India is world’s number two in intangible value

MUMBAI: I can make a whole lot more money skillfully managing intangible assets than managing tangible assets —Warren Buffet, CEO Berkshire Hathaway.

It’s a wonder that Warren Buffet isn’t managing India Inc. A recent global survey from Brand Finance, which specialises in brand valuation and intangible asset valuation, reveals that India notches the second highest proportion of intangible value. This partly reflects the dominance of the software sector in the Indian stock market. Switzerland leads the pack in the ‘Global Intangible Tracker 2006’ study which covers 5000-plus companies quoted in 25 countries over five years. The headliner: David Haigh, chief executive of Brand Finance says we could easily overtake the leader country over a ten-year period.

Intangibles are not seen and hence often not appreciated. The surveyed companies had a total Enterprise Value of  $36.2 trillion end-2005. But know this, 62% of the value of the world’s quoted companies is now intangible. Advertising is the most intangible sector globally, with all of its value being intangible, and sectors with very high proportions of intangible asset value are media (91% intangible value), pharmaceuticals (89%), reveals the study.

Our drivers of intangible power

It’s not Scotch mist or airy fairy. A panoply of categories and brands is firing India’s intangible-value growth. Says Unni Krishnan, managing director, Brand Finance India: Whilst diversified Indian umbrella brands like Tata, Godrej and Reliance make significant contributions, the rise of sectoral specialists cannot be overlooked. From ICICI in banking and financial services to Jet Airways in airlines, Wipro in IT Services and L&T in construction and engineering, Indian brands are poised to make their mark on the global stage. Even smaller companies like a Ritu Kumar in fashion or PNC in Bollywood are making rapid strides in building brand and IP value.

Haigh lists the main intangible asset categories for India as marketing, artistic, technological, customer and contractual. `` All these areas have powered India to its high position.  However in absolute terms, areas like IT/ Telecoms/ Software; Service/ Outsourcing; Film/ Media and Medical/ Pharmaceutical are likely to create the biggest gains over the next 10 years.’’

His explanation on each:

Marketing: Companies like Reliance, Hutch, Bharti, Tata and Godrej have strong Indian brands which have generated significant brand value in the Indian market.  Most are not well known outside India but this will change organically as Indian companies continue to expand abroad. 

The larger, more sophisticated Indian companies are buying brands and marketing intangibles as well as creating home-grown ones.  For example, Tata bought Typhoo tea in the UK and Godrej bought Erasmic bodycare products and others.  The main difference this will have is that accounting standards require that acquired intangibles are capitalised in balance sheets, so the number and value of disclosed intangible assets will increase.

Artistic: Companies in the film and recorded rights industry create this type of intangible asset.  The accounting standard-setters had Hollywood in mind when thinking of this because Disney and other major Hollywood studies generate huge intangible values from their film and artistic rights.  There are also huge merchandising rights associated with them.  The same value creation opportunity is clearly attached to Bollywood.

Technological: Companies like Ranbaxy have already created huge value in the area of patents and know-how.  It is already the largest supplier of prescription drugs in the US market as measured by volume.  But volume lags value because most of its products are off-patent generics or contract-manufactured.  Ranbaxy has a strategy of creating original pharmaceutical molecules and has thousands of trained pharmacists, engineers and technical people in India to achieve this.

Customer: Companies like WIPRO in the outsourcing business with customers in the developed world have created huge customer relationships which are intangible assets.  These will create a long stream of revenue into the future as they are based on intelligent, low-cost, English-speaking service which India is ideally equipped to provide.

Contractual: Companies like Mittal Steel have massive contracts for raw materials and supply of finished steel.  These often have huge embedded value.  One other intangible asset in this area is ‘assembled workforce’.  In the case of India the quality of assembled workforce is one of the most powerful assets for the future.  At a national level this is perhaps the most important intangible asset as many of the others come from this source.