Asian Paints Equity Research

Date of Research – 12 January 2016

Price – Rs. 873.15

About the Company

Establishes in 1942, Asian Paints Limited (“Asian Paints” or the “Company”) manufactures paints in the decorative and industrial segments. APL is India’s largest and Asia’s third largest paint company and operates in the geographies of Asia, Middle East, Caribbean and South Pacific islands through its subsidiaries and joint ventures. It has presence in 17 countries with 25 paint manufacturing facilities. It operates in five regions across the world viz. South Asia, South East Asia, South Pacific, Middle East and Caribbean region through the five corporate brands viz. Asian Paints, Berger International, SCIB Paints, Apco Coatings and Taubmans.

The Indian paint industry is currently estimated at ~ Rs. 16,000 crore and is expected to grow between 12-15% per annum over the next 5 years. The top 4 players i.e. Asian Paints, Kansai Nerolac, Berger Paints and Akzo Nobel control about 60% of the total share of the paint market with the unorganised sector controlling roughly 35% of the market. In the organised sector, Asian Paints dominates the Indian paints industry with about 33% market share.

In Decorative paints, Asian Paints is present in four segments: Interior Wall Finishes, Exterior Wall Finishes, Enamels and Wood Finishes. In the beginning of FY 2013, the Company expanded the capacity of its plant at Rohtak (Haryana) from 150,000 KL to 200,000 KL per annum.

Key Financial Figures

Consolidated(Rs. Cr)
ParticularsFY 2013FY 2014FY 2015FY 2016FY 2017
Total Income from Operations10,970.7412,714.8114,182.8115,534.14 17,084.76 
Earnings Before Other Income, Interest, Tax and Depreciation (Operating Profit)1,731.941,997.892,235.412,808.62 3,021.43  
Depreciation154.60245.66265.92287.97 338.84  
Finance Costs36.6542.2234.7640.51 30.58  
Other income114.52134.22169.71200.72 262.60  
Exceptional items9.9627.5752.45 – 
PBT1,655.211,834.272,076.872,628.41 2,914.61  
Tax495.69571.51649.54849.14 947.98  
Extraordinary items– – 
PAT (before Minority Interest and share of Associates)1,159.521,262.761,427.331,779.27 1,966.63
Profit/ (loss) attributable to Minority Interest45.6443.9532.1853.06 – 
Share of profit / (loss) of Associates– (49.61) 
Consolidated Profit / (Loss) for the year1,113.881,218.811,395.151,726.21 2,016.24  

Profitability Analysis

ParticularsFY 2013FY 2014FY 2015FY 2016FY 2017
Operating Profit Margin Ratio15.7915.7115.7618.08 17.68 
Net Profit Margin Ratio10.579.9310.0611.45 11.51 

Operating profit margin is a measurement of the proportion of a company’s revenue that is left over after paying for production costs such as raw materials, salaries and administrative costs. Net profit margin is arrived at by deducting non operating expenses such as depreciation, finance costs and taxes out of operating profit and shows what is left for the shareholders as a percentage of net sales. Together these ratios help in understanding the cost and profit structure of the firm and analysing business inefficiencies.

Key Balance Sheet Figures

Sources of Funds / Liabilities(Rs. Cr)
ParticularsFY 2012FY 2013FY 2014FY 2015FY 2016
Share Capital95.9295.9295.9295.9295.92
Reserves & Surplus2,652.583,288.373,943.304,646.445,509.33
Net worth (shareholders funds)2,748.503,384.294,039.224,742.365,605.25
Minority Interest136.69160.77246.02263.67294.21
Long term borrowings55.8547.8041.4078.2874.91
Current liabilities2,770.522,931.413,405.123,517.233,816.43
Other long term liabilities and provisions184.65107.96117.66130.80134.93
Deferred Tax Liabilities156.73190.01180.14217.60
Total Liabilities5,896.216,788.968,039.438,912.4810,143.33


