Borrowing against Brands !…Interesting,but Risky area opening out !

For Years ,Brand Valuation has been part of my sessions on Valuation of Equity at BSE and Other Forums….so it was with great Interest that I read the Economic Times Front Page atricle today on ‘Cos flash brands to raise cash’

Strapped for cash,Kingfisher Airlines has managed to Borrow from State Bank of India against it’s Brand of ‘Kingfisher Airlines’ which has been valued at Rs 1900 crs,that’s US $ 391 Million at an Exchange Rate of US $ =Rs 48.50 

Interestingly,Kingfisher Airlines has actually included this Brand Value as an Asset in it’s Balance Sheet…If it had not,then the Debt/Equity ratio would have computed higher….However,It’s probably because the Brand  is shown in the Balance Sheet,that PSU Bank,State Bank of India has been convinced to lend against this Asset

‘Kingfisher Airlines’ is a seperate registered Brand than ‘Kingfisher’ for Beer and Wines…Just a thought…if the Airlines defaults ,then the bank could opt to make the Brand it’s property…It would need to monetise this to recover dues…so it will have to sell the Brand !…to a Competitor Airline or a new Airline maybe !?…does the Borrowing Agreement categorically state that this Brand also include all the licenses and permissions  etc ?…what’s the hairline % taken by the Bank for this Asset value when lending?

Now Brand Value,like Intellectual Property Rights and Goodwill is an Intangible Asset.It normally is never reflected in the Accounts,because no real consideration has been paid for it…Thus this makes this Asset Class,riskier to lend against…It may be difficult to liquidate or realise monies for it in case of default

Being an Intangible,Brand Valuation is one of the most subjective and controversial areas in Valuation…Valuing Tangible Assets is a more objective exercise

Will Banks lend against Brand Value even if it is not reflected in the Books as an Asset !?

Clearly,Corporates appear to be running out of Tangible Assets to pledge or offer as Collateral and therefore borrow against…….They are resorting to prop up their  Brand Values for actual Funds leverage

An interesting Valuation and IPO assignment I was involved in recently,threw up this demand from the Promoters when we were working to price the placement and the IPO…”Does not our Brand count for anything ?”…Of course it did…In fact it is one of India’s largest companies in it’s field and has been in existence for over a hundred years !….but potential buyers were reluctant to negotiate a higher valuation that included,both soft and  hard numbers read more

Mahindra Hoilidays lists above Issue Price of Rs 300 on NSE today….stays and closes above too….but will it continue to stay above ? I continue to say ‘No’

Mahindra Holidays and Resorts India Ltd (MHRIL) was listed on NSE today….It was issued at Rs 300 and the Issue was comfortably oversubscribed

A freak trade saw a High of Rs 374.50 and a low was registered of Rs 311.35…but it closed at Rs 313,towards the Day’s Low

12.74 Million shares were traded and the average price was Rs 325.21 creating a turnover of Rs 414.42 crs

I yet hold a view that this price of Rs 300+ will not hold…my reasons have been spelled out when I reviewed in great detail the IPO on this blog on June 22,2009

So it was with some amusement that I viewed Tarun Kataria of HSBC,the IPO’s Underwriter, spelling out on UTVi this morning,his four reasons why MHRIL has done well on listing and is quoting at Rs 325 ,8% to 9% higher than IPO Price of Rs 300 levels…He was justifying the HSBC philosophy of Leaving something on the table for the Investors

Tarun,this margin has already reduced on the first day itself to below 5% if you take closing price of Rs 313 and I fear that we shall soon get MHRIL below issue Price of Rs 300…..in a sense the price will fall off the table !

Let’s take Tarun’s four reasons why he views MHRIL as a success…His view is in Black while my view on his view is in Red if I disagree and in Green if I tend to Agree

  • MHRIL epitomises Emerging Markets….It’s just a ‘feel good’ perception
  • MHRIL practices financial discipline and good corporate governance….I tend to agree
  • Embedded in MHRIL are the Value Systems of the Mahindra Group….I tend to agree
  • Pricing of MHRIL IPO at Rs 300 was to leave something on the table for the Investors.There was good interest at even top end bookbuilding range of  Rs 325I strongly disagree…even Rs 300 is high…you’ve priced it at 30 times earnings multiples…even with a high Promoter holding of 83 % it will be difficult to hold the Share Price above Rs 300
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    Should you invest in the IPO of Mahindra Holidays & Resorts India Ltd in the Price Band of Rs 275-Rs 325 ?I don’t think you’re missing any Boat here

    13 Years after Mahindra Holidays & Resorts India Ltd (MHRIL) set up,it is coming tomorrow to the Public to raise Equity Funds.It’s in the Business of Vacation Ownership and is a leader in this Field having a market share of over 70%.

    Members are empowered with a right to stay at any of the Company’s resorts,subject to prior reservation, for a period of One to Seven Days during designated months and for a Period of 10,25 or 33 Years depending on which Plan they have joined.For this Right they have paid an average of Rupees Rs 2.5 lakh with options to spread the Payment over as long as even 5 Years…Recognition of Income is a portion of this Fee in the year of Joining,with the rest apportioned over the plan Period

    In these 12 years,the progress has been slow and steady with momentum seen in only the last few years

    As of March 31,2009,it has a cumulative of  92825 Members…..Currently It has 27 resorts,some owned,some on long lease and five on short (under Two year Lease) with 1261 Apartment and cottages across them

    Financial Performance….In FY 09 It earned Rs 80 crs on an equity of Rs 77 crs giving an EPS of just over Rs 10…It’s networth was just under Rs 196 crs giving a Book Value of @ Rs 25

    So do I like the Company ?………Yes

    So do I like the IPO ?……..No

    So would I rather be a Member of MHRIL than a Shareholder ?……….Neither

    Why is that ?……Well,both issues should be evaluated seperately

    Let’s take the prospect of being a Shareholder first

    The Pedigree is good and the Prospects are fair…..but the IPO Pricing is expensive…At Rs 275-Rs 325 MHRIL is asking us to pay 30 earnings multiples and 13 Book Multiples on recent performance…That’s HIgh…They are justified in doing this only if they see strong and quicker quantum growth ahead in earnings…I don’t.Their Growth will be constrained by the Apartments and cottages thay have available for right of use…The Object for this Issue reveals that Rs 211 crs are to be spend for Five Properties…to expand at Asthamudi in Kerala and Coorg in Karnataka,to renovate an acquired property in Ooty in Tamil Nadu and to build two new properties in Tungi,near Lonavla in Maharashtra and in Theog,near Simla in Himachal Pradesh…Over Rs 150 crs are for the last two new projects…Rs 111 crs are planned for FY 10 and Rs 93 crs for FY 11,rest later…there are no definitive agreements for the capex spend as of yet…each room would cost an average of @ Rs 50 lakhs and capacity is being projected close to 1600 apartments and cottages within a few years read more