Asian Paints

Asian Paints GroupAsian Paints Group 2222

TABLE OF CONTENTS

EXECUTIVE SUMMARY........................................................2

BACKGROUND....................................................................3

VISION..............................................................................3

DEMOGRAPHICS.................................................................5

STRATEGIC BUSINESS UNITS...............................................6

INDUSTRIAL PAINTS....................................................................................................6DECORATIVE PAINTS..................................................................................................7INTERNATIONAL OPERATIONS.....................................................................................8CHEMICALS BUSINESS................................................................................................9

FUNCTIONAL EXPERTISE...................................................10

SALES, DISTRIBUTION AND OPERATIONS.................................................................10INFORMATION TECHNOLOGY....................................................................................11RESEARCH & DEVELOPMENT...................................................................................11QUALITY...................................................................................................................12

SWOT ANALYSIS...............................................................13

STRENGTHS...............................................................................................................13WEAKNESSES............................................................................................................13OPPORTUNITIES........................................................................................................13THREATS...................................................................................................................14

TRENDS...........................................................................15

REVENUES AND COST...............................................................................................15ASSETS AND LIABILITIES..........................................................................................16

FINANCIAL RATIO ANALYSIS.............................................17

PROFITABILITY RATIOS............................................................................................17LIQUIDITY AND COVERAGE RATIOS.........................................................................18LEVERAGE AND UTILISATION RATIOS......................................................................19

CASH FLOW ANALYSIS......................................................20

MARKET BASED INDICATOR ANALYSIS...............................21

FINANCIAL PROJECTIONS..................................................22

INVESTMENT PLANNED.....................................................23

FUTURE OUTLOOK............................................................24

REFERENCES....................................................................25

Appendix 1......................................................................26

1


EXECUTIVE SUMMARY

Among the ‘200 Best under a Billion’ companies in the World in 2002 - Forbes4th in India on Corporate Governance in 2002 – Asia Money

Best Small Company (MCAP below USD 500million) in India in 2002 – The Asset

These are some of the accolades that external agencies have awarded Asian Paints. However what

Asian Paints India Limited (APIL) has given to its stakeholders is much more and better. It is not often

that an organization grows at such a fast pace in a sustained manner. It is not often that an Indian

organization has a vision of being among the top 10 or top 5 among the world in the Industry it

operates in. And even if it does, to actually achieve those targets. And neither do we find organizations

whose ratios when doing a financial analysis are consistently better across all parameters, compared

against time or competition, to the extent that we doubt our own analysis. However these are facts with

Asian Paints, as we would see during the course of this report.

This is Asian Paints, one of the best companies and also one of the top 10 employers in India. With a

turnover of around Rs. 2000 Crores and a Profit after Tax of Rs. 140 Crores, Asian Paints has been

growing at a pace faster (at 16% 10 year CAGR) than the Indian economy and more importantly the

Indian Paints industry on a regular basis. APIL has also followed a conscious policy of organic and

inorganic growth to achieve its target of becoming on of the top 5 decorative paint company status in

the world.

It operates in the Decorative and Industrial paints segment. The firm also backward integrated into

Chemicals, which forms a small portion of its Revenue pie. A substantial portion of the income comes

from the International business of APIL, which now contributes, to around 21% of its revenues.

Innovation in products and colors, sophisticated Supply Chain Management, integration of production

and marketing in the form of dealer tinting machines and huge investment in Information technology

systems are some of the reasons of the success of Asian Paints.

The enterprise has consistently shown increases in revenues, reduction in utilization of materials by

improving efficiencies and reduction in Working Capital investment especially Inventories and

receivables on Debtors. The funding for growth has been in-house through repatriation of profits. Debt

Component in the firm has gone down significantly over the 5 year period even when 2 big

acquisitions were made in the last fiscal. All these and more are reflected in the Ratio Analysis section

of the report, where as they say ‘figures speak for themselves’.

The report presents the what, why and how of Asian Paints’ business and financial performance and

ends with the Projections of its Income and Expenses for the future to enable us with a basis for

company valuation.

2


BACKGROUND

1942 Asian Paints born

1945 Touches a turnover of Rs. 3.5 lakhs and launched the mascot ‘Gattu’

1957 -First plant comes up in Bhandup.

-Breakthroughs in R&D.

-Ambitious marketing campaigns leading to formation of close ties with thousands of

dealers in various towns across India

1967 Becomes India’s No. 1 paint company, representing 27% of the market.

1981 Second plant comes up in Ankleshwar.

1983 -Public Issue made

-Name changed to Asian Paints (India) Limited

1998 Major restructuring with the help of consultants Booz Allen & Hamilton, restatement of

the company’s vision.

