FINAL ANALYTICAL REPORT

ASIAN PAINTS

Presented to

Prof. Manoj Kumar

Indian Institute of Management, Lucknow

On September 10th, 2008.

In

Partial Fulfillment of the Requirement for the Course

Management Accounting -I in the

Post Graduate Programme

By

Group F Section B

Name Roll Number

Pratyush Kumar Sinha 24088 Rajesh Kumar Snehi 24089

Sai Harish Chava 24090 Samar Sinh 24091

Samarendra Singh 24092

Sankalp Mittal 24093

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CONTENTS

Final Analytical Report ........................................................................................................ - 1 - Asian Paints ......................................................................................................................... - 1 - Contents ............................................................................................................................... - 2 - Background – The Indian Paint Industry ............................................................................. - 3 - Asian Paints ......................................................................................................................... - 3 - SWOT .................................................................................................................................. - 4 - Recent Sales Breakdown of Asian Paints’ Products ............................................................ - 5 - Future Plans ......................................................................................................................... - 6 - Auditor’s Report .................................................................................................................. - 6 - Director’s report, Analysis and its Impact ........................................................................... - 7 - Revenue Recognition Policy ................................................................................................ - 8 - Inventory Valuation Policy .................................................................................................. - 9 - DEPRECIATION POLICY ............................................................................................... - 10 - Accounting policy for Tangible & Intangible Assets ........................................................ - 11 - Impact of clause 49 ............................................................................................................ - 13 - Balance Sheets ................................................................................................................... - 15 - Income statements .............................................................................................................. - 17 - Ratio Analysis .................................................................................................................... - 19 - Cash flow analysis ............................................................................................................. - 21 - Competitors’ Analysis ....................................................................................................... - 22 - Other Accounting Policies ................................................................................................. - 23 - Operating Cycle ................................................................................................................. - 24 - Recommendations .............................................................................................................. - 25 -

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BACKGROUND – THE INDIAN PAINT INDUSTRY

The paint industry in India is Rs 49 billion sector. There is demand for paints due to industrial

and economic growth and is somewhat relatively price-elastic. The global average per capita

consumption is 15 kg. The per capita consumption of paints in India is very low at 0.5 kg per annum

if compared with 4 kg in the South East Asian nations and 22 kg in developed countries. In India the

organized sector controls 70 percent of the total market with the remaining 30 percent being in the

hands of nearly 2000 small-scale units. In India the industrial paint segment accounts for 30 percent

of the paint market while the decorative paint segment accounts for 70 per cent of paints sold in

India. Asian paints enjoys a strong hold over Indian paint industry with an overall market share of 33

per cent in the organized paint market. The main reason that contributes to this fact is their strong and

largest distribution network among the players and its aggressive marketing has earned it strong

brand equity. It also has a strong focus on becoming a global brand. It was ranked 24th amongst the

top paint companies in the world by Coatings World - Top Companies Report 2006. Also it is double

the size of any other paint company in India.

ASIAN PAINTS

Asian Paints is India’s biggest and Asia’s third biggest paint company today, with a turnover of

USD 1.1 billion. The company has an enviable reputation in the corporate world for professionalism,

fast track growth and building shareholder equity. Asian Paints operates in 20 countries and has 28

paint manufacturing facilities in the world functioning in over 65 countries. The group operates

around the world through its subsidiaries Berger International Limited, Apco coatings, SCIB paints

and Taubman. The company has come a long way since its small beginnings in 1942. Four friends

who were willing to take on the world's biggest, most famous paint companies operating in India at

that time set it up as a partnership firm. Today it’s a corporate force and India's leading paints

company. Asian paints is the industry leader with an overall market share of 33 per cent in the

organised paint market. It has the largest distribution network among the players and its aggressive

marketing has earned it strong brand equity. It also has a strong focus on becoming a global brand. It

was ranked 24th amongst the top paint companies in the world by Coatings World - Top Companies

Report 2006. Also it is double the size of any other paint company in India.

Anecdotes: Asian Paints has been known for its innovations in the industry. It has been one of the first

companies to come up with 50 ml and 100 ml paints packs for rural markets where consumers

needed very small quantities. They also were the first to come up with the tinting machine option.

This allows the consumers to select literally any shade of color at the dealer’s location. The dealer

would then use the computerized tinting machine to mix the appropriate primary colors and deliver

the colour the customer requires. This technology greatly reduced the inventory at the dealers

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because they had to store only the base and the primary colours at their location instead of stocking

each and every shade available. The consumers also could get all the colours they wanted at a single

point.

SWOT

Strengths: Asian Paints (India) Ltd has the credit of entering the segment, cement paint, first when it

introduced exterior acrylic emulsion paint under the brand name, Apex, five years ago. Asian Paint’s

strategy of quick response translates into supplying 95 per cent of the orders supply in 48 hours,

which is a positive competitive advantage. Asian Paints has innovative management, which

understands the Indian market much better than competitors. Today it accounts for nearly 25 percent

of the industry sales and 44 percent market share. In the intermediate segment the company managed

to capture higher market share by offering more choices in colors than the competition. Moreover, its

basket of excellent brands gives it an edge over competitors ICI and Goodlass Nerolac.

