VRO PROJECT

Brand
Valuation of
Titan
ANIRUDH S 17/005
USHA BHAKUNI 17/057

Contents
OBJECTIVE ............................................................................................................................................... 2
NEED AND RELEVANCE OF THE STUDY ................................................................................................... 2
PROBLEM IDENTIFICATION AND OBJECTIVES OF THE STUDY................................................................. 2
LITERATURE REVIEW ............................................................................................................................... 2
TITAN COMPANY LTD. ............................................................................................................................. 3
VALUATION OF THE BRAND USING INTERBRAND METHODOLOGY ....................................................... 4
MANAGERIAL FLEXIBILITIES USING REAL OPTIONS ................................................................................ 6
Option to delay expansion ................................................................................................................... 7
Brand extension ................................................................................................................................... 7
CONCLUSION......................................................................................................................................... 10
REFERENCES ....................................................................................................................................... 11

OBJECTIVE
The brand valuation of Titan, a subsidiary of TATA through Real option Brand valuation
methods.

NEED AND RELEVANCE OF THE STUDY

Titan operates in different business segments and is an umbrella brand for several other
brands, making traditional brand valuation methods would lead to undervaluation of the
brand. Further, methods focus on the short-term and not on the long-term value created by
the brand. Hence, the option of strategic flexibility should be explored by using real options.
Real options provide an insight into the future benefits of a brand extension and hence give a
more appropriate view to the managers.

PROBLEM IDENTIFICATION AND OBJECTIVES OF THE STUDY

To analyze the Titan brand with respect product/service expansions and extensions in
recent past and value each individually
To study traditional methods of brand valuation for assessing its pros and cons and for
observing the reduction in brand value for ignoring real options
To study some existing brand valuation methods which incorporates real options and
recommend the most suitable method and perform valuation

LITERATURE REVIEW
In a research paper by Pablo Fernandez, various techniques of valuing brands are analysed
models given by Interbrand, Damodaran, Financial World, etc. All these models are based on
the traditional method of discounting cash flows attributable to the brand. He has evaluated
each method in detail and has given the shortcomings of each.
Lenos Trigeorgis and Francesco Baldi propose a valuation technique for brands using real
options. They value the brand Starbucks as a series of growth options in two scenarios one
with growing business and one when the economic conditions deteriorated. They say that the
brand options are inter-related.
Sam Dias (2002) in his paper says that the brand valuation may be underestimated using the
traditional methods of valuation, as they do not account for the options of brand extension.
Such methods focus on the short-term and not on the long-term value created by the brand.
The flexibility to increase or decrease the brand extensions depending on the future situations
is what makes brand more valuable to the management. Real options can be used to value the
brands in terms of these flexibilities. Real options provide with an insight into the future
benefits of a brand extension. They used the real options to analyse the returns on brand
investments. The authors suggest that the plans to invest in marketing become more
defendable if the future options are also incorporated into them.
Thomas L. Sporleder and Juan Liu (2007) analysed the long term potential of the brand
names in the food processing industry using the method of real options. Value of the growth

options can be a substantial portion of a firms total value. The authors show an empirical
evidence to prove that brand value has a positive effect on the growth options value.
Lenny H. Pattikawa (2006) talks about the factors which influence the value of the options
related to brand extensions. She concluded that the brand extensions for most of the
companies are means to deal with competition, and uncertainty. She drew parallel between an
agent exercising a call option in financial markets and a company deciding for brand
extension.

TITAN COMPANY LTD.

Titan is an Indian manufacturer of watches, precision accessories, sunglasses, jewellery,
fragrances, etc. Titan was found in 1987 as joint venture between Tata group and Tamil Nadu
Industrial Corporation. Presently Titan has four divisions.
Watches
Titan sells its watches in 32 countries and is the market leader in Indian market with a market
share of 60%. There are a wide range of products in this category covering all customer
segments.