VISION

"Asian Paints aims to become one of the top five Decorative coatings companies world-wide by

leveraging its expertise in the higher growth emerging markets. Simultaneously, the company intends

to build long term value in the Industrial coatings business through alliances with established global

partners."

It would be appropriate in this context to highlight some of the lines from the Chairman’s Speech from

the 2003 Annual Report.

“In the Director's Report of 1998-99, Asian Paints outlined a major corporate objective and that was

being one of the top ten global players in Decorative paints. I am happy to inform you that with the

sustained good performance of our Indian operations over past few years and the international

acquisitions in the second half of the year under review, your company has attained this objective.”

Thus this company does believe in setting stiff targets, achieving them and raising the bar constantly.

The vision of the corporation states the intent of its leadership forming critical input to an analyst’s

Report.

3


DEMOGRAPHICS

Shareholding:

Promoters – 42.60%

Institutional Investors – 33.85%

Others (incl. India Public) - 23.54%

Total Foreign Shareholding (including GDR) is 21.25% of the total equity capital

(Figures as at 31.03.2003)

Financial Statistics:

Total Paid Up Equity Capital: Rs. 641.86 million

Market capitalization: US$ 460million

Revenues: ~Rs. 18590 million. (10 year CAGR 16.1%)

PAT: ~Rs. 1420 million (10 year CAGR 21.0%)

D/E Ratio: 0.2:1.0

Manufacturing: 23 manufacturing facilities with capacity of 330mn liters per annum

Manpower: 5000 Approx (1300 overseas)

Geographic Presence - Asian Paints operates in 23 countries across the world. It has manufacturing

facilities in each of these countries and is the largest paint company in nine overseas markets. In 12

markets it operates through its subsidiary, Berger International Limited and in Egypt through SCIB

Chemical SAE.

4


STRATEGIC BUSINESS UNITS

SBU Sales

Decorative (India) 16635 million

Decorative (international) (combined for decoratives)

Industrial Paints 550 million

Chemicals (Phthalic Anhydride/ Pentaerythritol) 1148 million

This is the structure adopted by Asian Paints to ensure prompt response to new challenges.

We discuss each of these business segments separately, the dynamics in markets for each of these, the

initiatives APIL or group companies are taking to cater to and grow in this segment and also the

outlook for the Strategic Business Unit. We start with Industrial Paints category.

Industrial Paints

Product Categories: Operating Company

Automotive Segment Asian PPG Industries (50:50 Joint Venture)

Powder Coatings Asian Paints Industrial Coatings Limited

Protective Coatings Asian Paints India Limited

The SBU has witnessed a 35% growth rate in the last concluded fiscal year, far ahead of the

decorative segment, largely as a result of excellent performance in the Protective Coatings

category.

A lot of restructuring has taken place in the last year which has resulted in a clear demarcation of 3

companies serving the 3 markets within Industrial Paints as against the overlap that existed in prior

years with APIL also serving in the Powder coatings segment, etc.

Outlook for the segment is positive owing to the huge investment in Road infrastructure, which is

projected to being about an increase in Automotive Demand, the largest consumer within the

Industrial Paints segment.

5


Decorative Paints

Product Categories: Select Brands

Interior Wall Paints Tractor, Utsav

Exterior Wall Paints Apex Weatherproof, Ace Exterior

Doors & Windows Paints Apcolite, Touchwood

Furniture Paints same as above

Metal Paints same as above

Ancillaries same as above

Whilst Decorative Paints constitutes 75% of the total paints market in India, For Asian Paints the

segment constitutes 90% of its total business. APIL is market leader in all of these categories

listed, with Wall finish paints being the largest segment in the pie.

A conscious strategy of converting customers using low price distempers to economic emulsion is

being followed.

The company is trying to cover niches by introducing product in all categories across various price

points. This is an exercise to save itself from the Nirma and P&G kind of niche competition that

large players like HLL have encountered in the Indian context.

APIL is constantly increasing its operational and technical efficiencies to serve its customer better

and improve margins. Further elaboration will be done on this point in the section on Operations

and Information Technology.

The organization is trying to get as close to the customer as possible using various initiatives:

- ‘ColorWorld’ program with 3200 dealer tinting machines, where thousands of colors can be

made at the dealer stores depending on customer’s preferences. About 50% sales of the company’s

Decorative segment business comes from these dealers.