Weaknesses:

On the marketing side, there are some gaps in the product range, some lapses in positioning in the

market place. While internal communication has to improve, so does communication with

consumers. Frugal, value-for-money is a virtue that at Asian Paints is understood very well and so do

the customers. But in other markets, it is not a virtue and just doesn't work. Brand building in the

overseas market. They need to fully understand how the retail channel functions, how wholesalers

work, which channels work, what are the expectations of contractors, retailers, architects, and final

consumers in the overseas market.

Opportunities:

As for international expansion, it is exploring South Asia, East Africa and Middle East, where

there is a sizable Indian expatriate population and hence, high brand recognition. Per capita paint

consumption in India is very low at 0.5 kg per annum so there is huge scope in terms of capturing the

Indian market.

Threats:

Losing market to counterfeit products that use fake labels of Asian Paints is the biggest threat.

Competition from big international brands in the global market is also one of the threats faced by

Asian Paints.

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RECENT SALES BREAKDOWN OF ASIAN PAINTS’ PRODUCTS

The following table gives the sales break down of different products of the company in the year 2007 – 08.

Product Name Quantity Sales Value (In Crores) Paints, Enamels, Varnishes 433318 Tonnes 3,906.22 Phthalic Anhydride 12783 Tonnes 86.59 Others 32.19 Penta Erythritol 2642 Tonnes 27.3 Processing Charges 12.38 Other Services 9.79 Sodium Formate 3166 Tonnes 6.42 Formaldehyde 368 Tonnes 1.21 Lease Rentals 0.59 Total 4,082.69

The following chart shows the sales by region for the company in the year 2007 -08

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FUTURE PLANS

It has set itself a stiff target to acquire 60 percent plus market share in the domestic market

and has plans up its sleeve to make inroads in the international market. To achieve its goals,

Asian Paints plans to launch a range of new products across all segments, backed by a

further strengthening of distribution network. Asian Paints is boosting capacity in a bid to

grab a larger share of the incremental demand, along with focused marketing strategies to

make its products the preferred paint. The company is expanding its capacity by 40% to

494,000 tons per annum in 2009-10 at capital expenditure of Rs 3 billion. The company also

plans to focus on increasing the revenue by reducing losses from its South East Asian

operations.

AUDITOR’S REPORT

Role of an independent auditor:

Generally speaking the role of an Independent Auditor in Indian business milieu is to

conduct an audit in accordance with the auditing standards generally accepted in India.

These standards require that the auditor plan and perform to obtain reasonable assurance

about whether the financial statements are free of material misstatements. An audit includes

examining on test basis, evidence supporting amounts and disclosure in the financial

statement. An audit also includes assessing the accounting principles used and significant

estimates made by the Management, as well as analyzing the overall financial presentation.

On Approval of the shareholders Asian Paints Limited has appointed Joint Auditors of the

company.

The Auditors and their report: The company has been quite consistent in hiring the services of SHAH & COMPANY

as the as an independent auditor till the annual report of year 2006-07. There has been a

change in the Auditors of the company in the year 2007-08 with the appointment of BSR &

ASSOCIATES AND SHAH & COMPANY as Joint Auditors with the approval of the

shareholders at the Annual General Meeting held on 27 June, 2007. A passing look at last 4

years report would suggest that every year the auditors arrive at a similar assessment in

terms of audit practices. Both, in the auditors report to the members and auditors report on

the annual financial statement, the independent auditors remain very satisfied consistently

over the years. Both the documents in terms of compliance to accounting standards over the

years read the same. The only changes that occur in report to members is in terms of

disputed dues in respect of sales tax, wealth tax, income tax, service tax, customs duty,

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excise duty and cess unpaid as at the last day of the financial year. The report gives a very

unbiased and objective assessment of the financial health of the company. The Independent

Auditors opinion can play a very important role in our assessment. A true and fair reflection

of the company makes us confident of our analysis.

DIRECTOR’S REPORT, ANALYSIS AND ITS IMPACT

The report begins by outlining the financial summary of the company and specifically

highlights the growth in the areas of net sales, operating income, operating profit and PAT.

While Asian Paints Limited made a profit of Rs 525 Crores, the group’s consolidated profit

was Rs 559 crores. The profit was disposed off by distribution of dividend, transfer to

General reserve and C/F to balance sheet. The company therefore instills confidence in the

shareholders and investor community. A dividend of Rs 17 per equity share is proposed to

be distributed. The report is followed by Management discussion and analysis. Health of the

economy is a matter of concern and the medium term outlooks for growth seems good, albeit

a little lower than the past because of volatile commodity prices. The director goes on to say

that in the year under review, the company benefited immensely from a strong rupee and a

good supply situation, resulting in soft prices for the raw materials. The future of the

company seems bright because of its strong commitment to growth. The international

business unit of the company has performed well by showing growth in all the regions

except East Asia and South Pacific region.

Director’s report brings out that the company is conscious of its environmental impact.

