ERPM PROJECT

Security Valuation & Technical Analysis of Asian Paints

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ASIAN PAINTS

We issue a SELL recommendation as intrinsic value of the stock is substantially lower than the

current market price.

Valuation Approach

To reach to the value of Weighted Average Cost of Capital, Risk free rate is assumed to be

return on 10 year GOI bonds. Cost of equity and cost of debt is taken as 15.2% and 10%

respectively. Beta is calculated by regressing daily closing price of Asian Paints stock on BSE and

that of BSE Sensex. Result of all the exercise is WACC, which comes out to be 14.8% considering

company’s Debt Equity Ratio.

FCFF approach has been used to estimate the intrinsic price of the stock, Rs. 812.77, which is

lower than the current market price of the stock, 901.25 (Refer Excel File for detailed

calculations).

Asian Paints Limited headquartered in Mumbai, India is an Indian chemicals company. It

manufactures paints for decorative and industrial use. It is India's largest paint company and

third largest in Asia. It has a turnover of Rs 140 billion. Besides Asian Paints, the group operates

around the world through its subsidiaries Berger International Limited, Apco Coatings Limited,

SCIB Paints and Taubmans.

History

Asian Paints was established on 1 February 1942 by Champaklal H. Choksey, Chimanlal N.

Choksi, Suryakant C. Dani and Arvind R. Vakil. They name their company 'The Asian Oil & Paint

Company', a name that was randomly picked from a telephone directory.

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Products & Services Offered:

Asian Paints manufactures and markets industrial and decorative coatings along with home

painting services and solutions. Its key products and brands include:

Decorative paints: Interior wall paints, Exterior wall paints, Wood surface paints, Metals

surface paints.

Industrial coatings: Protective coatings, Floor coatings, Road markings.

Ancillaries: Wall primer, Acrylic Wall Putty, Exterior Wall Putty, Wood Primer.

Joint Venture between Asian paints and PPG Industries made a foray in automotive paints in

the year 1997. The JV is called PPG Asian paints. The company manufactures body coatings and

plastic coatings.

Few paint brands owned by the company are:

Interior products: Ustav, Tractor Emulsion, Premium Emulsion, Royal sensation,Royal

Glitter,Royal Aspira,Royal play,Royal play neu,Stucco,Dune,Safari,Textile,Kids world,Magneeto.

Exterior products: Ace,Apex,Apex ultima,Ultima protek,Ultima metalics,Ultima vibrants. Asian

Paints, Colour Next,

Wood & Metal paint & polish: Premium glossy enamil,Satin enamil,Touch wood,Melamine,Pu

Aqadur,Pu Polish,Pu Emporio,Polyester.

Competitive Position of the Company:

FY14 was tough for the Indian paint sector. Hopes of a revival in demand after a good monsoon

and during the festive season were dashed by high inflation. The demand for paint, being a

discretionary expenditure, is typically hurt during periods of rising inflation. However, to their

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surprise, paint makers have found that while demand remained tepid in cities, consumption

was rising in rural areas. The increasing reach of media in villages has also helped paint makers,

making easier for them to advertise their products in these regions. Companies have also

discovered that demand for premium paints is high even in remote locations.

Asian Paints has belied fast-sobering consumer sentiments with its financial results. The volume

growth of decorative paints, which brings in most of Asian Paints' revenue, has come down to

8-9 per cent in April-June, 2013. However, Asian Paints bucked the trend and grew at 10 per

cent. In fact, it went up from its average growth last fiscal of 7.5 per cent.

In contrast to industrial paints, decorative paints comprises interior and exterior wall finishes,

enamel paints and wood finishes, and enjoy higher margins. They account for 75 per cent of the

overall paints market in India. Asian Paints and Berger Paints get 80 per cent of their revenue

from the segment, while Kansai Nerolac and Akzo Nobel derive about 53-55 per cent.

The company's strong brand equity, robust distribution network of over 30,000 dealers (double

of that of Berger's 15,000) and operational efficiencies are the key differentiators that protect

its position.

With a market share of 52-53 per cent, Asian Paints remains the undisputed leader. The gap

between Asian Paints and the next competitor, Berger Paints (with an estimated market share

of 17 per cent), is large enough to not be bridged anytime soon.

Growth Prospects:

The market for paints in India is expected to grow at 1.5 times to 2 times GDP in the

next five years. With GDP growth expected to be between 5-6% levels, the top three

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players are likely to clock above industry growth rates in the future, considering they

have a strong brand and good reach.

The market size of the paint industry in India is estimated at around Rs 290 bn. Industry

players expect close to 12% growth in business volume and 10-12% rise in sales in FY15.

Decorative paints segment is expected to witness higher growth going forward. The

fiscal incentives given by the government to the housing sector have immensely

benefited the housing sector. This will benefit key players in the long term.

Although the demand for industrial paints is lukewarm it is expected to increase going

forward. This is on account of increasing investments in infrastructure. Domestic and

global auto majors have long term plans for the Indian market, which augur well for

automotive paint manufacturers like Kansai Nerolac and Asian-PPG. Increased industrial

paint demand, especially powder coatings and high performance coatings will also

propel topline growth of paint majors in the medium term.

If the new capacities do not get utilized well, companies may face margin pressures in

the near term.

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Industry Analysis

Sensitivity to business cycle – beta = .353751

Therefore the returns for the FMCG sector are less volatile than the market returns.