Edge for tech savvy people

Nebula exquisite designer watches
Fastrack for youth
Raaga for women
Flip for working professional
Sonata for economy segment
Xylys for premium segment

Watches are sold through exclusive World of Titan showrooms and other 12000 retail
outlets in over 2500 cities in India
Precision Engineering
This Division was started in 2002 to manufacture parts for aerospace
and automotive Industries. The product range includes clocks, pointers, dashboard clusters
like temperature gauge, fuel gauge, gear shift indicators, injection molded plastic
parts, electromechanical assemblies for automobiles and press tool, molds, jigs, fixtures for
other industries.
Jewellery Division
Titan manufactures and sells jewellery under the brand names Tanishq, Goldplus and Zoya.
While Tanishq caters the luxury and premium jewellery market, Goldplus caters the economy
segmets. Zoya is an exclusive diamond collection from Titan. These are sold through
exclusive outlets located all over the country

Eyewear Division
Titan Industries Ltd. ventured into the eyewear segment in March 2007 with Titan Eye +.
Titan Eye + has 228 stores across 78 cities across India. This division offers stylish and
contemporary eyewear as well as prescription lenses. The eyeplus store offers complete eye
checkup and administers prescription lenses following it. The stores also houses famous
international brands like RayBan, Vogue, Espirit, Tommy Hilfiger, Mont Blanc, Bulgari, etc
and sells its products throughout the country through exclusive outlets

Fragrances
In addition to the above division, Titan launched a everyday French luxury perfume line
called Skinn in September 2013. It has been performing well and have already left a mark in
the Indian market.

VALUATION OF THE BRAND USING INTERBRAND METHODOLOGY

The Interbrand valuation considers three aspects of the brand in order to evaluate it
1. Financial power
2. Role of the brand in the buying decision of the customers
3. Future revenues generated by the brand
It considers the brand strength framework to analyse the value of the brand. It uses the DCF
approach.
The financial power of the brand is measured as the economic value added by the brand to
the company. For calculating the economic benefit, the capital cost of generating revenues is
deducted from the net operating profit after tax (NOPAT). The capital cost is set according
to the industry WACC for the company. The economic benefit from the brand is said to be
the Intangible earnings
Intangible earnings = NOPAT Capital Charges
The brand earnings are calculated by multiplying the Intangible earnings with a factor called
Role of the Brand Index.
Brand Earnings = Intangible earnings x Role of the brand
The role of brand measures the degree to which the brand influences the decision to
purchase. It is measured by the brand strength. It has two factors Internal and External. The
internal factors measure the importance of the brand for the parent company. The internal
factors are

Clarity Clarity internally about what the brand stands for.

Commitment This factor deals with the internal commitment of the company to the
brand, regarding what resources are dedicated to the brand.
Protection It deals with how well protected the brand is in terms of legal protection,
propriety, designs, etc.
Responsiveness It measures the ability of the brand to respond to the changes of the
market.

The external factors measure the perception of the brand in the minds of the customers. The
external factors are

Authenticity It means how true the brand stands to its heritage and culture
Relevance It means how relevant are the brands products to the needs of the
customers
Differentiation It means how unique do the customers perceive the brand as
compared to its competitors
Consistency It means how consistent the brand experience is across all the touch
points where the customers come in contact with the brand
Presence It shows the extent to which the brand is available to the customers in
both physical as well as digital space
Understanding It means the what level of in-depth knowledge about the brands
qualities and characteristics do the customers possess

We evaluated these factors using a questionnaire. There were 120 respondents. The
respondents were asked to rate Titan Industries on a scale of 1-5 in these parameters. We
calculated the Role of brand Index by taking a weighted average of the scores in each of the
parameters. The weights were 10% for all the parameters.
Role of the brand = Weighted average (Brand scores)
The role of the brand index for Titan Industries is given below
Titan Industries
Weighted
average
Parameters
scores
Clarity
0.087
Commitment
0.083
Protection
0.087
Responsiveness
0.086
Authenticity
0.084
Relevance
0.081
Differentiation
0.083
Consistency
0.082
Presence
0.086
Understanding
0.082
Role of brand

0.84

The base case value of the brand was evaluated using the DCF methodology. We forecasted
the earnings for the next 5 years, by taking an average of the past 3 years growth rate. The
terminal growth rate was taken to be 2%. The Industry WACC was taken to be 11.2% (capital
charge). The WACC of Titan Industries is calculated to be 17%. The base case Value of the
brand comes to be Rs. 5,174 crores.