Its CSR initiatives, HR practices and environmental responsibility will enhance its goodwill

and bring visibility. Focus on use of IT to achieve efficiency and R&D for new products will

add to the profitability in the times to come. All its assets are adequately insured. The report

makes a thorough analysis of current industry problems and prospects. The report has rightly

assessed the growth outlook for the economy at 7.5 to 8% in 2008-09. However the lower

growth is likely to be neutralized by an impetus in consumer demand due to IT slab changes,

implementation of sixth pay commission, farmer loan waiver and a normal monsoon. It also

brings out significant challenges for reducing losses in South East Asia Region in the form

of price controls. The company is also seized of the risks in the macro-economic conditions

in the global economy that might have an adverse impact on its operations. All these aspects

will be taken into consideration in assessing the financial health of the company.

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REVENUE RECOGNITION POLICY

Revenue from sale of goods is recognized on transfer of all significant risks and rewards of

ownership to the buyer which is on dispatch of goods. Sales are stated gross of excise duty

as well as net of excise duty; excise duty being the amount included in the amount of gross

turnover. The excise duty related to the difference between the closing stock and opening

stock is recognized separately as part of ‘Material Cost’. Dividend income is recognized

when the right to receive payment is established. Interest income is recognized on the time

proportion basis.

Analysis: v We feel that the revenue recognition policy has not changed over the last 4 years. It has

been consistent with the policies prescribed by the regulator (AS – 9). These policies are

consistent with the way the company carries out its business because most of the

revenues are generated by selling paints and varnishes. As most of the sales are by

tangible goods, it is easier for the company to recognize its revenues and for the auditor

to verify them. The company has little scope to play with the accounts as it has to

recognize the revenues generated from total sales of its goods.

v A major part of Asian paints revenues are generated by sales of paints. Asian paints also

have revenues generated from services which form a very small part of its total revenue.

The following revenue recognition policy was mentioned in the year 2004 – 05.

“Revenue from rendering of services is recognized by reference to the stage of

completion of the transaction at the balance sheet date determined by services performed

to date as a percentage of total services.” Where as, in the year 2007 - 08 it was changed

to “Revenue from service is recognized on rendering of services to customers”. There is

no mention of the revenue recognition policy used during the years 2005 – 06 and 2006 –

07 in the annual report of the company though it has revenues generated from services.

v We feel that the company has been following the standards prescribed by the regulator

and it has been less conservative in recognizing its revenues from goods. But the

company has changed its stance from the year 2004 - 05 to 2007 – 08 in recognizing the

revenues from services. It has tried to be more conservative in reporting the revenues

from services in the last year where as it appeared to be less conservative about this in

the year 2004 – 05.

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INVENTORY VALUATION POLICY

Inventory valuation deals with determination of the cost assigned to raw materials,

work-in-process, finished goods, and any other inventory item. Various methods are allowed

in valuing inventory including Last-In, First-Out (LIFO), First-In, First-Out (FIFO) and

Weighted Average. Inventory is valued at the lower of cost or market value applied on an

item-by-item basis, a category basis, or a total basis. The following are the points mentioned

by the company under its inventory valuation policy:

v Raw materials, work in progress, finished goods, packing materials, stores, spares, traded

goods and consumables are carried at the lower of cost and net realizable value. The

comparison of cost and net realizable value is made on an item-by-item basis. Damaged,

unserviceable and inert stocks are suitably depreciated

v In determining cost of raw materials, packing materials, traded goods, stores, spares and

consumables, weighted average cost method is used. Cost of inventory comprises all

costs of purchase, duties, taxes (other than those subsequently recoverable from tax

authorities) and all other costs incurred in bringing the inventory to their present location

and condition

v Cost of finished goods and work-in-process includes the cost of raw materials, packing

materials, an appropriate share of fixed and variable production overheads, excise duty as

applicable and other costs incurred in bringing the inventories to their present location

and condition. Fixed production overheads are allocated on the basis of normal capacity

of production facilities

Analysis: v We feel that the inventory valuation policy has more or less remained same over the last

4 years. It has been consistent with the policies prescribed by the regulator (AS – 2). The

policies used by the company as mentioned in their annual report are precisely the same

as those mentioned by the ICAI.

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v As the company deals with tangible goods, the policies can be applied to this company

with ease. We feel that the way the company valuates its inventory is in agreement with

the standards prescribed by the regulator

v The only minor change that we found out in the inventory recognition policy is that the

company changed the way it valued the traded goods after 2004 – 05. Initially, the traded

goods were valued at cost while they have been valued on a weighted average basis

subsequently

DEPRECIATION POLICY

Accounting standard -6 describes depreciation and depreciable assets. It also provides a

guideline for the norms of standard accounting treatment for various aspects of depreciation.

The amount of depreciation charged off in the year must be disclosed in the financial

statements, In addition to AS-6 we as a group tried to understand Asian Paints’ Depreciation

policy by keeping in mind that:

“Depreciation is a process of allocation, not of Valuation”

Asian Paints uses Written down Value / Straight Line Method depending on the type of

asset. Depreciation on fixed assets is provided at rates permissible under applicable local

laws or at such rates so as to write off the value of assets over their useful life Company

considers the rates of depreciation prescribed in Schedule XIV to the Companies Act, 1956

as the minimum rates. If the management’s estimate of the useful life of a fixed asset at the

time of acquisition of the asset or of the remaining useful life on a subsequent review is

shorter than that envisaged in the aforesaid schedule, depreciation is provided at a higher rate

based on the management’s estimate of the useful life/remaining useful life.