- Home Solutions Program, where APIL tries to provide entire painting solutions to customers

located in 6 of the metro cities in India.

Asian Paints has launched a new visual identity for a new and contemporary image. The branding

strategy ahead is to make the ‘Asian Paints’ company brand the centerpiece of product portfolio

and leverage its high brand recall.

The Outlook for this segment of business is positive primarily on two counts

1. Drop in Interest rates

2. Fiscal incentives provided for the housing sector in the Budget

6


International operations

The last year was very important in the manner that APIL concluded two of its most important

acquisitions of:

1. Berger International of Singapore having revenues of Rs.3251 million, taking a 50.1%

controlling stake.

2. SCIB Chemical SAE of Egypt having revenues of Rs. 451 million, taking a 60% stake.

Cost of acquisition of both the deals amounted to Rs. 819 million.

International Operations of APIL has now attained critical mass and is a very important

contributor in trying to meet its vision of becoming one of the 5 leading companies in the world in

the Decorative Paints category.

- More than 25% of the capital employed of the company is now in its Internal

Operations and around 21% of the total revenues come from this SBU.

BERGER: This is currently a loss making enterprise and APIL is betting on its capabilities in

creating operational efficiencies to turn around Berger International from the red. The strengths

that the deal brings to the table for APIL is the strong brand identity that Berger enjoys across the

world, especially in regions where APIL’s presence is either low or none, thus creating a great

synergy.

SCIB: This is the fifth largest player with only 6% of the market share, in the Rs. 7125 million

domestic Egyptian markets. APIL is looking to extract some of the huge opportunity existing in

the domestic market in Egypt by acquiring SCIB.

Outlook for International Operations is also positive as

1. Emerging markets with low per capita consumption of paints offer growth opportunity.

2. There are niches available in these emerging markets that can be exploited, especially as an

entry strategy.

3. APIL plans to rationalize the product portfolio and leverage its competence in technology to

improve operational efficiencies of its international operations, lot of which are being

operated through acquired companies.

7


Chemicals Business

The business segment within APIL has grown at the rate of 32%. This has been as a result of

better market conditions, volatile and lower Raw Material prices and higher production capacity

utilization, leading to higher margins.

The outlook for this segment is cautious as:

1. The import duties are coming down as along with will come down the domestic prices.

2. This was backward integration by APIL and the organization as no plans to scale up the

business further as there is ample opportunity being offered in the core business.

8


FUNCTIONAL EXPERTISE

Though one would feel that the analysis of all functions would be separate it is very clear after reading

about Asian Paints that this discrimination is difficult to make. Distribution takes a lot from

Operations, which in turn a lot from the IT backbone of the company. Some analysis of its various

functions is provided here.

Sales, Distribution and Operations

ColorWorld: The concept has gained immense popularity as a result of various innovations

introduced by APIL in its ColorWorld chain of stores. It has an

- In store Shade Display Unit with over 1000 unique shades

- Interactive Computer System to see how various colors look in the interior of a room

- Take away shade strips

- 1/4/10/20 liter gryoshaker for mixing paints in the store

Marketing of Paints is similar to an FMCG product, where there is a huge number of SKUs (more

than 3000 in case of APIL,) the quantities sold can vary from 200 ml. of paints to hundreds of

liters and where the selling point should be located near the consumer who are present in all nooks

and corners of the country.

Rural Penetration of APIL products are also very good. It approaches it through focusing on

towns, which have a cluster of villages attached to it thus giving it a minimum critical mass to

operate there.

Effectively managing the Distribution Channel becomes a very important source of competitive

advantage or otherwise a poor SCM can create a nuisance for the firm, by holding up stocks at

various levels of the chain, by not providing the required shades and quantities when required

resulting in lost sales, by delayed responses to channel members affecting the quality of service to

customers and similar issues.

The Supply Chain Management system at APIL links 4 plants, 6 regional distribution centers, 38

outside processing centers, 74 Branches, 15000 dealers and 500 industrial customers.

SCM system performs the functions of materials planning, procurement and distribution

The SCM system has the objective of and has led to improvement in organizational efficiencies in

various forms:

- Improving flexibility of operations

9


- Reducing throughput time

- Lowering Delivery Cost

- Improving Customer Service levels

Notwithstanding the 6% increase in input costs in the preceding year, Material Costs as a

percentage of Sales remained constant at 53.9%, reflecting on the operational efficiencies in the

system.

Information Technology

APIL is the only company in India to have integrated SCM solutions from i2 and ERP solutions

from SAP.

