Asian Paints Investment Research Report

Value Investment Analysis Report

26^th December 2016

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Basic Filtering Criteria:

Asian Paints Share's Market Snapshot

Critical prima-facie Observations of Asian Paints Limited:

1. PE Ratio: Asian Paint’s PE Ratio is 47.42 is well above the maximum permitted 15 and the Ideal for Indian conditions of 10 and therefore makes it highly expensive!
2. Price to Book Value Ratio: At 14.84 as against the permitted 1.5 again makes the share unaffordable to buy.
3. Distance from 52 week low: The current price of Rs.867.80 is just 5% away from the 52 Week Low of Rs.826. On this parameter the market condition of the scrip is favorable.
4. Dividend Yield: A dividend yield of 0.87% is very low.

In light of the above conditions, where three out of the four parameters are unfavorable, under normal circumstances Asian Paints shall be dropped without any further study. But considering that the company is no doubt a market leader and a strong brand in India and further considering that the market has valued the share so highly, we make an exception and undertake limited further study.

A. Company Performance

Profitability Analysis

Asian Paints Consolidated Profit and Loss Account                            (Rs. in Crores)	March 31' 2016
Net sales	15,534.14
Cost of sales:
Purchase of Stock in Trade	723.20
Changes in Stock of WIP & FG	171.30
Personnel Expenses	1017.84
Other Expenses	3502.09
Depreciation	287.97
Interest	40.51
SUB-TOTAL	13054.00
Operating profit after interest	2,480.14
Net Non-operating income	148.27
Profit Before Tax	2628.41
Provision for taxes	849.14
Profit After Tax (PAT)	1779.27
EBDITA (Operating Profits)	2808.62
EBDITA (Operating Profits) %	18.08%
Depreciation	287.97
EBITA	2520.65
EBITA %	16.23%
Interest	40.51
Interest Cost to Sales - %	0.26%
EBT	2480.14
EBT %	15.97%
Net Non-Operating Income	148.27
FINAL PBT	2628.41
FINAL PBT %	16.92%
Income Tax	849.14
PAT	1779.27
PAT %	11.45%

Remarks:

1. Asian Paints’ EBDITA and other profitability margins are respectable but nothing great to command such high market valuations
2. Interest cost is an insignificant at 0.26% of revenues, which shows that the company has followed a prudent, low debt business model.
3. Net non-operating income constitutes a mere 5.98% of operating profits (EBT), which means that there is little cushion other than operating profits to service dividends.

Overall Asian Paints Company Limited’s profitability ratios are decent but nothing to praise about and clearly do not justify such a high market premium.

Balance Sheet Analysis:

Asian Paints Consolidated Balance Sheet (Rs. in Crores)	March 31' 2016
LIABILITIES
Short-term borrowings	231.08
Sundry creditor (Trade)	1590.10
Other current liabilities & provisions	1,995.25
Total Current Liabilities	3,816.43
Term loans	74.91
Deferred Tax Liability	217.60
Long Term Provisions	124.36
Minority Interest	294.21
Other term liabilities (Advances from Customers)	10.57
Total Term Liabilities	721.65
Total Outside Liabilities (TOL)	4,538.08
Ordinary share capital	95.92
Reserves & Surplus	5509.33
Net Worth	5,605.25
Total Liabilities	10,143.33
ASSETS
Cash and bank balances	420.43
Current Investments	1558.94
Trade Receivables	1248.26
Inventory:	2064.00
Other current assets	569.00
Total Current Assets	5,860.63
Fixed Assets - Net Block	3074.59
Capital Work in Progress	110.80
Total Fixed Assets	3185.39
Non Current Investments	539.25
Long Term Loans & Advances	179.32
Deferred Tax	0.51
Other non-current assets	49.75
Total Other Non-Current Assets	768.83
Intangible Assets	130.82
Goodwill On Consolidation	197.66
Total Assets	10,143.33
Tangible Net Worth	5,276.77
Current Ratio	1.54
Total Outside Liabilities/ Tangible Net Worth (TOL/ TNW)	0.86
Total Long Term Liabilities/Tangible Net Worth	0.14

Highlights:

1. Though the interest cost as a percentage of sales is negligible, Asian Paints is not totally debt-free. We wonder why it is so.
2. Current Ratio is below the recommended two and above at 1.54.
3. TOL/ TNW ratio is well below the maximum prescribed 3.
4. Long-term Deb-Equity ratio is also well less than the recommended not more than 1.

Therefore on the balance sheet front Asian Paints is strong.