Fundamental Analysis

COST OF EQUITY

Risk Free Rate - Rf 8.60% 10 year government bond data

Rm - Market Return 15%

Beta (B) 1.04

Cost of Equity (ke) % 15.2% Cost of Debt (Kd) % 14% After Tax Cost of Debt (Kd) % 10% Debt 418.17 Equity 4742.36 Debt/Equity 0.09 WACC 14.8% Tax 32% Long Term Cash Flow Growth rate

(g) 11%

0.00% 5.00% 10.00%15.00%20.00%25.00%

AUTO

FMCG

CONSUMER DURABLES

HEALTHCARE

IT

TELECOM

ANNUALIZED RETURN

AUTO

FMCG

CONSUMER DURABLES

HEALTHCARE

IT

TELECOM

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VALUATIONS FCFF METHOD

PV

FCFF1 1596.479647 1456.19

FCFF2 2363.052572 1877.64

FCFF3 2899.16314 2006.76

TERMINAL VALUE 98788.9164 68380.3

VALUE TO THE FIRM

73720.9

INTEREST EXPENSE FY15

42.24

VALUE TO EQUITY HOLDERS

73678.7

OUSTANDING SHARES

95.92

INTRINSIC VALUE PER SHARE 768.126

VALUATIONS FCFE METHOD

PV

FCFE1 1684.361911 1532.43

FCFE2 2432.0514 1920.16

FCFE3 2942.659105 2016.16

TERMINAL VALUE 87741.20756 60115.8

VALUE OT EQUITY HOLDERS

65584.6

OUTSTANDINS SHARES

95.92

INTRINSIC VALUE 683.743

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Technical Analysis

The below graph shows the candlestick pattern and the moving average lines. The black

candlestick body indicates the bearish trend and the white candlestick body indicate the bullish

trend. The data taken is across 6 months for building up the candlestick pattern. Three types of

moving averages are taken: 7 day SMA of Closing price, 14 day SMA of closing price and 28 day

SMA of closing prices.

Whenever a SMA of smaller duration crosses the SMA of a longer duration a signal is

generated. The signal can be of the following two types:

1. Whenever the 7 day SMA crosses above the 28 day SMA, a buy signal is generated. For

example: on 22nd April 2015 we see the 7 day SMA crossing the 28 day SMA, which is

indicating the sell signal.

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2. Similarly a sell signal is generated when the 7day SMA crosses below the 28 day SMA.

For example: on 27th June 2015 the crossing of 7 day SMA over the 28 day SMA

indicates bullish trend.

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Candlestick signals:

1. Double top: We see there is a formation of double top between the dates 27th Feb to

25th March, after which the trend goes into a bearish cycle.

2. Three black crows: There is formation of three black crows bearish candlesticks, this

indicates the bearish trend to follow next

3. Hammer: A hammer is formed on 17th June, which indicates the end of bearish trend

and the beginning of bullish trend.

4. Bullish Engulfing: On 29th June bearish candle was formed which was engulfed by a

bullish candle which indicates that the sellers are no more in the markets.

Dow Theory:

We see that the chart also shows a primary trend, secondary trend and a minor

trend. Which satisfies the basic need of the proof for this theory. The Dow theory

detects the start of a major movement and analyse the aggregated market. Hence

there exist a chance for major movements in the coming days.

Support and/or Resistance:

We see that between the price band 790 and 815 a resistance is formed initially

and resists the movement between 14th march and 18th march. But these prices

are surpassed between 7th to 13th June. We can now consider that this resistance

line once surpassed has become a support line.

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Bollinger Bands:

Bollinger bands indicates the oversold and over-bought conditions of the markets.

Bollinger Bands are calculated using the formula:

600

650

700

750

800

850

900

950

13-Feb-15 13-Mar-15 13-Apr-15 13-May-15 13-Jun-15 13-Jul-15

Bollinger Band

Close Price BB Upper BB Lower

0

100

200

300

400

500

600

700

800

900

1000

-25

-15

-5

5

15

25

35

45

55

65

23

-Mar-1

5

27

-Mar-1

5

6-A

pr-1

5

10

-Ap

r-15

17

-Ap

r-15

23

-Ap

r-15

29

-Ap

r-15

6-M

ay-15

12

-May-1

5

18

-May-1

5

22

-May-1

5

28

-May-1

5

3-Ju

n-1

5

9-Ju

n-1

5

15

-Jun

-15

19

-Jun

-15

25

-Jun

-15

1-Ju

l-15

7-Ju

l-15

13

-Jul-1

5

17

-Jul-1

5

23

-Jul-1

5

29

-Jul-1

5

4-A

ug-1

5

10

-Au

g-15

MACD & Signal

Histogram MACD Signal

Close Price BB Upper BB Lower

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( )

( )

We draw a graph of Closing price, Upper BB and Lower BB. We also take the

MACD line and generate the signal line with MACD data. The following are the

interpretations:

1. When the closing price approaches the lower BB it indicates the stock is in

oversold condition and buying will take place. This is also substantiated by

the movement of MACD line moving above the signal line at the same time.

i.e. the MACD line has moved above the signal line which indicates buy

signal.

2. When the closing price approaches the upper BB it indicates the stock is in

overbought condition and selling will take place. This is also substantiated

by the movement of MACD line moving below the signal line at the same

time. i.e. the MACD line has moved below the signal line which indicates

sell signal.

3. The movement of the prices is also indicated by the Histogram.

SMA Vs. EMA:

350

550

750

14 day SMA & EMA

14 day SMA 12 day EMA