Learning to manage performance assets

How companies can unlock real and lasting value for shareholders

Did you know there are just 1500 listed companies in India with a market value in excess of Rs 100 crore? Even more confounding is the fact that the proportion of companies whose profits can justify their capital employed is just a single percentage point. Or 16 companies to be precise.

Exactly 15 years ago, 12 per cent of the BT500 (Business Today's list of top 500 companies) claimed to have profits in excess of cost of capital employed (Weighted Average Cost of Capital or WACC). Have we turned the clock back on this count? But the bigger issue is whether 'this count' actually matters?

Let's look at the folks who made it to the 16. ITC, HDFC, Asian Paints, Page Apparels (Jockey) and Marico among others - an array of categories from home decor to banking to inner-wear to FMCG. Very different markets, highly competitive, and hence difficult to differentiate on the basis of pure product offering.

How did these companies make the cut? Let's stay with the qualifying metric for a moment. These 16 firms have an earning which exceeds the market cost of all the capital employed in the business. In simple terms their percentage return on capital employed (ROCE) is greater than percentage WACC. The trillion dollar question is why the 16 are an exception.

Now if we were to look at an allied ratio, the mystery may not be so dark. Years ago, in an acrimonious meeting about marketing budget allocations, I had asked a CMO whether it might be okay to include in the measure for return on total assets (ROTA), brands in the denominator. An uproar ensued and the entire marketing department wanted to lynch me. I followed that up with my next suicidal question: Can you generate demand for the business without the brand in play?

I can almost hear you say 'But how do we accurately assess what it's really worth'. That's an easy exit route. Before too long international financial reporting standards will demand that we have a considered view on the value of our intangibles, at least from a governance standpoint. If you acquire a brand for $100 million to improve your market presence or enter a new market, is that not real capital employed? Would you need to measure the efficacy of that money? Then why not the same for your organic brands?

If we go back to the outperformers you will notice that many of them are also regular members of the brand league table. Evidence based on research from North Carolina and Harvard has shown that brands are two-and-a-half times as efficient as the market in creating wealth. Companies that focus on customer engagement tend to provide returns in excess of double the market average. By this I don't mean firms that spend more on media. That's only one element. The list of 16 is focused on owning mindshare, managing high repeat purchase (loyalty) and driving advocacy. In any brand valuation due diligence, these should form the primary pillars of audit. This doesn't happen through increasing media exposure. It needs the firm to evaluate and work on what it means to its customers and its marketing department to be held accountable for the three metrics above all else.

We have in the past encouraged such clients to publish brand value as a part of their annual report. Typically these firms tend to deliver a return on capital in excess of 25 per cent. That's a 1000 basis points above the average market return for India in 2016!

RAMESH JUDE THOMAS
President & chief knowledge officer, EQUITOR Value Advisory