What Role Do Intangible Assets Play in Valuing New-Age Indian Companies?

What Role Do Intangible Assets Play in Valuing New-Age Indian Companies?

Intangible assets such as brand value, technology platforms, customer data, and intellectual property play a decisive role in valuing new-age Indian companies where physical assets are limited. For investors, understanding how these intangibles translate into pricing power, scalability, and sustainable cash flows is critical to avoid overpaying for growth or missing long-term value creation.

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Introduction: Why Intangibles Matter More Than Ever

The Indian equity market has witnessed the rise of new-age, asset-light companies across technology, digital platforms, fintech, consumer internet, and specialty services. Unlike traditional manufacturing or infrastructure businesses, many of these companies derive their value not from factories or machinery, but from intangible assets—brands, software, data, networks, and intellectual property.

For retail investors, this shift creates both opportunity and risk. While intangible-driven businesses can scale rapidly and earn high margins, valuing them using traditional balance-sheet metrics can be misleading. Understanding how intangible assets influence valuation is therefore essential for making informed, long-term investment decisions.

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What Are Intangible Assets?

Under Indian Accounting Standards (Ind AS 38), intangible assets are non-monetary assets without physical substance that are identifiable and expected to generate future economic benefits.

Common examples include:

• Brand names and trademarks

• Software platforms and proprietary technology

• Customer databases and user networks

• Intellectual property (patents, licenses)

• Distribution relationships and ecosystem advantages

Importantly, many internally generated intangibles are not fully reflected on balance sheets, making them harder to analyse using conventional ratios.

Source (ICAI – Ind AS 38):
https://www.icai.org/post/release-educational-material-indas38

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Why Intangible Assets Are Central to New-Age Companies

1. Asset-Light Business Models

Digital-first companies often require limited physical capital but significant investment in technology, branding, and customer acquisition. Once built, these assets can support rapid, low-cost scaling.

2. Network Effects and Data Advantage

Platforms benefit from network effects—where value increases as more users join. These effects are powerful intangibles that are difficult for competitors to replicate.

3. Pricing Power and Customer Stickiness

Strong brands and embedded platforms enable higher pricing power and lower churn, improving long-term profitability even if near-term earnings are volatile.

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How Intangibles Influence Valuation Multiples

Traditional valuation tools such as price-to-book (P/B) often fail for new-age companies because:

• Book value understates economic assets

• Intangibles are expensed rather than capitalised

• Early-stage profitability is sacrificed for scale

As a result, markets rely more on:

• Revenue growth sustainability

• Unit economics and contribution margins

• Lifetime value (LTV) vs customer acquisition cost (CAC)

• Operating leverage potential

High valuation multiples are often justified when intangibles create durable competitive advantages.

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Accounting Reality vs Economic Reality

One of the biggest challenges for investors is the gap between accounting treatment and economic value.

• Advertising, R&D, and technology investments are often expensed

• Brand-building costs reduce reported profits

• Balance sheets may look “weak” despite strong franchises

This does not mean financial discipline can be ignored—but it does require contextual interpretation of financial statements.

Source (ICAI – Accounting Treatment of Intangibles):
https://www.icai.org/post/release-educational-material-indas38

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India-Focused Case Studies

Case Study 1: Infosys Ltd – Intellectual Capital at Scale

While Infosys owns offices and infrastructure, its real value lies in:

• Client relationships

• Skilled workforce

• Proprietary processes and platforms

These intangibles enable consistent margins and repeat business.

Source (Infosys Annual Reports):
https://www.infosys.com/investors.html

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Case Study 2: Avenue Supermarts (DMart) – Brand and Supply Chain Intangibles

DMart’s balance sheet shows physical stores, but its core strengths are:

• Vendor relationships

• Supply-chain efficiency

• Customer trust and brand recall

These intangibles support superior return ratios over long periods.

Source (Avenue Supermarts Investor Relations):
https://www.dmartindia.com/investor-relationship

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Case Study 3: Eternal Ltd – Platform and Data Assets

Eternal’s valuation has historically depended on:

• User network and restaurant ecosystem

• Delivery logistics data

• Brand recall in food discovery

While profitability remains a focus, long-term valuation hinges on monetising intangible platform strengths.

Source (Eternal Annual Reports & Filings):
https://www.eternal.com/investor-relations/

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Risks of Overvaluing Intangibles

While intangibles can justify premium valuations, investors must remain cautious.

Key risks include:

• Overestimating brand durability

• Ignoring cash burn and weak unit economics

• Regulatory risks in platform-based businesses

• Competitive disruption eroding intangible advantages

SEBI has repeatedly cautioned investors to evaluate sustainability of business models, not just narratives.

Source (SEBI Investor Education):
https://investor.sebi.gov.in/

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How Retail Investors Should Analyse Intangible-Heavy Companies

A disciplined approach includes:

• Reading Notes to Accounts for R&D, marketing, and technology spends

• Tracking consistency in customer acquisition efficiency

• Monitoring operating cash flow trends

• Comparing valuation to long-term addressable market

• Assessing governance, disclosures, and management credibility

Intangibles must ultimately translate into predictable cash flows to justify valuation.

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Role of Regulation and Disclosure in India

Indian regulators require enhanced disclosures for listed companies, including:

• Segment reporting

• Risk factors

• Intangible asset accounting policies

These disclosures help investors evaluate how much value is real, repeatable, and monetisable.

Source (SEBI Listing Obligations & Disclosure Requirements – LODR):
https://www.sebi.gov.in/legal/regulations/may-2025/securities-and-exchange-board-of-india-listing-obligations-and-disclosure-requirements-regulations-2015-last-amended-on-may-01-2025-_93799.html

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Key Takeaways for Investors

• Intangible assets are central to valuing new-age Indian companies

• Accounting numbers may understate economic value

• Strong intangibles support scalability, margins, and resilience

• Valuation must still be anchored to cash flow potential

• Governance and transparency remain non-negotiable

For retail investors, understanding intangibles is no longer optional—it is essential.

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Sources & References:

1. Institute of Chartered Accountants of India (ICAI) – Accounting Treatment of Intangible Assets
   https://www.icai.org/post/release-educational-material-indas38

2. Securities and Exchange Board of India (SEBI) – Investor Education & Market Disclosures
   https://investor.sebi.gov.in/

3. SEBI – Listing Obligations and Disclosure Requirements (LODR) Regulations
   https://www.sebi.gov.in/legal/regulations/may-2025/securities-and-exchange-board-of-india-listing-obligations-and-disclosure-requirements-regulations-2015-last-amended-on-may-01-2025-_93799.html

4. Infosys Ltd – Annual Reports & Investor Information
   https://www.infosys.com/investors.html

5. Avenue Supermarts Ltd (DMart) – Investor Relations & Annual Filings
   https://www.dmartindia.com/investor-relationship

6. Eternal Ltd – Annual Reports, Financial Statements & Regulatory Filings
   https://www.eternal.com/investor-relations/

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Pricing Power: The Secret Behind Multibagger Stocks

Understanding Cash Flow Statements for Investors

Understanding the Income Statement: A Beginner’s Guide

How to Read a Company’s Balance Sheet Before Investing

Understanding Earnings Quality: Cash Profits vs Accounting Profits

Disclaimer: This blog post is intended for informational purposes only and should not be considered financial advice. The financial data presented is subject to change over time, and the securities mentioned are examples only and do not constitute investment recommendations. Always conduct thorough research and consult with a qualified financial advisor before making any investment decisions.