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. -Sanket Dhanorkar [email protected]