Pursuant to this policy, Asian paints provides depreciation on following assets at

rates which are higher than the corresponding rates prescribed in Schedule XIV.

v Information Technology Assets: 4 years

v Scientific Research Equipment: 8 years

v Furniture and Fixtures: 8 years

v Office Equipment and Vehicles: 5 years

For Phthalic Anhydride and Pentaerythritol plants, depreciation is provided

on rates applicable for continuous process plants and for other eligible plant and machinery

depreciation is provided on triple shift basis. Depreciation on tinting systems except

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computers leased to dealers is provided under Straight Line Method with a useful life of nine

years. Depreciation on computers given on lease is provided under Straight Line Method and

at rates specified under Schedule XIV to the Companies Act, 1956.

Assets held under finance leases are depreciated over their expected useful lives on

the same basis as owned assets or where shorter, the term of the relevant lease. Intangible

assets are capitalized and amortized over their estimated useful life.

Analysis

The depreciation policy used by Asian Paints remained consistent for the last four

years. The company depreciates its assets at a faster rate than what is prescribed in the

companies act. The company does not mention at any place the kind of methods used by

them to calculate the useful life of an asset. This policy appears to be more conservative as

they estimate the life of their assets to be lesser than that is prescribed in companies act. This

on the other hand gives the company to show more expenses and decrease the tax amount

paid by the company. On the whole, though the company appears to have chosen a more

conservative approach, there may be an advantage of reduced taxes on account of this policy.

The company has been transparent in reporting to the share holders the estimated life over

which different kinds of its assets are depreciated. This is unlike its competitors who do not

clearly disclose/ demarcate the life of their assets over which depreciation is calculated. We

believe that Asian Paints has tried to present before its shareholders as many details as

possible about its depreciation policies.

ACCOUNTING POLICY FOR TANGIBLE & INTANGIBLE ASSETS

The ICAI issued Accounting Standard AS-10, AS-19 and AS- 26 explains the

significance of tangible and Intangible Assets such as land, buildings, plant and machinery,

vehicles, furniture and fixtures and Leases in preparation of financial reports of a company.

These accounting standards also provide an insight in to the norms of standard accounting

treatment for various aspects of tangible and intangible assets mainly:

v Identification

v Measurement

v Valuation

v Revaluation

v Retirements and Disposals

v Impairment

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We decided to have a thorough discussion based on above mentioned points

for improving our understanding of these accounting standards and there by analyzing the

accounting policy for valuation of tangible and intangible assets. The financial statements for

Asian Paints have been prepared by taking the historical cost convention on accrual basis of

accounting; management displays conformity with GAAPs to make estimates and

assumptions for the reported amount of its tangible and intangible assets.

Fixed Assets

For fixed assets Asian Paints uses at the cost of acquisition or construction less

accumulated depreciation. The cost of fixed assets includes taxes (other than those

subsequently recoverable from tax authorities), duties, freight and other incidental expenses

related to the acquisition and installation of the respective assets. Interest on borrowed funds

directly attributable to the qualifying assets up to the period such assets are put to use is

included in the cost. Know-how related to plans, designs and drawings of buildings or plant

and machinery is capitalized under relevant asset heads.

Lease

Leasehold land and major leasehold improvements are amortized over the primary

period of lease. Purchase cost, User license fees and consultancy fees for major software are

amortized over a period of four years. Acquired Trade Mark is amortized over a period of

five years.

Assets taken on lease: Lease rentals on assets taken on lease are recognized as expense in

the Profit and Loss Account on an accrual basis over the lease term.

Assets given on lease: The Company has provided tinting systems to dealers on an

operating lease basis. Lease rentals are accounted on accrual basis in accordance with the

respective lease agreements.

Goodwill

Goodwill is initially recognized as an asset at cost and is subsequently measured at cost

less any accumulated impairment losses. For the purpose of impairment testing, goodwill is

allocated to each of the Group’s cash-generating units expected to benefit from the synergies

of the combination. An impairment loss recognized for goodwill is not reversed in a

subsequent period.

Impairment loss

An impairment loss is recognized whenever the carrying amount of asset exceeds its

recoverable amount. Asian Paints reported impairment losses of Rs 41.86 Crores in 2007-08,

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a decline of 5.27% from previous fiscal. Company reported impairment losses in following

assets:

S. No. Assets Impairment Loss % of Net Block

1 Leasehold Buildings 1.65 11.99

2 Plant and Machinery 13.96 5.81

3 Scientific Research Equipment 0.50 14.36

4 Furniture and Office Equipment 1.80 13.59

5 Vehicles 0.03 9.09

6 Assets given under operating lease 23.92 314.32

7 TOTAL 41.86 7.24

8 Previous Year 44.19 9.21

Normally an assessment is done to determine whether there is any indication of

impairment of the carrying amount of the Company’s fixed assets. Company explains that if

any such indication exists, an asset’s recoverable amount is estimated. A reversal of

impairment loss is recognized in the Profit and Loss Account. After recognition of an

impairment loss or reversal of an impairment loss as applicable, the depreciation charge for

the asset is adjusted in future periods to allocate the asset’s carrying amount, less its residual

value (if any), over its remaining useful life.