Cash Flow Analysis

Asian Paints Limited. Cash Flow Statement (Rs. in Crores)	March 31' 2016
Cash Flows from Investing Activities
Net Cash Flows from Operating Activities as Reported	2333.28
Finance Cost	-40.09
Adjusted Cash From Operations/ Free Cash flows	2293.19
Face Value	1.00
Number of Equity Shares	95.92
Free Cash Flows / Share	23.91
Free Cash Flows / Share as % of Market Price	6.47%
Cash Flows from Investing Activities
Purchase of Fixed Assets (Net)	-824.43
Sale of Fixed Assets	18.51
Sale/ (Purchase) of long-term investments	-113.65
Sale/ (Purchase) of short-term investments	35.87
Fixed Deposits	-70.15
Interest and Dividend Income received	84.71
Total Net Cash Flows from Investing Activities	-869.14
Cash Flows from Financing Activities:
Loans Raised/ (Repaid)	-113.86
Equity Buyback
Dividends Paid	-764.23
Dividend Distribution of free cash flows	33.33%
Total Cash Flows from Investing Activities	-878.09
Net Increase/ Decrease in Cash for the year	545.96

Highlights:

1. Asian Paints is generating decent amount of free cash flows from its operations.
2. Free cash flows per share constitute a mere 6.47% of the current market price of the share, which means that it is going to take more than 15 years for the company to earn back what you invest to buy the share today. Actually it is not the fault of the company but that of the market, which has made the share so expensive
3. Again even though the company is distributing a handsome portion (33.33%) of its free cash flows as dividends, the steep market price of the share has pulled down the dividend yield to below 1%
4. A respectable proportion of free cash flows is being invested in new fixed assets that can be expected future boost sales and profits.

On the cash flows front Asian Paints’ performance is good.

Dividends

Distribution of net Profits

Let us study the dividend distribution pattern of Asian Paints:

	Mar ' 16	Mar ' 15	Mar ' 14	Mar ' 13	Mar ' 12
Dividend payout ratio (net profit)	45.03	44.08	43.48	42.02	40.03
Dividend payout ratio (cash profit)	39.18	37.73	36.80	37.48	36.26

So, on this count company performance is good.

Uninterrupted Dividend Payment History

Year
2016
2015
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997

The above table shows uninterrupted dividend payment for the last 20 years.

On the uninterrupted dividends payment front Asian Paints has an excellent track record.

Dividend Yield:

Dividend Yield is a combination of both the company’s dividend policy and performance as well as market condition. A dividend yield of 0.87% is poor, but this lower yield is primarily on account of high market price of the share.

Five-year price graph:

Graph Depicts Asian Paints Share's Five Year Price Movements

From the graph we can see that the market has been chasing this scrip for the past five years, pushing the price from around Rs.270 in June 2012 to the current level of Rs.867, a whopping 221%.

In conclusion the five year price graph of Asian Paints shows that presently the share is closer to  it’s five year peak and this is not a favourable market condition for buying the stock.

Five years returns (price rise):

Picture Shows the Five Year Returns (Price Gains) of Asian Paints' Share

The five years return of Asian Paints share reveals a return (price increase) of 225.86%. It indicates that the price of the share has appreciated significantly in the past five years.

Therefore the market condition under this parameter too is not very favourable.

Distance from 52-Week Low:

52-Week Low: Rs.826

52-Week High: Rs.1,227.30

Current Market Price (CMP) on 26^th December 2016: Rs.867.80

The current price of Rs.867.80 is just 5.06% away from the 52 Week Low of Rs.826.

On this parameter the scrip is favorably placed. How? The price corrected more than 25% in the last quarter. Still overall the share is still very expensive.

Final Conclusions:

1. Asian Paints is without doubt a great company with market leadership and strong brand value. It will shine in any value investor’s portfolio.
2. The EBDITA, EBT and PAT margins are decent but nothing to brag about. The company is consistently profitable for many years into the past.
3. Current Ratio is a bit weak but TOL/ TNW and Long-term Debt-Equity Ratio are strong.
4. Free cash flows are good and well deployed.
5. PE Ratio of 47.42 makes the share highly expensive.
6. Price to Book Value Ratio (P2BV) of 14.84 again makes the share very expensive and unaffordable.
7. The market condition parameters of five-year price graph and five year returns do not favour buying the share presently.
8. Though the company is distributing a good proportion of the profits as dividends, the high market price has pulled down the dividend yield.

Final Investment Advice:

1. Asian Paints is a good company.
2. Market price is too high.
3. Only during post Lehman Brothers bank collapse like situations will the price come down. Even then it will never come down enough to bring down below a PE of 15 and P2BV of below 1.5. Buy the Shares of Asian Paints only during such times. Certainly not now.

Post Disclaimer: Opinions expressed here are the author’s personal opinions. Market conditions have a great bearing on many end results discussed in this report. No disrespect is intended towards the company, it’s management. Investors are advised not rely blindly on the opinions expressed herein but to exercise their own judgment. Neither the author nor the blog shall be responsible for any loss suffered by either acting or not acting based on the opinions expressed herein.

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