Valuation of Asian Paints Ltd

Group 8 Abhishek Banerjee 08FN-0 Amit Kumar 08FN-008 Anirudh Singh 08FN-013 Aravind Menon M 08FN-01 Biswajit Mohanty 08FN-02 Praveen R 08FN-060

ObjectiveTo calculate the value of equity of Asian

Paints at the beginning of the Year 2004.By using actual data for year 2004-2009. By projecting data for year 2004-2009.

To compare the Share price determined

using above two methods and analyse the reasons for the difference.

Indian Paint Industry Overview Current Market Size of Rs 110 bn. Demand for paint is relatively price elastic . Paint industry is working capital intensive.

Revenue Drivers Decorative Paints (70%) Housing & Building sector Industrial Paints (30%) Automobiles, white goods & industrial expansion. Cost Drivers 70% of raw materials are petroleum products global oil price is a main driver Commodity price of tin as packing material is tin based.

Asian PaintsLargest paint company in India and 10th

largest in the world. Twice the size of nearest competitor in India. Among Forbes Top 200 Small Companies in the world Revenue as on FY 2009 is Rs 4510 Cr P/E ratio is 24.03 Vs Industry P/E of 18.97.

MethodologyPart 1 Objective: to determine the actual value of firm Activities Data collection Calculation of firm cash flow, cost of debt and equity Using CAPM technique for finding cost of equity. Determination of firm value using DCF technique.

Part 2 Objective: to estimate firm value based on projection Activities Forecasting of NOPAT, Capex and Working Capital

based on historical CAGR, Depreciation forecast on the basis of constant life of asset. Calculation of forecasted firm cash flow, cost of debt and equity

AssumptionsSustainable GDP growth rate of 6 % has

been assumed and since Asian Paints is a mature company a long term growth rate of 5% has been assumed. A constant life of assets has been assumed for forecasting the depreciation value. Balance sheet and P&L items are assumed to grow at their respective CAGRs. For forecasting beta, we have assumed constant unlevered beta, implying that business risk remains unchanged from 2009 onwards.

Calculation of beta: Regression Results

ResultsShare Price based on Actual FCFF Year 2004 2005 2006 2007 2008 Perpetual Value Value of firm Value of debt Value of equity No . of shares outstanding Calculated MPS Actual MPS WACC 10.54 9.75 11.19 10.67 10.94 FCF 220.35 173.90 170.51 180.83 322.61 PV 199.34 144.37 124.05 120.53 191.96 3639.02 4419.26 103.61 4315.65 9,59,19,779 449 . 92 402 . 10 Share Price based on Forecasted FCFF Year 2004 2005 2006 2007 2008 Perpetual Value Value of firm Value of debt Value of equity No . of shares outstanding Calculated MPS Actual MPS WACC 11.94 11.98 12.01 12.05 12.08 12.01 FCF 198.92 238.71 285.53 404.98 412.78 PV 177.70 190.38 203.17 256.95 233.40 3506.25 4567.85 103.61 4464.24 9,59,19,779 465 . 41 402 . 1

G ro w th ra te , g a t te rm i a l ye a r = 5 % n A si n p a i ts b e i g a m a tu re co m p a n y i exp e cte d to g ro w a t a l sse r ra te a n n s e th a n G D P g ro w th ra te o f 6 %

Results Actual Vs Projected FCFF Difference of 105.19 Crores between actual and forecasted FCFF values. This is due to Variation in Actual Vs Forecasted values of: Capex Change in Working Capital Depreciation

1. Actual Vs Forecasted Capex

Large difference of approximately Rs 200 crores in 2008 between actual

and forecasted Capex.

The forecasted capex is based on the CAGR of the historical capex.

Capex of Rs 400 crores to set up a Greenfield manufacturing facility at

Rohtak in Haryana for period of 18 months.

WC

Change in working capital based on CAGR of working capital exceeds

the actual change in working capital

In 2008 the company has introduced measures to improve the

working capital turnover ratio from 12 to 17 over the previous year (2007).

Actual Vs Forecasted D/E

Asian Paints has followed a strategy of gradually reducing its D/E

ratio over the period considered.

The forecasted decrease in D/E ratio almost matches the actual

decrease in D/E ratio.

Actual Vs Forecasted Beta

The actual beta slightly lags below the forecasted beta for the period

considered and hence it contributes to a marginally higher WACC as per the forecast.

Actual Vs Forecasted WACC

Higher forecasted WACC attributed to variation

in forecasted Beta

ConclusionsThe Asian Paint scrip was underpriced as of beginning of 2004 Reasons for under pricing (Based on actual data for 2004-09)

The calculated value is higher than the actual price because

during this period company acquired two companies.

Although the investors were convinced of increased revenue

due to acquisition but they were still not sure of full integration so the perceived benefit were lower than the actual benefit. In Main

2003 GDP was 4.3% so expectation was low but in subsequent years average growth in the GDP was 8%-9%. Drivers of Paint industry are manufacturing infrastructure sector which saw a boom in 2004 2008. &

ConclusionsReasons for difference in firm value arrived at by the actual and forecasted FCF methods Main difference is driven by the sudden increase in Capex in 2008 (Greenfield plant in Rohtak). Due to measures taken by the company, Working Capital turnover has increased from 12 to 17 YoY from 2007-08; resulting in variation in forecasted value.

Risks in valuationAsian paints has operation is 22 nations and

therefore any exchange rate fluctuation can hurt profitability. The growth of domestic paint market depends on economic growth and unforeseen macroeconomic events. 70 % of raw materials being petroleum derivatives are linked to global oil prices. This causes uncertainty in predicting operational costs

Thank You