IMPACT OF CLAUSE 49

Clause 49 of the Listing Agreement, which deals with Corporate Governance norms that a

listed entity should follow, was first introduced in the financial year 2000-01. SEBI has

revised this Clause in the year 2004. The new changes that were made covered issues like

Independence of Directors, Whistle Blower policy, Performance evaluation of nonexecutive

directors, Mandatory training of non-executive directors, etc.

It is mentioned in the annual report that the company is in compliance with all the

regulations stipulated by SEBI in the Listing Agreement.

Composition of Board

The composition of Board of directors of the company has been listed in detail in

the corporate governance report in the Annual Report of the company. Various details like

Name of the Director, Nature of Directorship, Date of joining the Board, Attendance,

Directorship in other Companies and Membership & Chairmanship of the Committees of the

Board of other Companies are clearly mentioned in the report. The Board of the company

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consists of 3 Executive Directors and 9 Non- Executive Directors, out of which six 6 are

Independent Directors. All the Directors, except the three Executive Directors, are liable to

retire by rotation and one third of the Directors who are liable to retire by rotation, are

eligible for re-election.

Remuneration policy and details of remuneration paid

The company has clearly mentioned all the details about the remuneration paid to its

executive and non executive directors. It has also reported to the shareholders, the various

limits and conditions imposed by the companies act and Clause 49. It has detailed

remuneration paid to its directors in all forms and a table which shows the relations among

its directors and the remunerations paid to each one of them is also given in the report which

includes details like Salary, HRA, perquisites, commission and sitting fees.

Further it has also given the details of other transactions in which the board members

were involved and it has mentioned that those transactions have no material effect on the

company. It has given the details any other income that the directors or their relatives have

drawn from the company and the duties that they discharged to earn that income. The

percentage of shares held by each director in the company is also listed in the report. The

company has also given the proposed changes to the salaries of each director which would

require an approval from the shareholders.

Other Committees

The details of other committees of the board like Audit Committee, Remuneration

Committee, Shareholders Investors Grievance Committee and Share Transfer Committee

and their scope of work has been mentioned in the report. The compositions of each

committee, some of the decisions made by them and other details have been detailed.

Details like the number of meetings, dates of meetings and attendance details for the

Audit committee have been given the report. It has also given the role and various

responsibilities of the audit committee in the report.

Subsidiary Companies

The company has mentioned that it does not have a material non-listed Indian

subsidiary company, whose turnover or net worth exceeds 20% of the consolidated turnover

or net worth respectively, of the Company and its subsidiaries in the immediately preceding

accounting year.

Disclosures

The company has disclosed many other details like code of conducts, reasons for

extending/reinstating directors, punishment for non compliance etc in the report.

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Analysis

The clause 49 of the listing agreement has made the company disclose all the minute

details related to the composition, remuneration and roles of each and every member in the

board of directors. This has made transparent many details about the company which would

have not been possible without the existence of the clause 49. Under such circumstances the

board of directors cannot afford to make any decisions for their personal gains and hence the

rights of the share holders are also protected to some extent by this.

BALANCE SHEETS

A quick overview of vertical from of balance sheet clearly shows an increasing trend in total

current assets and total assets.

Particulars 2008 2007 2006 2005

Cash, cash equivalent 1072.6 1034.1 577.05 490.02

Market Securities 2016.2 1162.07 1015.8 387.88

Accounts Receivables 4603.3 4206.12 3475.22 2958.67

Inventories 7140.1 5980.06 4888.66 4545.44

Other Current Assets 2264.3 1673.19 1244.36 1116.37

Total Current Assets 17096.5 14055.54 11201.09 9498.38

Net property, plant & Equipment 6815.2 4716.98 4200.5 4308.65

Other Long term Assets 1330.5 1468.22 1660.59 1429.68

Total Assets 25242.2 20240.74 17062.18 15236.71

Total Current Liabilities 12882.4 11227.01 7711.12 6786.53

Long term debt 1397.6 185.64 1947.54 1786.53

Other long term liabilities 564.8 449.42 340.71 353.37

Preferred share 0 0 0 0

Total Equity Capital 10397.4 8378.67 7062.81 6310.28

Total Liability & Equity 25242.2 20240.74 17062.18 15236.71

All items shown in this table are in Million Rs.

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Total assets have shown an increasing trend over the years that can be attributed to the

acquisition and installation of fixed assets over successive years & an increase in long term

investments.

Chart 1: Asset Trend

Similarly there is an increasing trend for total current liabilities and other long term

liabilities. Following graphs clearly illustrates the trend in various financial parameters:

Chart 2: Liabilities & Shareholder Equity Trends

05000

1000015000200002500030000

Million Rs.