MANAGERIAL FLEXIBILITIES USING REAL OPTIONS

The managers of Titan can make crucial decisions regarding the market expansion and brand
extension options available to them. This is equivalent to options in a financial market where
the holder has right to exercise the option or not. This adds substantial value to the brand
equity and cannot be captured by normal DCF or other conventional valuation techniques. So
to incorporate these flexibilities real options has to be used.
Value of Brand = NPV (cash flows) + Options Premium

There are three types of options in undertaking investment decisions. All these may add value
to the project making it a good investment from a bad one.

Option to delay- this option can be used if the firm hold exclusive rights for a given
period giving them the opportunity to invest at a convenient time. Typical valuation
will reject/accept the project based on todays NPV and hence doesnt consider this
extended opportunity which might turn it into a positive NPV one.
Option to expand- this option gives the firm opportunity to take up projects which
will enable them to undertake further valuable projects in the future
Option to abandon- this option enable the firm to forego unprofitable projects in the
future and thereby avoiding loss to shareholder value

Market expansion
Titan has plans to go into the rural markets to expand its markets. Expansion into the rural
areas will help Titan Industries to tap into the potential of the market. This is expected to be
carried out in phases, and would require an investment of Rs 2500 crore(one-time) . The
expansion can be treated as a call option. The decision tree can be built as below

We have projected the revenues and profits for 10 years. We have assumed that the option
has 2 years to expire. The volatility of this expansion project is considered to be a standard
deviation of 30%. The spot price of the option is taken to be the PV of the profits at Titans
WACC. The strike price is the investment requirement. If we see the project, it is a negative
NPV project (NPV = -359.65 cr). However, when the expansion is taken as an option, the
total NPV of the project becomes positive (Option value = Rs 368.65 cr)
Total NPV = NPV without option + Option value
The total NPV comes to be Rs 9.09 crores.
The brand value of Titan Industries should take into consideration the value of this option as
well.
Brand value of Titan Industries = 5174+9.09 = 5183.09 crores

Option to delay expansion

Titan Industries can benefit by delaying the expansion into rural areas. We have considered
delaying by 3 years. During these three years, the rural infrastructure will improve, with
better connectivity and availability of electricity, we suggest that the investment required will
go down to Rs 2000 crore, and the standard deviation will increase to 50%. Assuming the
revenues are same, we get a negative NPV of -208.57 crores. However, the option value
comes out to be 399.28 crore.
Total NPV of the project with option to delay = 191.02 crore.
Therefore, Brand value of Titan Industries with the option to delay = 5174+191.02 =
5365.02 crore.

Brand extension
Titan has been transforming into a lifestyle brand from just selling watches. The present day
portfolio involves watches, jewellery, belts, bags, lenses, eyeglasses, etc. and the recently
launched fragrances. It has explored the possibilities of brand extensions into eye wear,
jewellery, precision equipment, etc. successfully. So we propose the next brand extensions
Titan can perform are the apparel segment and the footwear segment. The fitness of these
extensions are examined below

Complementary- the current portfolio of Titan and the extended segment

complement each other as they satisfy specific needs of customers. Together they
complete the lifestyle segment giving the customer a full range of products. Since
they are in different product classes, there is no threat of cannibalism.
Perception- customers perceive Titan as a stylish and trendy brand which retains an
essence of traditionalism. Launching an apparel brand with the same image will
strengthen customer perception about Titan and increase brand value

Use of existing resources- Titan have over 2500 exclusive outlets in the country as
well as over 11,000 dealerships. The new brand can leverage on this network to
successfully distribute its products. The brand identification, supply chain network,
market expertise are sufficiently high in this case and the new brand can easily exploit
these.

For a start Titan can launch product categories for Mens apparel under the fastrack brand or
under a new brand name. This will give them an opportunity to venture into other segments
in the apparel industry womens wear.
In the footwear segment, the entry can be made through casual footwear and in the future
options to expand in to sports, premium and mass footwear is available.
Apparel Industry Entry
The Indian Textile & apparel Industry is expected to be worth $220 Billion by 2020. The
retail apparel industry consists is expected to be worth $100 Billion by 2020 and about 40%
of this is considered to be in the organized sector. Titan is expecting to enter into particular
segments of Mens apparel market consisting of Tshirts, Jeans, etc.

