K BALAKRISHNAN

Logically, if profits go up, earnings per share should rock. And if EPS is on a roll, there’s every reason for earnings multiple to rise.

Which means higher market cap and a huge demand for shares of the company. You know it’s time to extend a congratulatory PAT-on-the-back to the top management team. Well, not always...

Take the case of Britannia which has increased profit after tax (PAT) by 51% but has yet suffered a 13% erosion in market capitalisation between FY’01 and FY’04. Ditto HLL.

While marginally increasing its PAT by 8% — you’d expect it to at least protect its market cap — it has actually suffered a loss of Rs 23,000 crore (a whopping 47%) between 2001 and 2004.

On the other hand, ITC, with a surge in PAT by 58%, has also increased market capitalisation by a hefty Rs 6,000 crore. All three are amongst the most admired FMCG companies — they have world-class systems, top-flight talent and scale of operations.

So why do two of India’s best-of-breed companies get it so completely wrong? And more, how does ITC, which for the better part of the last decade is fighting serious perception issues, pip such stalwarts to the market post?

Although there is no scientific research that corroborates the fact that advertising in print enhances market capitalisation, it is apparent that ITC is one such company that created higher wealth through intelligent use of both media — print and television.

HLL as well as Britannia need to think whether their blind obsession with sales through television, to the exclusion of newspapers, can truly put them on the road to wealth creation.

In the early years, advertising was relatively easier. Most businesses sold a single product, and one market represented multiple stakeholders — consumers, suppliers, employees and owners. Communication, therefore, to the stakeholders could be uniform.

Today, there is no longer a ‘Market of One’. Companies operate in multiple markets, catering to multiple stakeholders — one buys the company’s products, another buys the company itself.

The original — some say primitive — outlook to advertising was that success was linked to sales. The health of the company was measured in terms of sales. More sales meant more margins, which meant more profit, which meant more EPS, which meant more value to the owners.

Companies blindly pursued sales, being conventionally conditioned to think that success lay in more sales, unmindful of market capitalisation — a comprehensive measure of investor confidence. This view held good when companies had to sell in an investor-neutral scenario.

With the emergence of investors — and the rise in clout of the FIIs — as the new customer, this view is no longer relevant. The company (or its stock) has in itself become an equally rewarding merchandise.

The company’s product has one market; the company itself has a different market. Companies need to understand this reality that no single medium could reach all markets, stakeholders or consumers. Each medium has its own alchemy, its own specialty. You can call it its own Unique ‘Buying’ Proposition.

Obsessed with pursuing higher sales through television and internet, some companies managed to either defend their market share, or even make marginal gains, thereby resulting in incremental returns.

Despite this, they have lost in enterprise value, as seen clearly in their declining market capitalisation. Increase in sales through television and internet did not automatically translate into increase in market cap.

Perhaps these companies failed to appreciate that market capitalisation is determined equally by investors’ perceptions about the company’s performance. Financial investors are obviously better reached by conventional print than by television, which delivers mass audiences for mere sales.

Market Share strategy requires new customers and new territories, especially hinterland and moffusils, better reached by television. However, Market Value of the company requires communication to high-value investors, better reached by newspapers, especially financial dailies. So if television is more about hogging marketshare, print is about grabbing mindshare and, hence, upgrading value share.

Print and television complement each other. Both media, when used judiciously, would result in a multiplier effect — meaning gain in value of enterprise, relatively higher than gains through sales. Hence, this could cause a rise in PE ratios, therefore enhancing market capitalisation more than conventional model of sales and profits.

HLL and Britannia on the one hand and ITC on the other could serve as a pointer for the dynamics of exponential gains from a right blend of communication — print for investors, television for consumers.

Can HLL PAT itself on the back with increase in sales, but with falling market capitalisation? Perhaps, if all new initiatives of HLL were equally expounded to investors — consumers, in this case — through print, market cap would not have suffered such a precipitous fall. In the present day market economy, communication too plays a direct role in wealth creation, unlike in the past, when it acted as a mere catalyst.

Only if companies adapt to this changing market reality, and use both print and television to reach out to investors and consumers respectively, only then will they be able to optimise returns from — and for all — stakeholders.