How Can Two Ratings Agencies Value the Kingfisher Brand So Differently? - The 5 Minute WrapUp by Equitymaster
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How Can Two Ratings Agencies Value the Kingfisher Brand So Differently?

Mar 23, 2016

In this issue:
» Why buybacks by PSUs makes sense
» Jim Rogers' take on how to beat volatility
» Market roundup
» ...and more!
Madhu Gupta, Research analyst

A lot has been said about Vijay Mallya's airline business misadventure that left the banks thousands of crores poorer.

And now begins the blame game...

The buck is being passed from the now grounded airline to banks that lent and now to the Reserve Bank of India, whose corporate debt restructuring scheme in 2008 was seen as a signal to lenders to go easy on large corporate borrowings.

The latest to be caught in the ire are the rating agencies that overvalued the Kingfisher brand.

In the eye of the storm is Grant Thornton India. The valuation agency assigned a huge value of Rs 41 billion to the KingFisher Airlines (KFA) brand back in 2010.

What set off the alarm, rather late in this case, is that the brand was valued much lower... at Rs 2 billion... by another rating agency in 2013. This agency was appointed by one of the lenders, State Bank of India.

Both the Serious Fraud and Investigation Office and Central Bureau of Investigations have recently questioned the initial high valuation.

The huge gap in the two valuations has sparked debate on the sanctity of brand valuation methods. Since the brand was used as a collateral, the overestimation of its value, is a big reason the lenders are in such a mess.

The brand or franchise value, is one of the most effective moats a company can have.

Warren Buffett swears by branded consumer goods companies such as Coca Cola, See's Candy, and Heinz.

Strong brands are equipped with high power of association and recall value. This in turn imparts consumer loyalty and pricing power to a company's products.

So branded consumer goods companies earn huge shareholder returns.

However, brands do not have a tangible existence on the balance sheet. And so its monetary value can only be known when the brand is revalued or sold, meaning a brand's value remains open to subjective assessment.

There is no doubt that companies with established brands can be great defensive investments even in volatile times. That's why, most of them trade at huge valuations. But sometimes the high valuations are driven more by perception rather than the underlying fundamentals. And that's why the stocks of these companies tend to offer a low margin of safety.

Are branded consumer goods companies expensive?
Company Name Return on Networth (%)* Trailing Twelve Months PE (times)
Britannia Industries Ltd. 59.4 45.7
Colgate-Palmolive (India) Ltd. 81.6 38.9
Dabur India Ltd. 37.2 50.8
Glaxosmithkline Consumer Healthcare Ltd. 29.7 35.8
Godrej Consumer Products Ltd. 20.5 63.1
Hindustan Unilever Ltd. 124.8 45.6
Marico Ltd. 25.3 46.1
Nestle India Ltd. 45.5 89.0
Page Industries Ltd. 58.0 58.5
Procter & Gamble Hygiene & Health Care Ltd. 31.0 49.4

Source: Ace Equity
* FY15 financials

The team at StockSelect takes a conservative approach to evaluating branded goods companies. They don't believe in valuing brands separately. Yes, they will assign a relatively higher valuation to a company with strong brands... but only after the brand is proven to add to the company's return on capital on a long-term basis.

To blindly assign a value to a brand when it has no impact on the company's bottomline or return on capital is a recipe for disaster.

Do you think that brands always deserve huge valuations? Let us know your comments or share your views in the Equitymaster Club.

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Editor's note: There will be no issue on The 5 Minute Wrapup on 24th, 25th and 26th March 2016. We wish our readers a very happy Holi and Easter!

2:00 Chart of the Day

PSU stake sale in a bull market is certainly a good bang for the buck. Stocks generally tend to trade expensive in a bull market and therefore, offloading them makes perfect sense. But what about a bear market? Since Government needs to raise money across market cycles, a bear market could throw spanner in their works. The Government may not want to sell their trophy assets at throwaway prices. This is where stock buybacks come in. Stock buybacks is a great way to raise money in a bear market. Even Warren Buffett is of a similar opinion. He has often said that stock buybacks make perfect sense when a stock sells in the market below its intrinsic value. And this could indeed be true for most good quality PSUs today.

However, there's a second condition that also needs to be satisfied. The company should have enough availability of funds in order to carry out the buyback exercise. Do PSUs satisfy this criterion as well? As today's chart of the day highlights, a lot of PSUs certainly do. Coal India has close to Rs 550 bn worth of cash and equivalents sitting on its balance sheet. Others like ONGC, NMDC and NTPC are no slouches either. We are of the view that most of these companies have enough cash beyond the capital expenditure needs and therefore, buying back should make great sense.

Will Government Go The Buyback Route?


In the current turbulent times, it pays to listen to the big guns of investing. Jim Rogers is certainly one of them. The maverick investor doesn't like what he is seeing these days.

He believes the world will have serious problems because of the massive debt build-up in recent years. And this time, even Asia is going to be hit hard as the savings cushion is all gone.

His choice of asset class is a little surprising though. Rogers is long US currency and short US stocks. The short position in US stocks is understandable. It is the interest in US currencies that's a little surprising. After all, he's been a big bear on the US dollar in light of the tremendous debt the US Government has amassed.


Meanwhile, Indian stocks traded weak today with the Sensex lower by around 96 points at the time of writing. The BSE Mid cap and BSE Small cap indices were seen bucking the trend as they were up but only marginally. The sectors that were the worst hit were consumer durables and energy. Metal stocks on the other hand were trading in the positive.

4:50 Today's Investing mantra

"If calculus or algebra were required to be a great investor, I'd have to go back to delivering newspapers." - Warren Buffett

This edition of The 5 Minute WrapUp is authored by Madhu Gupta (Research Analyst) and Rahul Shah (Research Analyst).

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2 Responses to "How Can Two Ratings Agencies Value the Kingfisher Brand So Differently?"


Mar 30, 2016

Misleading title please!!
Kindly know the difference between a rating agency and a consulting/audit firm. Grant Thorton is a consulting cum audit firm. And secondly, you haven't named the 'other rating agency' that valued KFA in 2013.


Gurunath Malvankar

Mar 24, 2016

Very interesting article on how valuation of brands can differ so vastly. But moot point is that brand has value so long as the underlying business is running. Banker's made blunder in accepting brand as collateral in case of KFA as company started in the year 2005 was incurring heavy losses continuously for more than 5 years when brand was valued in the year 2010. When survival of the business is in question what value the brand has?.
Basically banks extend finance to industries to create assets either fixed assets or productive current assets. In the case of KFA, for the reasons best known to bankers ,finance was given against accumulated losses and business expenses ( which in fact are fictitious assets ) that to against fictitious security like brand sidelining all basic banking norms. This is aspect is to be probed in and guilty punished so that there would be no repeat of such incidences in future.

Gurunath Malvankar - ex banker.

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Equitymaster requests your view! Post a comment on "How Can Two Ratings Agencies Value the Kingfisher Brand So Differently?". Click here!
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