Projected Earnings And Cost Estimates Accounting Essay

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The valuation of Brand of SOFTA INDIA LIMITED (herein after referred to as 'the Company' or 'SOFTA') was carried out based on its Audited financial statements, past earnings and projected earnings and cost estimates. The data required for the purpose of this exercise was obtained from:

Audited financial statements as at March 31, 2008, on a stand alone basis;

Projected earnings and cost estimates, and

Discussions held with key officials of the Company.

All information pertaining to the projected earnings and cost estimates and audited financial statements as at March 31, 2008 have been provided by the Company's personnel and have been relied upon by us. It may be mentioned that any changes in the data could significantly affect the projections, our analysis and recommendations based thereon.

As this valuation exercise has been based on information provided to us, we recommend that any transaction based on this valuation be subject to a detailed due diligence to establish the reasonableness of the estimates considered.

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The Brand value of SOFTA activities as at March 31, 2008 has been assessed using the following valuation methods:

Purpose of valuation

Considering the tremendous demand/growth potential for the Company's products and technology, which will be achieved through a combination of an efficient man/machinery mix, increased productivity, re-engineering, long term cost effectiveness as well as diversification, the management of SOFTA has contemplated future expansion plans. For this purpose the Company proposes to enter into a strategic alliance with global industry leaders by offering equity shares in their Company. The purpose of this exercise is to determine the fair value of the existing Brand of the SOFTA and to arrive at a fair valuation of the shares of the Company.

The Brand value of SOFTA calculated by us is presented below:

Brand Valuation Method

Value of Brand

(Rupees)

1.

Royalty Relief Method

397,424,889

2.

Brand Multiple Method

165,723,346

3.

The Economic Use / Future Earnings Method

616,058,398

The following sections detail industry overview, our understanding our methodology and the various assumptions considered in assessing the Brand value of SOFTA. The detailed calculations are presented in relevant annexure.

2. LIMITATIONS AND DISCLAIMER

SOFTA INDIA LIMITED ("SOFTA" or "the Company") has requested ABC & CO. to carry out a valuation of its Brand. In preparing this valuation Report ("the Report"), we have relied upon information, documented and oral, provided by SOFTA without independent verification. We have by no means carried out any audit or due diligence exercise to verify the financial data pertaining to the Company in terms of both past and current balance sheet or profit and loss accounts as provided to us.

At this point, we offer no comments on the accuracy and completeness of the Brand projections and related information as set out in the valuation document, given that such estimates involve subjective judgment and, accordingly, no representations can be made as to their attainability. The attainability of the projections is the responsibility of the management of the SOFTA. Further, the valuation exercise is based on the Brand projections formulated and any changes in the data or assumptions used for preparing the Brand projections could significantly affect our valuation. We may mention that the Brand valuation as carried out by us is based on the assessment of present and future understanding of the industry and the Brands as on the date of valuation. Any changes in the assumptions undertaken may substantially change the valuation of the Brands.

We may mention that our scope of work for this exercise did not include technical/financial feasibility or market research.

We shall not have any liability for any misrepresentation (express or implied) contained in, or for any omissions from, this document or for any other written or oral communication transmitted to us for the purpose of this assignment. It should be noted that any estimates contained herein are based on information available at the time of preparation. Any change in the external/internal environment could significantly affect our analysis and findings.

This report contains confidential information that has been provided at your request and the same should not be disclosed or circulated in whole or in part without express written consent of ABC & CO. This document should not be duplicated or used, in whole or in part.

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The Report is being provided solely for the benefit of the Company and is not on behalf of, and shall not confer rights or remedies upon, any other person other than SOFTA. The Report may not be used or relied upon by, or disclosed, referred to, or communicated by SOFTA (in whole or in part) to any third party for any purpose whatsoever except with our prior written consent in each instance. This document should not be duplicated or used, in whole or in part

In furnishing the Report, we reserve the right to amend or replace the Report at any time. Our views are necessarily based on economic, market, and other conditions currently in effect, and the information made available to us, as of the date hereof. It should be understood that subsequent developments may affect our views and that we do not have any obligation to update, revise, or reaffirm the views expressed in the Report. Nothing contained within the Report is or should be relied upon as a promise or representation as to the future.