FY 2008 FY 2007 FY 2006 FY 2005

Financial year

Assets Trend

Total Current Assets Total Assets

05000

1000015000200002500030000

Million Rs

FY 2008 FY 2007 FY 2006 FY 2005Financial Year

Liabilities & Equity Trends

Other LT Liabilities Current Liabilities Total Liabilities and Equity

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INCOME STATEMENTS

The net sales figure comprises sale of products/services, income from hire

purchase and loan contracts and other miscellaneous incomes. This figure is net of discount

& excise duty. It can be noted that the sales figure has been growing consistently over the

years. With the increase in income level of the overall population and growing consumer

culture, the Paint industry is expected to show a steady growth both in terms of personal

requirements as well as industrial demand.

Table: Income Statement

Particulars 2008-07 2007-06 2006-05 2005-04

Net sales 100 100 100 100

Less: Cost of sales (86.238) (87.196) (88.707) (88.565)

Other expenses (0.764) (0.495) (0.2384) (0.3496)

Interest expense (0.4804) (0.5153) (0.3846) (0.4224)

= earnings before taxes 13.48 11.794 10.67 10.663

Less: Income taxes (4.618) (4.192) (4.452) (4.143)

+/-Extraordinary items

Or adjustments 0.428 0.056 (0.078) 0.279

Net Income 9.29 7.658 7.14 6.799

All items shown in this table are in Million Rs.

Cost of sales has shown an increasing trend over the years due to increased

production and hence increased consumption of raw material and components & other

related production costs. Other expenses include product development expenditure which

has been shown an increase followed by subsequent decrease over the last four years. The

increase in the net value of other expenses can be attributed to the increase in depreciation

expenses. Depreciation is calculated on a straight line basis and the value has shown a rise

because of additions in depreciable fixed assets over the years

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The interest expense in 2008 has shown a fall in the period 2007-2008 as compared to the

previous year.

Chart 3: Cost of sales and other expenses trends

0

20

40

60

80

100

% of total sales

2008-07 2007-06 2006-05 2005-04

Financial Year

Expenses

Cost of Sales Other Expenses Interest expense Income tax

An overall comparison of EBIT, Net Income and Income tax expense:

Income taxes have shown a steady increase proportionate with the EBT except for

the year 2007 when the company had to shell out more taxes as deferred taxes along with the

current tax expenses.Net income has been steadily increasing over the last four years.

However the growth has declined in the last year because of a decline in the growth of sales.

Chart 4: EBIT & Net Income trends

02468

101214

% of total sales

2008-07 2007-06 2006-05 2005-04

Financial Year

EBIT & Net Income

Earning Before taxes Income taxes Net Income

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RATIO ANALYSIS

Liquidity, efficiency & solvency Ratios:

Liquidity ratios are a set of financial metrics that is used to determine a company's ability to

pay off its short-terms debts obligations. We have used only the sum of cash and equivalents

divided by current liabilities because they feel that they are the most liquid assets, and would

be the most likely to be used to cover short-term debts in an emergency. Liquidity ratios

measure the availability of cash to pay debt.

Table: Liquidity Ratios

Generally higher value of the ratios means the larger the margin of safety that the company

possesses to cover short-term debts. Common liquidity ratios include the current ratio, the

quick ratio and the operating cash flow ratio.

Chart 5: Liquidity Ratios

0.000

0.500

1.000

1.500

FY 2008-07

FY 2007-06

FY 2006-05

FY 2005-04

Financial Year

Ratios 1

Current ratio Quick Ratio Debt-Equity Ratio

FY 2008-07 FY 2007-06 FY 2006-05 FY 2005-04

Current ratio 1.327 1.252 1.453 1.400

Quick ratio 0.773 0.719 0.819 0.730

Average Collection period 34.857 34.563 36.348 37.772

Days Inventory 59.172 59.475 60.058 64.795

Days Payable 47.882 44.609 40.496 41.982

Debt-Equity Ratio 1.428 1.416 1.416 1.415

- 20 -

Chart 6: Liquidity Ratios

0.000

20.000

40.000

60.000

80.000

Days

FY 2008-07

FY 2007-06

FY 2006-05

FY 2005-04

Financial Year

Ratios 2

Days Inventory Days Payable Average collection period

DuPont Analysis:

DuPont analysis was first used as a method of performance measurement by the DuPont

Corporation in the 1920s. With this method, assets are measured at their gross book value

rather than at net book value in order to produce a higher return on equity (ROE). It is also

known as "DuPont identity".

ROE = (Profit margin)*(Asset turnover)*(Equity multiplier)

= (Net profit/Sales)*(Sales/Assets)*(Assets/Equity)

DuPont analysis tells us that ROE is affected by three things:

v Operating efficiency, this is measured by profit margin

v Asset use efficiency, which is measured by total asset turnover

v Financial leverage, which is measured by the equity multiplier

Table: DuPont Analysis

Profitability Ratios

FY 2008-07 FY 2007-06 FY 2006-05 FY 2005-04

ROE 0.394 0.335 0.300 0.276

Profit Margin 0.093 0.077 0.071 0.068

Asset turnover 1.745 1.813 1.741 1.680

Equity Multiplier 2.428 2.416 2.416 2.415

- 21 -

Chart 7: DuPont Analysis

0.0000.5001.0001.5002.0002.500

FY 2008-07

FY 2007-06

FY 2006-05

FY 2005-04

Financial Year

DuPont Analysis

ROE Profit Margin Asset turnover Equity Multiplier

CASH FLOW ANALYSIS

The major chunk of cash in flow to the company in the last 4 years has been from the

Operating activities indicates the good health of the company in its operations. There is no

net inflow of cash for the company from investing and financing activities in the last 4 years.