The organization is e-enabled. The road ahead is to extend this to the connected business parties

and some initiative has already been taken in this regard.

- Launched Supplier portal for document exchange in 2002-03.

- Setup employee portal for both domestic and international employees.

- A pilot test for dealer portal has been conducted and it is in the process of being

scaled up.

Given that APIL has bet so heavily on its IT backbone, a disaster recovery system has been setup

in South India.

Research & Development

R&D at APIL focuses on

1. Developing new products (in 2002-03 it developed two new products viz. Apcolite Premium

Satin Enamel and a textured exterior emulsion called 'Apex Textured'),

2. Reduction of costs and

3. Improving the quality of its products.

APIL has stressed on enhancing productivity and higher utilization of assets as against investment

in new production facilities.

10


Quality

All of the company's paint manufacturing facilities have the ISO 9001 certification for Quality

Standards and the ISO 14001 certification for Environment Management Standard. The Phthalic

Anhydride plant has been certified for ISO 9002 and ISO 14001 whereas the Pentaerythritol plant has

been certified for ISO 14001. The Penta plant will shortly receive its ISO 9002 certification.

11


SWOT ANALYSIS

After having discussed the various business units, their driving forces and the behavior of various

functions within the organization, SWOT essentially serves the purpose of showing us in a brief

manner, what direction the organization should take or is expected to take.

Strengths

Drive and Clear Corporate Vision

High caliber employees, maximum number of MBAs as a proportion of employees

Market leader in the organized segment, second player is not even half of APIL

Strong national and international Brand Image

Innovative Selling Concept in Color World, leveraging technology by putting in strong

production-marketing coordination

National coverage achieved with 13000 dealers across the country

Efficient Distribution Network, resulting in efficient Working Capital Management

Over 90% accuracy in forecasting

Products in almost all need segments and price points

Sound R & D skills

Weaknesses

Slowing growth in the mainstay Decorative Paints segment at the national level

Weak position in the Industrial Paints segment with only 15% share compared to the leader at 43%

Expanding product mix puts strains on distribution capabilities, inventory management and

administration

Opportunities

The acquisition of loss making and inefficiently managed Berger represents an opportunity to

APIL to use its expertise in establishing strong operating and SCM systems in place to better

utilize the investment made in the enterprise.

The brand equity of Berger paints is very strong internationally and Asian Paints can only encash

on it by exploiting it effectively in the right markets

12


Threats

Lowering Import duties has resulted in reduced prices of Paints in the domestic market and there is

a continuing trend in that direction. This will result in pressure on the margins of the firm.

Largely the threats, or rather challenges pertain to their international operations and in case APIL is

unable to integrate the acquired units into the APIL fold on the following counts

Human Resources: Maximum number of mergers and acquisitions are said to fail because the

organizations fail to do their HR due diligence. Integrating cultures and organizational systems are

very essential to success of any alliance. In case of APIL it is still easier as the acquired part of the

entity will operate in different markets.

Marketing: There are nations where Berger and Asian Paints are both strong brands and it will be

a decision that APIL will have to make to keep which one and drop which depending on the

specific market and APIL’s long term strategy. It might be the case that taking off a brand from

the market leads to loss in market share which competitors take advantage off, leaving it worse off

than what they were to begin with.

Loss making International Operations: It is true that this reflects and opportunity as well.

However assuming that the systems all/most of the offices internationally were not efficient and

that APIL can definitely bring a significant change to it would be wrong. This is a bet that APIL

has taken in order to achieve its goal of becoming one of the top 5 players in the world decorative

paints industry. This turnaround might well be an enormous task to achieve and it only remains to

be seen how much it does to bring Berger back to the black.

There are some other concerns, which are generic in nature to most industries, and we list some of

them here for Asian Paints also

Domestic Market: Political Uncertainty, Monsoon, Transport risks, VAT Uncertainty

Internationally: Political & Legal systems of various countries, Currency fluctuations.

13


TRENDS

Revenues and Cost

Asian Paints had started restructuring its business after 1997-98. Since then, the results speak its all

round performance. Sales of Asian Paints (India) currently stand at Rs.18836 millions. The

compounded annual growth rate for the past five years has been 13.68%. In absolute terms the sales

has increased from Rs.11279 million in 1998-99 to Rs.18836 million in 2002-03. Sales growth rate is

almost constant for past five years except for period 2001-2002 when the sales growth has actually

dipped below 10% p.a. The sales has increased during the past five years because of:

The launch of premium Elastomeric Hi- Stretch exterior paint in 2001-02.