Application of Funds / Assets(Rs. Cr)
ParticularsFY 2012FY 2013FY 2014FY 2015FY 2016
Fixed Assets1,876.112,455.952,491.792,610.233,316.21
Noncurrent Investments69.72150.12192.13385.88539.25
Current assets3,559.874,006.505,056.465,355.195,860.63
Long term advances and other noncurrent assets348.99129.81155.47315.17229.07
Deferred Tax Assets2.352.190.200.51
Goodwill on consolidation (net)41.5244.23141.39245.81197.66
Total assets5,896.216,788.968,039.438,912.4810,143.33

Efficiency Analysis

ParticularsFY 2012FY 2013FY 2014FY 2015FY 2016
ROE / RONW35.9732.9130.1729.4231.74

Return on Capital Employed (ROCE) measures a company’s profitability from its overall operations by calculating the return generated on the total capital invested in the business (i.e. equity + debt). Return on Equity (ROE) or Return on Net Worth (RONW) measures the amount of profit which the company generates on money invested by the equity shareholders. In short, ROE draws attention to the return generated by the shareholders on their investment in the business. Together these ratios can be used in comparing the profitability of the company with other companies in the same industry.

Valuation Analysis

ParticularsFY 2013FY 2014FY 2015FY 2016FY 2017
Total Income from Operations (Rs. Cr.)10,970.7412,714.8114,182.8115,534.14 17,084.76 
Growth (%)13.90 %15.90 %11.55 %9.53 % 9.98 % 
PAT (Rs. Cr.)1,159.521,262.761,427.331,779.27 1,966.63  
Growth (%)13.61 %8.90 %13.03 %24.66 % 10.53 % 
Earnings Per Share – Basic (Rs. )116.1312.7114.5418.00 20.22 
Earning Per Share – Diluted (Rs. )116.1312.7114.5418.00 20.22 
Price to Earnings42.3241.6853.0348.26 56.67 

Dividend History

The Company has maintained an average dividend yield of 1.58 % over the last 5 financial years.

Liquidity and Credit Analysis

Current Ratio

Higher current ratio implies healthier short term liquidity comfort level. A current ratio below 1 indicates that the company may not be able to meet its obligations in the short run. However, it is not always a matter of worry if this ratio temporarily falls below 1 as many times companies squeeze out short term cash sources to achieve a capital intensive plan with a longer term outlook. Asian Paints’s average current ratio over the last 5 financial years has been 1.43 times which indicates that the Company is comfortably placed to pay for its short term obligations.

Long term Debt to Equity Ratio

Companies operating with high long term debt to equity on their balance sheets are vulnerable to economic cycles. In times of slowdown in economy, companies with high levels of debt find it increasingly difficult to service the interest on their borrowings as profit margins decline. We believe that long term debt to equity ratio higher than 0.6 – 0.8 could affect the business of a company and its results of operations.

Asian Paints’s average long term debt to equity ratio over the last 5 financial years has been 0.02 times which indicates that the Company operates with very low level of debt and is placed well to withstand economic slowdowns.

Interest Coverage ratio

Interest coverage ratio indicates the comfort with which the company may be able to service the interest expense (i.e. finance charges) on its outstanding debt. Higher interest coverage ratio indicates that the company can easily meet the interest expense pertaining to its debt obligations. In our view, interest coverage ratio of below 1.5 should raise doubts about the company’s ability to meet the expenses on its borrowings. Interest coverage ratio below 1 indicates that the company is just not generating enough to service its debt obligations.

Since Asian Paints operates with very low levels of debt, its average interest coverage ratio over the last 5 financial years has been 50.96 times which indicates that the Company can meet its debt obligations without any difficulty.

Ownership pattern

In its latest stock exchange filing dated 31 March 2017, Asian Paints reported a promoter holding of 52.79 %. Large promoter holding indicates conviction and sincerity of the promoters. We believe that a greater than 35 % promoter holding offers safety to the retail investors.

At the same time, institutional holding in the Company stood at 26.88 % (FII+DII). Large institutional holding indicates the confidence of seasoned investors. At the same time, it can also lead to high volatility in the stock price as institutions buy and sell larger stakes than retail participants.

About the Author

Rajat Sharma pictureRajat Sharma is a well known stock market analyst and commentator. He has covered Indian markets for over a decade and is regarded for consistently identifying early stage investment opportunities. Attorney by qualification, Rajat has done extensive work for improving corporate governance and disclosure standards.