The company has consistently been buying and selling investments which generated net cash

outflows in the last four years.

The company has consistently been acquiring new assets over the last four years

which indicates that the company is in expansion mode. The company acquired fixed assets

worth 258Crore in the year 2007 -08 which is significantly higher when compared to the last

3 years. This indicates that the company has begun a massive expansion this year. Asian

Paints has a net decrease in the cash and cash equivalents at the end of 2007-08 owing to the

heavy cash outflows in form of investments.

The company also has only net outflow from financing activities over the last four

years which indicates that the company is self sufficient and it has been repaying its old

loans which is why the company has net outflow of cash from financing activities. The

company has lesser cash outflow in the year 2007-08 when compared to the previous year

due to considerable reduction in the amount of dividend paid.

The analysis of cash flow statements for the last 4 years indicate that the company is in a

maturing phase and the cash generated from its operating activities are sufficient to cater to

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its investing and financing activities. The continuously increasing cash flows from the

operating activities indicate that the cash flows of the company are very healthy.

COMPETITORS’ ANALYSIS

The following table shows the condensed cash flow statements of Asian Paints and

two of its competitors ICI India and Kansai Nerolac Limited.

Asian Paints

ICI India

Kansai Nerolac

Cash and Cash Equivalents at Beginning of the year 42.49 779.02 21.49 Net Cash from Operating Activities 457.29 80.82 150.08 Net Cash Used in Investing Activities -331.91 103.79 -122.54 Net Cash Used in Financing Activities -126.52 -264.64 -15.66 Net Inc/(Dec) in Cash and Cash Equivalent -1.14 -80.03 11.88 Cash and Cash Equivalents at End of the year 41.35 698.99 33.37

All figures in Crores.

The above table shows that Asian Paints clearly has the highest amount of cash inflows from

its operating activities where as the other two companies have very less amounts of inflows

from operating activities. Though ICI India has huge amounts of cash and cash equivalents,

it has the lowest amount of cash inflows from its operating activities. Asian paints also has

more cash outflows from investing activities than the other companies which shows that

Asian Paints is on a huge expansion mode where as the other companies are not. Especially,

ICI India has more cash inflows from investing activities than from its Operating activities

which means that the company is selling more of its assets for cash. ICI India also has more

cash outflows from Financing activities than from the inflows from Operating and investing

activities put together. This shows that the ICI India Ltd Company is not in a healthy

condition when compared to Asian Paints.

Kansai Nerolac has cash flow percentages similar to that of Asian Paints but in smaller

magnitudes. While Asian Paints and Nerolac have net decrease in cash at the end of the year,

ICI India has net increase in cash. Asian Paints has invested heavily in acquiring fixed assets

which led to net overall outflow of cash where as for Nerolac it is due to repayment of loans

that the net cash flow is negative. Clearly, Asian Paints cash flows look healthier and helpful

to the company in the future.

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OTHER ACCOUNTING POLICIES

The following are some of the other important accounting policies of the company.

Investments: Long term investments are carried at cost. Current investments are carried at

lower of cost and fair value.

Sundry Debtors: Sundry debtors are stated after writing off debts considered as bad.

Adequate provision is made for debts considered doubtful

Research and Development: Capital expenditure is shown separately under respective

heads of fixed assets. Revenue expenses including depreciation are charged to Profit and

Loss account under the respective heads of expenses.

Provision for Taxation:

Income tax expense comprises of current tax, deferred tax charge or credit (reflecting the tax

effects of timing differences). The deferred tax charge or credit and the corresponding

deferred tax liabilities or assets are recognised using the tax rates that have been enacted or

substantively enacted by the Balance Sheet date.

Deferred tax assets are recognised only to the extent there is reasonable certainty that the

assets can be realised in future; however, where there is unabsorbed depreciation or carry

forward loss under taxation laws, deferred tax assets are recognised only if there is a virtual

certainty of realisation of such assets. Deferred tax assets are reviewed as at each Balance

Sheet date to reassess realisation.

Provisions and Contingencies

The Company creates a provision when there exists a present obligation as a result of a past

event that probably requires an outflow of resources and a reliable estimate can be made of

the amount of the obligation.

All the above accounting policies show that the company follows conservative accounting

policies which enable the company prepare itself for any unpredictable events in the future.

The company also capitalizes its R & D costs which is accepted as one of the best practices.

The company also continuously revises its provisions and contingencies which help the

company smoothen its earnings in the coming years by using the reserves set aside for those

purposes. All these policies imply that the company is always prepared for future and the

earnings do not take a dip.

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OPERATING CYCLE

The following tables show the operating cycle calculations for the company.