Emulsion launched in 2001-02, as an economy emulsion for consumers, has established itself

well across markets, and the company's strategy of upgrading consumers from low value

distempers to this economy emulsion has met with success.

The thrust put by government in the growth of housing sector.

The "Colour World" programme was a huge success since its inception. More than 3,200

computerised dealer-tinting systems, which enable the company to provide a wide choice of

shades to customers has been installed. Colour World dealers now contribute more than 50

per cent of the decorative paints sales.

The organised sector’s compounded growth rate has been around 6.81% p.a. for the three years. (Year

2002-2003 not included due to unavailability of data). This implies that Asian Paints has eating away

market share of the competitors.

However, lately the growth rate is constrained by the drought and the consequent decline in agriculture

output which had an adverse impact on the paints industry. Rural off take was hit, particularly in

northern and western regions of the country during the second half of the year, where the impact of

drought was particularly severe. In addition, uncertainty surrounding the proposed implementation of

VAT in the states adversely affected sales in the last quarter of the year under review.

Further, decline in the sales of industrial paints is being noted lately. However, this is mainly due to:

The powder coating business of Asian Paints being transferred to the company's wholly

owned subsidiary, APICL in the month of May 2002.

Asian Paints (India) Limited discontinued production of automotive paints manufactured in

technical collaboration with Nippon Paints (Japan) in the second half of 2001-02.

Otherwise, the sale of industrial paints has increased by 35% during the last year.

Apart from decorative and industrial paints company also has the two chemical businesses viz.

Phthalic Anhydride and Pentaerythritol, which have performed very well in the last year. This was

primarily set up for the backward integration purpose. Sales from these businesses have increased by

14


32.2 percent from Rs.868.2 million in 2001-02 to Rs.1147.6 million in 2002-03. The reason behind the

sales growth is increased sales volume and increased realisations from Phthalic Anyhydride. Increased

realisations have helped in the increased margins. This was made possible majorly due to the

improvement in the market conditions. The performance of the chemicals division was been subdued

in the previous to last year largely due to lower realisation and also a shutdown at the phthalic plant for

about a month for change of catalyst.

In improving the cost structure the company has gained many grounds. Since 1997-98, the company

has succeeded in streamlining production, reducing working capital, increasing productivity, steadily

pruning costs, introducing state-of-the-art IT across the organisation, and creating an efficient, IT-

enabled supply chain process. This has helped reduce the cost to a major extent.

Input costs, which had softened during 2001-02, witnessed a marked increase of around 6 per cent

during the second half of 2002-03. This is the major reason of increase in the operating costs of the

company.

Asian Paints has made substantial decrement in interest expense. From Rs.223 million in 1998-99 it

has come to Rs.84 million in 2002-2003 as a result of reduced debt component in the capital structure.

Assets and Liabilities

The company is reducing its leverage. The debt has reduced from Rs.2168.6 Million to

Rs.103.61Million within a span of 4 years (1999-2003).

Investment has increased in the last year by Rs.843.5 million, mainly due to acquisition of 51% stake

in Berger Paints to increase its international presence.

The company however has not gone for gone for huge capitalisation over the years indicating that the

company was focusing more on existing capacity in the past five years.

15


Financial Ratio Analysis

Profitability Ratios

Return on Capital Employed

Return on capital employed should at least be the weighted average expected return of

different stakeholder else; the company is not profitable in the eyes of the stakeholders. The

return on capital employed in case of Asian Paints has been continuously on the rise. It was

25.24 for the year ended March 1999 and has risen sharply to 30.26 for the year ended March

2003. Compared to the industry’s declining return on capital employed these are impressive.

The industry’s ROCE was 25.22% for the year ended on March 1999 and after increasing for

the next year has taken a downhill and was 19.86% for the year ended March 2003.

Operating Margin

Operating margin is an important criterion to measure the company’s profitability. Asian

Paints operating margin almost stagnant near 15%. Lately, the raw material prices have

increased, increasing the total operating costs. In order to keep its margins intact:

o The company undertook its first price hike in 24 months in September 2002, and

another price increase took place in May 2003.

o The company has kept its material to sales ratio stable by efficient sourcing and

reduction in primary freight.

o The company has up graded its product mix in favour of high value premium

products, re-engineering product formulations through R&D initiatives, controlling

overheads.

The company has also able to maintain the operating margin at its level because of the

impressive growth in profits of the chemicals (others) business. This all measures have led the

company’s operating margin to be higher than the industry average of 12-12.5%.

