Security Analysis Of Asian Paints

DarkHorses

2/1/2015

This document describes about the company fundamental analysis (sales, profits, financial analysis and shareholding pattern),Technical analysis, Valuation(relative and DDM method)

Vyas Agastya Vemuri

Uppala Praveen

Vigneshwaran C

Indian Economy analysis

To understand the timing of investment we need to understand the Indian economy and the

favorable conditions

• One of the most attractive destinations of investment due to recent government policies

and reforms

• GDP is 5.6 % and is expected to grow to 6.4%

• IIP growth rate 2.5 %

• Inflation is 4.38 @ 13th Dec 2014

Industry Analysis

Porter’s five force analysis

Bargaining power of buyers: Households and Industrial Users are the main customers of this

industry. For housing requirements, the buyers can be customers (building contractors who buy

in bulk) and end customers (people who paint/re-paint their house). Customers are more price

sensitive because for them number of options are available and decisions are made based on

quality, price and differentiating factors (like weather protection, environment friendly paints).

The unorganized market has also have a large chunk of market share providing many options to

lower income segment. Whereas, Industrial segment is low margin high revenue business and

buyers of these segments are knowledgeable about their needs. Therefore, price comparison is

done effectively by the customers. However, the leading Industrial paint suppliers have their

expertise in their favor, which limits the bargaining power of buyers. Thus, bargaining power of

buyer is Medium.

Bargaining power of suppliers: The Indian Paint industry is raw material intensive industry

with more than 300 products going into the manufacturing of the final products. The raw

material can be divided into different categories like pigments, additives, solvents, binders etc.

Titanium Dioxide is one of the key pigment used in the production of paint and is facing a global

supply shortage. Thus supplier of this material has solid bargaining power. Thus, bargaining

power of supplier is Medium.

Competitive Rivalry: About 80% of organized market is created to by the below four players of

Indian Paint Industry. But the current market growth rate can provide ample room of opportunity

for all the players of the industry to flourish. However, competition will keep on increasing as

market will get saturated, but this will take some time to happen, till then one can keep satisfy

customer need with good margin. Also, the presence of unorganized market does provide room

for competition. Thus, on the whole competitive rivalry for the Indian paint industry is Low to

Medium.

Company's Business Model

Asian Paints: Overall Market leader due to cost leadership in decorative paint market.

Kansai Nerolac: Market leader in Automotive Industrial Paint segments, also into decorative

paint.

Berger Paints: Major revenue from decorative segment, also into industrial paints

Akzo Nobel: Major revenue from decorative segment, also into automotive segment

Shalimar Paints: Mainly into decorative and non-automobile industrial coatings.

Availability of Substitute: The availability of substitute of very minimal. In the rural areas lime

wash is conventionally used substitute for paints. One alternative option for decorative walls

available today is Wallpaper. Thus, the availability of substitutes in the Indian Paint Industry

is Low to Medium.

Threat of new entrants: As it has been stated earlier that the paint market in Indian is

dominated by few players, making it difficult for anyone new entering the industry to compete.

Since new technologies are also available to shorten production life cycle of paint. Thus, Threat

to new entrant is Medium.

ASIAN PAINTS

History

1945 – Established

1973- went public

1985 – Entered into a collaboration agreement with Nippon Paints Co. Ltd, Japan, to obtain

technical knowhow to manufacture powder coating and coil coatings

1990 – 00 – company is in the rapid expansion mode

2002 – Delisted itself from 7 stock exchanges like Ludhiana stock exchange, Calcutta stock

exchange etc

Shareholding Pattern

Category wise shareholding

As of 31st December 2014, Asian Paints does not have any outstanding ADR’s, GDR’s, warrants

or convertible shares. And also the company didn’t receive any equity funding for the previous

three years. Bodies corporate hold more than 40% of the stake in the company, out of which

Smriti holdings, Isis holdings, Geetanjali trading and investments, Sudhanava investments,

Rupen investments, and Satyadharama investments hold more than 27% stake in the firm. In the

public shareholding after FII’s, which hold 17% of the stake in the firm, Individual shareholders

holding nominal share capital up to Rs. 1 lakh contribute up to 12% of the total stake. Out of the

