and further enhance value through improvements in brand operations. The company is gearing towards improving the brand value, not just sales. It aims to multiply the brand value by 1.5 to 2 times by 2011-2012. No doubt that some of these brands are household names in India, but their ability to create value for the shareholders is highly suspect. A look at the last year’s financial results of the company points to the true picture. Gitanjali had a pre-tax profit of Rs158.45 crore which includes profits from its both branded and non-branded sales. That profit comes to 10.5% of the brand value—not very high from what a long-term return from safe financial assets would fetch. Besides, the company’s return on assets stood at a measly 3.25%. Return on capital employed is just 5.83%. If the company’s return on its brands is anything to go by, there is nothing to boast about. Its sales growth over the past few quarters has been erratic at best.
 
A company may score high in all brand surveys, but what matters most is whether this translates into returns. Brands themselves don’t create shareholder value, only financial returns do. In the end, brands signify nothing more than familiarity and name recognition. They have little to do with the earnings and cash flows of the company, which ultimately drive the market value higher. Product familiarity among consumers has no significance on financial returns for investors. The Gitanjali Gems exercise in brand valuation merely underlines this phenomenon. Its brands command recognition due to the company’s heavy promotional and advertisement activities. The impact on the earnings however is not that significant. The fact is, brand valuations by managements are often an exercise in narcissism.

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Scooty, Passion Pro and Access zoom ahead in Activa's absence
The strike and production cut at Honda Motorcycle & Scooter India Pvt Ltd (HMSI) has created an opportunity for other two-wheeler makers to sell more units during the festival season. In the absence of Honda’s flagship Activa, there has been an increased demand for other scooters like Scooty Pep, Passion Pro and Access.
 
The labour strike at HMSI's Manesar facility has forced the company to cut down production by more than 50% and it had even threatened to move to an alternate location. "HMSI dealers are under-stocked for the festive season. Demand for our products has gone up during to festive season but at the same time our production also fell due to the strike and it will have a direct impact on our sales," said a company official.
 
In normal days, HMSI's flagship Activa has a waiting period of 30 days, but owing to the labour problem, the waiting period could be double that duration, the official added.
 
According to some reports, HMSI's production has come down to half of its daily capacity of 4,200 units. HMSI has so far invested Rs10 billion in India and has an annual capacity of 1 million units, which it had planned to increase to 1.5 million units in the next three years.This shortage has created a demand for two-wheelers from other manufacturers like Hero Honda Motors Ltd, Bajaj Auto Ltd and TVS Motors Ltd.
 
“There is surely a demand currently, but this is due to the industry buoyancy and not because a competitor manufacturer is facing difficulties at their plant. I am sure they will find out a way soon. We are not looking at the deficit that would be created due to the problem,” said Millind Bade, general manager, marketing, Bajaj Auto. While availability of Honda models like Activa and Honda Shine have been adversely affected, business for TVS, Hero Honda and Suzuki is looking up. Two-wheelers like Scooty Pep, Passion Pro and Access are much in demand in the festive season.
 
“Activa will not be available for the next three to four months and at present the demand for scooters like TVS's Scooty Pep and Suzuki's Access is high,” said a Mumbai-based dealer. “Acitva and other Honda models will be available only after Diwali. There is a great demand for Hero Honda Passion Pro,” added another dealer.
 
Motilal Oswal Securities Ltd, in a report said, "While the below average monsoon coupled with hardening of interest rates might have an impact on demand in the second half of FY10, there has been no visible impact of poor monsoon on demand yet."
 
"Apart from conducive macro scenario in terms of better credit availability, lower interest rates and improved consumer sentiments, the second quarter of FY10 witnessed pre-festive inventory build-up leading to robust volumes for auto companies. Newly launched products in recent months also gave a boost to the growth on a year-on-year basis,” said Sharekhan Ltd in a report. 
 
During September, total two-wheeler volumes rose 7% year-on-year with Bajaj Auto clocking 15% growth on the success of its new launches. Hero Honda, however, reported a muted 4% growth due to some issues with its suppliers.
 
Last year, HMSI sold about 1.1 million units and was planning to increase production to 1.5 million units with the help of a third assembly line, but owing to the labour problems the company could not operationalise this facility. "We have approached the government, the court, the labour department. The talks are on. They have issued a notice to the workers’ union because this is against the Industrial Disputes Act. Workers have to answer why they have gone for the slowdown in production," the official said.
 
Labour problems at HSMI are not new. After the violent strike at HMSI that rocked Gurgaon in 2005, HMSI and the workers union had signed a long-term agreement in 2006 that expired in July. Since then, the workers and the management have been re-negotiating the terms and conditions.
 
Officials from Hero Honda and TVS Motors were not immediately available for comments.

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Exchanges bear the brunt

The market downturn last year had not just left the investors sweating. The stock exchanges too had to suffer through a decline in turnover and volumes. The fall in the volume of trading activity was reflected in the decline in income from transaction charges. For the National Stock Exchange (NSE), this contributes 56% of total income, and it fell 23% in FY2008-09. The Bombay Stock Exchange’s (BSE) income from transaction charges fell 30%.

Last year also witnessed little action on the IPO front and this was reflected in the fall in book-building fees. NSE’s book-building fees fell 92% in FY2008-09 while BSE recorded an 86% decline. While NSE recorded a small drop in total income, BSE’s total income remained largely unchanged. This was mainly due to the fact that BSE had a larger cushion from income from investments and deposits. Income interest grew by a whopping 231% for BSE whereas for NSE it grew by 63%. BSE’s total income was also supported by income from other services, which grew 56%.

In line with the reduced trading activity, BSE recorded a significant reduction in expenditure. But the same did not hold true for NSE. While BSE’s total expenses fell 31%, NSE’s expenses grew 15% over the year. NSE’s expenses were higher on account of higher spend on employee and administration expenses.
– Debashis Basu with Sanket Dhanorkar  [email protected]

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