Net Profit Ratio

Net Profit ratio vis-à-vis the Operating Margin shows the non-operating expenses incurred by

the company. Any high difference between the two indicates scope of cost cutting by reducing

the unnecessary flab of non-operating expenses (net of non operating income). In the case of

Asian Paints the net profit ratios are increasing and the difference between the operating

margin and the net profit ratios are almost stagnant at 7% inspite of the fact that interest

payment has fallen down. The operating margin was 15.55% for the year ended March 2003

16


up from 12.96 for the year ended March 1999. This is despite the fact that there is increased

amortisation charge of trademark, acquired by the company during the year 2001-02.

Operational efficiencies and lower interest payouts have resulted in a growth of pre- tax profit

margin and offset any such above mentioned limiting factor to the growth of the net profit

ratio. One of the reasons of the net profit ratio being lower during the year 2001-02 to 7.83%

was the first time implementation of Accounting Standard-22. Deferred tax charged during

the year was of the order Rs.62.9 million.

Earnings Per Share

This ratio gives the net return on a share. Despite the continuous increase in the net earnings,

EPS has been fluctuating. The reason being the share due to bonus issue in the year 2000

announced after the Balance Sheet date for the year ended March 2000. Therefore, in the year

ending March 2001, EPS has dropped and is on continuous rise thereafter.

Liquidity and Coverage Ratios

Liquidity ratios check the firm’s ability to square off the debts at that particular moment or to service

the debts during a particular period of time. It also checks the liquidity of the various assets.

Current Ratio

The current ratio for Asian Paints has declined from 1.92 at March 1999 to 1.12 at March

2003. This is primarily because of the tinting machines introduced in the past few years. The

total inventory required at the retailer level has decreased and thereby the inventory at every

other level has been reduced. The industry average is 1.44. This indicates the effectives of the

working capital management system of Asian Paints.

Quick Ratio

The Quick Ratio measures the firm ability to pay its debts in a very short period. The

difference between the Current Ratio and the Quick Ratio gives the quantity of inventory the

firm is carrying. (Assuming there is no illiquid liability and no other illiquid assets). In the

case of Asian Paints Quick Ratio has decreased over the past five year from 0.79 to 0.58. The

difference between the current ratio and the has reduced from 1 to 0.5 in the past five years.

The industry average is around 0.56.

17


Inventory Turnover Ratio

Effective and efficient working capital management was always an added advantage to the

company. The inventory turnover of Asian Paints has been on the rise due to the measures

taken to improve the distribution system of the company. The ratio was 7.44 five years back

and is now 9.81 as on March 2003.

Financial Charges Coverage Ratio

Continuous decrease in the debt and rising income has dual impact on the rise of the Financial

Charges Coverage Ratio. The ratio was 6.17 five years ago and now it stands at 33.80.

Debtors Turnover Ratio

The company has continuously reduced the working capital cycle time throughout the past

five years. On e of the component that drove this reduction was increase in debtor’s turnover.

The company managed to reduce the debtors’ payment cycle time. The debtor’s turnover has

been increased to 15.77 from 14.04. Therefore the debtor’s payment days now stands at 23

days from 26 days five years back.

Leverage and Utilisation Ratios

Debt Equity Ratio

The debt ratio of the Asian Paints is on the downslide by the persistent effort to reduce debt

component in the capital employed. Currently is a stand at 0.17 against 0.68 five years back.

Fixed Assets Turnover Ratio

The fixed assets turnover ratio has increased from 2.36 to 2.70 in the past five years. The

Fixed Asset productivity is being improved and production cycle time is being reduced by

curtailing time losses in individual processes, which form part of the overall production

process. Better utilisation of assets using factory level planning software and improvements in

inventory management have resulted in better utilisation of productive assets

18


Cash Flow Analysis

The points worth noting about the Cash Flow are:

Total cash flow from operations as a % of sales has been erratic in case of Asian Paints. It was

as low as 4.40% for the year ending March 2001 and as high as 14.70% in the next year.

A major portion of the Cash Flow from operating activities is used for net investment. It may

at the first glance give an impression that the company does not have good investment

opportunities and is generating excess cash. The investments are however, in the subsidiaries,

which are in the similar business as that of Asian Paints.

There is a conscious effort on the part of the company to pay off its debts. In the past three

years, company has net repayment of long-term loans in each of the year and has net

repayment of the short-term loan for the past three years.