8% stake held by public insurance companies, Life Insurance Corporation hold 5.53%

stake.Pattern of shareholding over the last 5 year period

promoters -individuals

11%

promoters -bodies

corporate42% public -

mutual funds/ UTI

2%

public -Financial

Institutions/ Banks

0%

public -Insurance

Companies8%

public - FII's17%

public - Non Institutions

20%

custodians -Others

0%

categorywise shareholding

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2010 2011 2012 2013 2014

% of shares held

as on 31st dec

shareholding pattern

promoters - individuals

promoters - bodiescorporate

public - mutual funds/ UTI

public - Financial Institutions/Banks

public - Insurance Companies

public - FII's

Source: www.bseindia.com

From the above graph we can infer that there is no much change in the pattern of the

shareholding of any category of investor. But it is very intriguing if we go in detail of the

investors. The investment of the highest promoter (body corporate) is 5.64% and the highest

investment of an individual promoter is just 2.97%. Also the investment from mutual funds is

very low and investment from insurance companies is not well diversified. This information

raises some doubt about the growth of the company, if the promoters’ stake is increasing means

there is high probability that company is going for any mergers, acquisitions or an capital

expansion.

Here one cannot help but notice that FII’s and retail investors are bullish about the company and

that’s why they are together holding 40% of the stake over the years. But on the flip side the

stock price may be highly volatile and highly influenced by the market sentiment.

Sales, profit margin, depreciation, tax rate, sources of financing, asset utilization – peer

comparison for 5 years

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profit margin growt rate sales growth rate tax rate asset utilization ratio

Technical Analysis

The above show the share price data for a 10 year Data from 14 Jan 2005 to 15 Jan 2015. As we

can see there is a dip in price at 20 July 2013 as the share got split in 1:10 ratio. As it is difficult

to do analysis with stock split, we need to do after the stock is split

We have taken the share price data from 30 July and plotted it with support and resistance points

Here the support point is 391.9 and resistance point is 842.65

We need to plot the closing price with the volume to understand the demand, so the below graph

is the closing price and volume traded in the time line from 30 July 2013 to 15 Jan 2015

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Close Price

We can see that when the share price is decreasing the volume traded is increasing, this shows

that the stock has a demand and has anticipation for investment. These kinds of stocks are

important for long term investments.

Candle stick Pattern

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opening price

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Low price

close price

Candle stick pattern is used to analyze and forecast the stock price, here we have taken the data

for a period of one month and observed the trend.

Observation: there are five important patterns in candle stick pattern: Engulfing pattern, Doji,

piercing pattern, morning start pattern and Harami.

If you can observe that at 15th Jan 2015 the pattern formed is piercing pattern and the share price

is going to increase on the next day. And with above graph of close price you can observe that

there is a constant increase in share price and this is a positive indication for the investors to

invest for a long term.

Stock Valuation:

Relative Valuation:

This model is most used model for stock valuation

The important ratios like P/E ratio, Dividend Yield, EPS, Price to book value and price to sales

are calculated for the company and are compared across its competitors to understand its

performance in the industry

We have calculated for four of its competitors and are given below

• Asian Paints has a Price to Sales of 3.5 owing to its Market Cap of 82246.41

• Akzo Nobel has the maximum Dividend Yield of 5% as it pays maximum dividend of

INR.75 per share

• Asian Paints has a high P/E Ratio of 61.31 implying high future growth prospects

• Kansai Nerolac has an EPS of 44.46 as it pays the highest dividend on its stock (INR.11)

dividend payout ratio 34.46%

retention ratio 65.54%

ROE 34.00%

growth rate 22.28%

The higher the Payout ratio higher the P/E ratio

Earnings (dividend) will increase by the growth rate and the P/E1 can be calculated, more the

P/E more the speculation to invest.

Dividend Discount Method:

Here we are using the discounted cash flow (DCF) method to value the stock and as the DDM

(dividend Discount method) is easier to implement we have chose that method to value the stock.

To understand the Dividend discount method we need to get the dividends the company pays on

yearly basis, as this the only income which an investor gets from the company

The value of the stock is calculated by growth rate method

The Decision is BUY for both short and long term