Market size (in crores)

35000
30000
25000
20000
15000
10000
5000
0

33,096
25,726

7,167

Shirt

Trouser Winter
wear

7,714

Inner
wear

6,171

Suits

6,589

6,001

Tshirts

Denim

5,143

Others

2,028

2,503

Ethinic

Active
wear

Expected CAGR
0.16
0.14
0.12
0.1
0.08
0.06
0.04
0.02
0

14%
10%

9%

Trouser Winter
wear

9%

8%

7%

Shirt

11%

10%

Inner
wear

Suits

Tshirts

Denim

8%

8%

Others

Ethinic

Active
wear

1) If Titan tries to enter is the T-shirt and Denim segment. The market size is 12589 crores
and the expected CAGR for the segments is 10%. Assuming that the brand can capture a
market share of 5% given the highly competitive nature of the segment the
Assuming an investment of 500 crore for building manufacturing facilities and distribution
and a market share capture of 5% the option value with 30% volatility rate is 73 crores
Total NPV = NPV without option + Option value
Total NPV = 26.7 + 73.3 = 100
Brand value of Titan Industries = 5174+ 100 = 5273.08 crores
2) If Titan is entering shirts and trouser segment, whose market size 65000 crores. The

expected CAGR over next 5 years is taken as 9.41%. Assuming Titan can capture a market
share of 2.5% with an investment of 1500 crores the option value is 228.8 crores
Total NPV = NPV without option + Option value
Total NPV = -78.53 + 130.99 = 52.2
Brand value of Titan Industries = 5174+ 52.2 = 5226.2 crores

Footwear Industry
Indian footwear industry is worth around 35,000 crores presently. 70% of this is in the
unorganized sector. Titan is planning to enter casual footwear market and can also expand
into sportswear segment also.

market share
70%
60%
50%
40%
30%
20%
10%
0%
Casual foot wear

Mass footwear

Premium footwear

Sports footwear

The market is expected to grow steadily at the rate of 15% over the years. If Titan is to enter
this segment then it can be assumed it acquires a market share of 5%. The option value is
171.3 crores.
Total NPV = NPV without option + Option value

Total NPV = -1.6 + 171.3 = 169.74

Brand value of Titan Industries = 5174+ 169.74 = 5343.74 crores
Shirt & Trousers
Optionvalue=73
Brand value = 5273cr

DECISION TREE

Brand Extension

Tshirts & Jeans

Optionvalue=130
Brand value = 5226 cr

Footwear
Optionvalue=171.3
Brand value = 5343 cr

Brand Value

Market Expansion

Without delay
Optionvalue=368.6
Brand value = 5183 cr

With delay
Optionvalue=399.3
Brand value = 5365
cr

CONCLUSION
We analysed the brand value of Titan Industries using the Interbrand method. We realised
that the brand value is not dependent only on the present cash flows generated by the brand, it
also depends on the future potential of the brand. We considered the value of the managerial
flexibilities that exist for Titan Industries. These flexibilities add a lot of value to the brand,
and enhance its valuation.

REFERENCES

DIAS, S. and RYALS, L. (2002) Options Theory and Options Thinking in Valuing returns on
Brand Investments and Brand Extensions. Journal of Product and Brand management
[Online] JStor Database. Volume 11, issue 2, pp115-128
SPORLEDER, L. and LIU, J. (2007) Growth-related measures of Brand Equity Elasticity for Food
Firms. International Food and Agribusiness Management Review [Online] JStor Database.
Volume 10, Issue 1
FERNANDEZ, P. (2002) Valuation of Brand and intellectual Capital. Research paper No. 456,
IESE, University of Navarra
PATTIKAWA, L.H. (2006) Modeling Brand Extension as a Real Option: How Expectation,
Competition and Financial Constraints Drive the Timing of Extensions. ERIM Report Series
Research in Management, ERS-2006-030-STR
TRIGEORGIS, L. and BALDI, F. (2010), University of Cyprus
Interbrand website www.interbrand.com
JIA, Y. and ZHANG,W. (2013) Brand Equity Valuation : an Optimized Interbrand Model which
is based on the Consumer Perspective, International Workshop on Social Science