The Intangible edge!
Sumeet Agarwal
CA Finalist || Content Writer || NISM-Certified in Research Analysis & Equity Derivatives || Passionate about Equity Research, Financial Modelling & Valuations
While analyzing Tech companies, proper understanding and in-dept study of Intangible Assets can help discern good businesses from great businesses. Unlike manufacturing companies, Tech or pharmaceutical companies often constitute a sizeable portion of their total assets in the form of Intangible Assets such as software, licensed IPR, goodwill, customer relationship, technology etc.
While analyzing Indian tech companies, what stood out for me was the significant variation in intangible asset size among the various players, with HCL having about 30% of it's total assets in the form of intangible assets and on the other end of the spectrum PB Fintech having a meagre 0.6%.
Indian tech firms being service-oriented have a major chunk of their assets locked up in the form of tangible assets like offices, computers and equipment.
In contrast, the US firms are more product driven and therefore rely heavily on intellectual property, patents and brand value. Median intangible assets in US firms is almost 2.5x as compared to their Indian counterparts.
A significant portion of this disparity can be attributed to the unevenness of R&D, where Indian tech firms often focus on outsourcing rather than proprietary tech development.
As per a report by R&D World, the Big 5 in US spent a combined $227 billion on R&D in 2023 alone, which is way above the spending done by their Indian peers.
However, Indian companies have gradually started moving towards AI, cloud-services and more product-based solutions which might increase their Intangible asset allocation in the future.