The pro-forma, estimates and financial information contained herein was prepared by SOFTA and our Report is based on certain assumptions, analysis of information available at the time of Report preparation. While the information provided to us is believed to be accurate and reliable, we do not make any representations or warranties, express or implied, as to the accuracy or completeness of such information. Part of this information is based, inter-alia, on published/private reports or research studies carried out by other agencies. The information provided there has not been verified by us, though we are neither aware nor has reason to believe that the information is otherwise unreliable in any material aspect. No representations expressed or implied are made in that behalf.

3. OUR UNDERSTANDING

3.1 COMPANY OVERVIEW

SOFTA India Limited is an Indian company operating in India and overseas. It provides software/information technology based engineering and geospatial solutions and services to customers across the world and has executed projects in more than 35 countries. SOFTA is headquartered in Mumbai and operates through a network of twelve regional/branch offices in India and seven subsidiaries located in USA, Canada, UK, The Netherlands, Germany, Saudi Arabia and UAE. It is listed on the Bombay Stock Exchange and National Stock Exchange in India.

SOFTA is India's leading provider of GIS/GeoEngineering solutions and services and one of the major AM/FM/GIS photogrammetry service providers in the world for segments such as Defense, Environment, Electric, Telecom, Gas, Emergency Services, Municipalities and Airports. The company's customer base for GIS projects is spread across 17 countries with multi million dollar projects executed in various parts of the world. SOFTA is also leading provider of plant design automation solutions and services in India and one of the major plant information management services providers worldwide. The company's customer base for such business is spread across 22 countries with over 500 projects executed in various parts of the world. To move up the value chain in the engineering domain, the company has established a joint venture with Stone & Webster Inc., USA, namely SWSL- Stone & Webster SOFTA Limited. SWSL has access to Stone & Webster's proprietary technology. This joint venture provides high quality engineering services worldwide and undertakes selective refinery, petrochemicals and power projects in India.

The company provides eSecurity implementation services, rapid application development and software testing services to its customers worldwide. In on-going partnership with CA's, the company has executed over 350 projects globally in 18 countries. SOFTA globally has around 2500 employees. Nearly 75% of the company's workforce has engineering qualifications, including significant numbers with master's degrees or doctorates and SOFTA ensures constant ongoing training to its professionals. The annual IDC-DQ best Employers Survey has consistently ranked the company as one of the top employers in the IT industry in India.

SOFTA quality standards are benchmarked to world class levels, with top quality certifications such as ISO 9001:2000, BS7799, and SEI CMM level 5. The British Standards Institution (BSI) has awarded SOFTA the BS15000 certification for its entire range of IT service management processes. This unique accreditation has been bestowed on less than 25 companies globally.

4. VALUATION METHODOLOGY

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In this chapter, we have presented the methodology adopted in determining the value of Brand.

There are many methodologies that may be used to value the Brand of a Company. Though different values are arrived under various methods, it is necessary to arrive at a fair value for the Brand of company.

For the purpose of estimation of brand value of SOFTA the following valuation approaches were considered, each of which is discussed in the ensuing sections:

Cost based valuation approach,

Earnings based valuation approach, and

Market based valuation approach.

Cost based valuation approach

Cost based approach seeks to aggregate the costs incurred in developing the brand to its present condition. In case of SOFTA, being an old brand, the information relating to the cost incurred on the development of brand is not available. Moreover, since the brand is used and maintained by licensee SOFTA India Technologies Limited (SITL), the information on cost incurred for management of brand is also not available. Further, there are some inherent limitations of cost based method of brand valuation, that the cost incurred on development of brand does not reflect possible economic value which may possibly be realised from the economic use of brand. Hence we have ignored this method of valuation and have predominantly used the earnings based, and market based valuation approaches for the purpose as discussed below:

Earnings Based Valuation

Under this valuation methodology we have considered the following methods,

Royalty Relief Method

This method is used when licensing and royalty arrangements exist for a brand name. The actual royalties, after deducting any costs associated with maintaining the brand/licensing arrangements, and taxes are capitalised at an appropriate rate. The capitalisation rate which would be reflective of the brand's current market position, expected future sales growth, business risks and time value of money, is used to discount the royalties to arrive at the value of the brand.

Brand SOFTA is also licensed to SITL, under a royalty arrangement which is assumed to be 15% of the revenue of the SOFTA on an annual basis.

Detailed Workings as per this Method are set out in Annexure 1.