There are not any major investment activities in terms of new plant installation. The

company's last greenfield paints manufacturing facility was set up in 1990. Over the last few

years, Asian Paints has been following a deliberate strategy of postponing capital expenditure

for primary production facilities. This has been possible, as they have focused on enhancing

productivity of existing assets and improving plant efficiencies to realize higher production

levels from existing plant and machinery. Quick and effective standardization of processes,

implementation of the concept "Right First Time (RFT)", 5S and RCA (problem solving

through Root Cause Analysis) are some initiatives undertaken by the company that have

allowed existing manufacturing facilities to produce more from the same assets.

19


Market Based Indicator Analysis

Beta

The company’s beta is 0.38, implying that the company is less responsive to the market

movements.

Price to Earnings Ratio

Price to Earnings ratio determines what are the growth prospects of the company. If the P/E

ratio is high it means that the investors expect the company to grow and hence the rate at

which they discount the earnings the to calculate the share price is low. In the case of Asian

Paints the P/E ratio was 14.92 at March 2003. The P/E ratio of the Asian Paints has not

fluctuated much and had hovered around 14.50 – 18.00 indicating that the P/E ratio is

consistent with the growth potential and is not venerable to the market sentiments. The P/E

ratio in case of Asian Paints is high indicating that the growth prospects as perceived by the

investors are high.

Price to Book Ratio

The Price to Book Ratio depicts the value the investors put to the intangibles and the

difference between the book value of assets and the revenue generation capacity of the assets.

If the P/B ratio is high, it means that the investors ascribe higher value to the intangibles of

the company and that the assets have much higher revenue generation capacity than their book

value. The P/B value of Asian Paints was 4.41 in the March 2003 and has hovered around

4.30. This indicates that the investors put higher value to the intangibles and that the revenue

generating capacities of the assets are much higher than that indicated by their book value.

Market Capitalisation

The market capitalisation of the Asian Paints has been increasing steadily over the past 5

years. The growth rate in the market capitalisation is 4.17% compounded quarterly over the

past five years indicating that the adjusted share price are increasing.

20


FINANCIAL PROJECTIONS

Based on the Industry dynamics, Company analysis and past performance of the organization some

projections are being made for Profit & Loss A/c. The underlying assumptions are:

1. Past 5 year data (Appendix 1) is taken to calculate CAGR for costs, the figure being 10%.

Similarly depreciation is taken on CAGR basis at 15%.

2. The rate of increase in costs is taken to be the same as that has been in the past, as we have no

reason to consider it otherwise. Also we feel 5 year is an optimum time period, no too long in

the past to distort any fundamental change in industry dynamics and not too short as to be too

affected by aberrations.

3. Since two important acquisitions have been made this fiscal and the corporation should be

valued in its entirety, we are taking the CAGR for the pre-acquisition firm data and plugging

them on the Income Statement figures of fiscal year 2002-03, to forecast the values for the

consolidated body.

4. Interest is assumed at 2003 levels

5. Provision for Tax is assumed at 35% of PBT, which is very close to the average of 33% over

the past 5 years.

6. Since we have data on the share of each of the SBU in the total revenue pie and have some

idea of the growth achieved by each of the business segments and the factors likely to affect

them in the future, we have arrived at growth rates for each of them for the next 3 years.

Growth rate from Year 4 onward is assumed to remain the same as that in Year 3.

Segment Share Growth Rate (%)

Year1 Year2 Year3

Domestic Decorative paints 71% 11 10 8

International Decorative 21% 15 15 12

Industrial paints & Chemical 8% 30 20 15

Weighted Average 100% 13 12 10

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Forecasts for Asian Paints India Limited (Consolidated)

Figures in Rs. million

Actuals Projections

Mar-03 Mar-04 Mar-05 Mar-06 Mar-07 Mar-08

Gross Sales 20426 23081 25851 28436 31280 34408

Cost of Sales 17531 19284 21212 23333 25667 28234

PBDIT 2895 3797 4639 5103 5613 6174

Less: Interest 137 137 137 137 137 137

Less: Depreciation 486 559 643 740 851 978

PBT 2271 3100 3858 4225 4624 5058

Less: Tax Provision 861 1085 1350 1478 1618 1770

PAT 1409 2015 2507 2746 3006 3288

INVESTMENT PLANNED

100,000 TPA plant for manufacturing paints in Pondicherry. This will be the largest of the

company’s plants

The first phase will be completed in 2003-04 and it will be scaled up in phases to achieve full

capacity.

The location has been selected for logistical advantages as well as for its fiscal benefits offered.

The decision of investing in a new facility has been on the basis of the growth of demand in water-

based Paints segment.

