Asian Paints

Group 22
TABLE OF CONTENTS

EXECUTIVE SUMMARY..................................................2
BACKGROUND..............................................................4
VISION........................................................................4
DEMOGRAPHICS...........................................................5
STRATEGIC BUSINESS UNITS.........................................6
INDUSTRIAL PAINTS.................................................................................................6
DECORATIVE PAINTS...............................................................................................7
INTERNATIONAL OPERATIONS.....................................................................................8
CHEMICALS BUSINESS.............................................................................................9
FUNCTIONAL EXPERTISE.............................................10
SALES, DISTRIBUTION AND OPERATIONS..................................................................10
INFORMATION TECHNOLOGY...................................................................................11
RESEARCH & DEVELOPMENT..................................................................................11
QUALITY.............................................................................................................12
SWOT ANALYSIS.........................................................13
STRENGTHS..........................................................................................................13
WEAKNESSES.......................................................................................................13
OPPORTUNITIES....................................................................................................13
THREATS.............................................................................................................14
TRENDS.....................................................................16
REVENUES AND COST............................................................................................16
ASSETS AND LIABILITIES........................................................................................17
FINANCIAL RATIO ANALYSIS........................................19
PROFITABILITY RATIOS..........................................................................................19
LIQUIDITY AND COVERAGE RATIOS ........................................................................20
LEVERAGE AND UTILISATION RATIOS......................................................................21
CASH FLOW ANALYSIS................................................23
MARKET BASED INDICATOR ANALYSIS.........................24
FINANCIAL PROJECTIONS............................................25
INVESTMENT PLANNED...............................................27
FUTURE OUTLOOK......................................................28
REFERENCES..............................................................29
APPENDIX 1...............................................................31

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EXECUTIVE SUMMARY

Among the ‘200 Best under a Billion’ companies in the World in 2002 - Forbes
4th 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’.

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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.

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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.

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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.

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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.

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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.

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 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

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.

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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.

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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

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 The SCM system has the objective of and has led to improvement in organizational
efficiencies in various forms:
- Improving flexibility of operations
- 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

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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.

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.

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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.

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 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

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.

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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.

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 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 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.

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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,
control- ling 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

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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 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

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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.

 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

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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

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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.

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 Asian Paints
Group 22

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.

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 Asian Paints
Group 22
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

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 Asian Paints
Group 22
Weighted Average 100% 13 12
10

26
 Asian Paints
Group 22
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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 Asian Paints
Group 22
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.

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 Asian Paints
Group 22
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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Asian Paints
Group 22

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 Asian Paints
Group 22
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

31