Capitalisation of Premium Profit Margins attributable to the Brand Names

The value of a brand may be assessed by comparing the profitability of a branded product to the profitability of an unbranded product of a similar quality and design. The difference in profitability represents the premium price that a buyer is willing to pay for a particular branded product. We have arrived at the conclusion that it would not be practically feasible to look at this method of brand valuation on account of lack of availability of data for prices in various regions.

Imputed royalty method

In this method, the brand is valued with reference to the amount of royalty income it would generate if the brand was instead licensed in an arm's length transaction. The benchmark royalty rate for the subject brand is arrived at by looking at royalty rates of comparable transactions. The net revenues expected to generate by the subject brand are then multiplied by the benchmark royalty rate. The benchmark royalty amount so calculated, is then adjusted for the advertisement and marketing cost to maintain the brand, to arrive at net income stream for the brand.

The Brand Multiple/Historical Earnings Approach

The "Brand Multiple" method is the "historical earnings" approach, the main steps for which are as follows:

Starting with the revenue attributable to the brand, multiply by the profit margin for the brand to get the operating profit for the brand (or, equivalently, deduct from the revenue the operating costs associated with the brand).

Estimate the capital employed by the brand, including both fixed assets and working capital. Multiply this by an appropriate capital charge to obtain the charge for capital employed by the brand.

Subtract the charge for capital employed by the brand from the operating profit for the brand to get the earnings after capital charge · Not all of these earnings are attributable to the strength of the brand itself there could well be some earnings after capital charge even if the brand were weak. Therefore multiply the earnings after capital charge by the proportion of the earnings that are attributable to the strength of the brand to obtain the brand earnings.

Multiply the brand earnings by the tax rate to get the tax payable on the brand earnings. Then subtract the tax payable from the brand earnings to get the brand earnings after tax.

Finally, multiply the brand earnings after tax by the multiple to obtain the brand valuation.

The Detailed workings under this Method are set out in Annexure 2.

Brand Multiple Applied calculations:

Though the detailed calculation can not be shown on account of breach of privacy of the company and lack of authentic information, the overall view has been given by indicating the factors used for computing Brand Multiple Applied or Brand Strength Factor.

Factors considered while computing or Brand Multiple Applied or Brand Strength Factor is as follows. The higher the score of the factor, the stronger the brand is.

1. Leadership - It signifies that the brand is more stable and has more value than another brand with a lower market share because leadership gives --

a. market influence,

b. the power to set prices,

c. control of distribution channels

d. greater resistance to competitors

2. Stability - It signifies the brand's strength in terms of

a. Degree of consumer loyalty

3. Market - it signifies the brand strength in terms of

a. Growth in market

b. Consistency in sales

c. Level of entry barrier (High entry barrier will give more score)

4. Internationality - it refers to the brand strength in terms of international presence. The higher the number of presence in the international market, the more will be the overall score.

5. Trend - It implies the brand's tendency to keep up-to-date and relevant for the consumer increases its value

6. Support - It implies that the brands that have received investment and support must be considered to be more valuable than those that have not. The quantity and quality of this support is also considered.

7. Protection - The robustness and breadth of the brand's protection ("Legal Monopoly") is critical factor in its valuation.

Weighted average of all factors has been considered to determine brand strength factor.

The Economic Use/Future Earnings Approach

The multiple used in the "historical earnings" approach should reflect both the growth prospects for the brand and the uncertainty attached to future earnings from the brand. Under this approach of brand valuation the Net Present Value of the future brand earnings after tax is estimated and discounted.

The Detailed workings under this Method are set out in Annexure 3.

Market based methodologies

Market based methodologies determine value of brand with reference to the value of comparable brand in recent market transactions. The comparable brand value will be adjusted on account of changes in economic conditions, the bundle of rights being sold / assigned, method of payment etc. The methods used are:

4. Sales Transaction Method

This method estimates the value of the brand based on sale of sector comparable brand to independent third parties. However, the details of recent transaction were not available for the purpose of calculation of transaction multiples. Hence we did not use this method of cross verification for valuation of brand.

Summary

From the various methods of brand valuation as discussed above, we have arrived at the following valuations:

Brand Valuation Method

Value of Brand

(Rupees)

1.

Royalty Relief Method

397,424,889

2.

Brand Multiple Method

165,723,346

3.

The Economic Use / Future Earnings Method

616,058,398