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FUTURE OUTLOOK

The outlook in the Domestic Decorative Paints segment is mixed.

The negative factors are shrinking in margins, reduced growth rate of the segment, dependence on

monsoons, which are erratic and therefore throw all investment plans in disarray.

The positive points are the fiscal incentives offered by the Government in the current budget,

continuous softening of interest rates and economic recovery after the slump witnessed in the past

2-2 ½ years. Penetration into the rural market would be the key.

The International Business will continue to be an important driver of the business as APIL

aggressively pursues its goal of getting into the top 5-company bracket. The opportunities are

immense in the less developed Paints industry in the emerging economies where APIL can put its

technology, manufacturing and operational and marketing expertise to good use.

The Industrial Paints segment is driven by the off take in motor vehicles, which is expected to get

a boost with the investment in road infrastructure by the Government of India. It is important that

Asian Paints takes advantage of this fast growing market though its primary focus is the decorative

paints business.

Its joint venture in Asian PPG was essentially to counter the weakness it had vis-à-vis other

players in the segment, which had foreign JV partners supplying technology. The capabilities of

this venture should be leveraged before competitors become too entrenched, as ‘relationships’ is

the key in industrial markets and the contracts would typically be long term and bulky in nature.

The size of this sector (industrial vis-à-vis decorative) in the total industry is relatively small at

30% in India, however as development as industrialization happens, we are more and more likely

to reach the global average of 50%, suggesting the increasing importance of Industrial Paints

segment.

23


REFERENCES

Databases

Prowess

Crisil

Indiastat.com

Bibliography

Income Tax Act, 1961 (Bare Act)

Balance Sheets

Asian Paints (India) Limited for the F.Y.

2002-2003

2001-2002

2000-2001

Web Pages

www.asianpaints.com

www.indiainfoline.com

www.delhipaints.com

http://www.domain-b.com/industry/paints/

http://www.isspa.org/indpaintindus.php3

http://in.biz.yahoo.com/030314/26/2275b.html

www.economictimes.com

http://www.coolavenues.com/know/ops/frameworks_rajitghosh2.php3

http://www.hinduonnet.com/thehindu/biz/2002/06/03/stories/2002060300040200.htm

http://www.equitymaster.com/research-it/india-economy/budget2004/paints.asp

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http://www.equitymaster.com/research-it/india-economy/budget2004/paints.asp

http://www.hinduonnet.com/thehindu/biz/2002/06/03/stories/2002060300040200.htm

http://www.coolavenues.com/know/ops/frameworks_rajitghosh2.php3

http://www.economictimes.com/

http://in.biz.yahoo.com/030314/26/2275b.html

http://www.isspa.org/indpaintindus.php3

http://www.domain-b.com/industry/paints/

http://www.delhipaints.com/

http://www.indiainfoline.com/

http://www.asianpaints.com/


Appendix 1

Income Statement Data for Asian Paints India Limited

April 1998- March 2003

0303-(12) 0203-(12) 0103-(12) 0003-(12) 9903-(12) CAGR

Operating Income 16324.87 14463.43 13102.15 11680.69 9675.47 0.11

Cost Of Sales 13785.32 12320.14 11171.56 9887.28 8421.28 0.10

Operating Profit 2539.55 2116.29 1930.59 1793.41 1254.19 0.15

Other Recurring Income 281.92 277.74 162.61 109.31 123.81 0.18

Adjusted PBDIT 2821.47 2394.03 2093.19 1902.72 1378.00 0.15

Financial Expenses 83.48 145.80 221.21 202.92 223.32 -0.18

Depreciation 451.25 417.84 315.82 278.37 226.90 0.15

Other Write offs 33.96 30.08 0.00 0.00 0.00

Adjusted PBT 2252.78 1800.31 1556.17 1421.43 927.78 0.19

Tax Charges 814.84 660.85 495.00 457.50 240.00 0.28

Adjusted PAT 1437.94 1139.46 1061.17 963.93 687.78 0.16

Non Recurring Items -4.29 8.65 2.42 9.41 78.28 -1.56

Other Non Cash adjustments -13.55 -5.02 -7.80 0.92 28.86 -1.86

Reported Net Profit 1433.65 1153.25 1063.89 973.36 768.79 0.13

Earnings Before

Appropriation 2040.10 1663.09 1475.79 1274.25 1044.92 0.14

Equity Dividend 706.05 577.68 449.30 401.16 320.93 0.17

Retained Earnings 1280.60 1062.50 957.94 828.96 690.10 0.13

Source: Prowess

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