DIO Calculations Mar' 2008 Mar' 2007 Mar' 2006 Mar' 2005 Cost of Sales Per

Day 7.841507 6.574055 5.389685 4.550082 Avg. Inventory 486.52 391.89 340.25 271.14

DIO 62.0442 59.61161 63.12985 59.59013

DIO (Days inventory outstanding) is obtained by dividing the average inventory by cost of

sales per day. The DIO has more or less remained in the same range over the last four years.

Compared to the other figures like DSO and DPO this number is a bit on the higher side

which means that the inventory has remained unused for nearly 60 days. The company has

some of its cash lying unused for many days which may not be a very good sign.

DSO Calculations Mar' 2008 Mar' 2007 Mar' 2006 Mar' 2005 Net Sales Per Day 9.531068 7.840384 6.452277 5.441562

Avg. Acc. Receivable 239.6 206.6 164.22 124.61 DSO 25.13884 26.35075 25.45148 22.89968

DSO (Days Sales Outstanding) is obtained by dividing the average Accounts receivable by

net sales per day. This number is very low compared to DPO which indicates that the

company is in a strong position in the market and is able to get back its accounts receivables

within 25 days. This number also has remained more or less stable over the years indicating

the strong position of the company in the market.

DPO Calculations Mar' 2008 Mar' 2007 Mar' 2006 Mar' 2005 Cost of Sales Per Day 7.841507 6.574055 5.389685 4.550082

Avg. Acc. Payable 321.54 225.52 175.72 153.43 DPO 41.00487 34.30455 32.60302 33.72027

DPO (Days Payable Outstanding) is calculated by dividing the average Accounts payable by

cost of sales per day. This number is on the higher side compared to DSO which indicates

the confidence that the sellers have in the company. This enables the company to have more

cash in operations. The continuous increase in the DPO over the years indicates the increase

in the hold of the company in the market.

Operating Cycle Mar' 2008 Mar' 2007 Mar' 2006 Mar' 2005

- 25 -

DIO 62.0442 59.61161 63.12985 59.59013 DSO 25.13884 26.35075 25.45148 22.89968 DPO 41.00487 34.30455 32.60302 33.72027

Operating Cycle 46.17816 51.65781 55.97831 48.76954

Operating Cycle = DIO + DSO – DPO

The operating cycle of the company has been fluctuating in the range of 46 and 55 in the last

4 years and there is no clear observed trend.

RECOMMENDATIONS

Every shareholder or investor, without exception, wants to maximize the value of his

investment. India is on a growth path and so are the many countries to which products of

Asian paints are exported. The shares of Asian Paints will add value to the portfolio of any

discerning investor because of following reasons:-

(a) The paint industry in India is Rs 49 billion sector. There is demand for paints due to

industrial and economic growth .Asian paints enjoys a strong hold over Indian paint

industry with an overall market share of 33 per cent in the organized paint market. The

main reason that contributes to this fact is their strong and largest distribution network

among the players and its aggressive marketing strategy. It also has a strong focus on

becoming a global brand. It was ranked 24th amongst the top paint companies in the

world by Coatings World - Top Companies Report 2006. Also it is double the size of

any other paint company in India.

(b) Asian Paints is India’s biggest and Asia’s third biggest paint company today, with a

turnover of USD 1.1 billion. The company has an enviable reputation in the corporate

world for professionalism, fast track growth and building shareholder equity. Asian

Paints operates in 20 countries and has 28 paint manufacturing facilities in the world

functioning in over 65 countries.

(c) Asian Paints has been known for its innovations in the industry. It has been one of the

first companies to come up with 50 ml and 100 ml paints packs for rural markets where

consumers needed very small quantities. Considering the fact that rural India is

growing fast, the future of the company looks promising. Asian Paints has innovative

management, which understands the Indian market much better than competitors.

(d) As for international expansion, it is exploring South Asia, East Africa and Middle East,

where there is a sizable Indian expatriate population and hence, high brand recognition.

It has set itself a stiff target to acquire 60 percent plus market share in the domestic

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market and has plans up its sleeve to make inroads in the international market. To

achieve its goals, Asian Paints plans to launch a range of new products across all

segments, backed by a further strengthening of distribution network. Asian Paints is

boosting capacity in a bid to grab a larger share of the incremental demand, along with

focused marketing strategies to make its products the preferred paint. The company is

expanding its capacity by 40% to 494,000 tons per annum in 2009-10 at capital

expenditure of Rs 3 billion. The company also plans to focus on increasing the revenue

by reducing losses from its South East Asian operations.

(e) As per the latest reports, the sales and earnings growth stand at 21.74% and 37%

respectively

(f) Over the last 12 months the stock has outperformed the Sensex by growing at 27%.

There is no downside to the stock and the risks are manageable The key ratios are as

given below

Return on Total Assets (ROTA) 23.30%

Return on capital employed (ROCE) 37.29%

Net profit margin 10.28%

We recommend that one can purchase the common stock of the company. The company

also has healthy cash flows which also clearly show that the company is in expansion mode

by continuously investing in acquiring new assets. By investing in this company one can

expect good return on investments in future as the company reaps the fruits of its current

investments.