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
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

Assets Trend

30000
25000
20000
Million Rs. 15000
10000
5000
0
FY 2008 FY 2007 FY 2006 FY 2005
Financial year

Total Current Assets Total Assets

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

Liabilities & Equity Trends

30000
25000
20000
Million Rs 15000
10000
5000
0
FY 2008 FY 2007 FY 2006 FY 2005
Financial Year

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
0.428 0.056 (0.078) 0.279
Or adjustments
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

Expenses

100
80

% of total 60
sales 40
20
0
2008-07 2007-06 2006-05 2005-04
Financial Year

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

EBIT & Net Income

14
12
10
% of total 8
sales 6
4
2
0
2008-07 2007-06 2006-05 2005-04
Financial Year

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

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

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

Ratios 1

1.500
1.000

0.500
0.000
FY 2008- FY 2007- FY 2006- FY 2005-
07 06 05 04
Financial Year

Current ratio Quick Ratio Debt-Equity Ratio

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Chart 6: Liquidity Ratios

Ratios 2

80.000
60.000
Days 40.000
20.000
0.000
FY 2008- FY 2007- FY 2006- FY 2005-
07 06 05 04
Financial Year

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

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Chart 7: DuPont Analysis

DuPont Analysis

2.500
2.000
1.500
1.000
0.500
0.000
FY 2008- FY 2007- FY 2006- FY 2005-
07 06 05 04
Financial Year

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 ICI Kansai

Paints India 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

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 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.

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