F​INAL ​A​NALYTICAL ​R​EPORT

A​SIAN ​P​AINTS

Presented to

Prof. Manoj Kumar

Indian Institute of Management,

Lucknow

On September 10​th​,
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
C​ONTENTS

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 -

-2-
B​ACKGROUND ​– T​HE I​ ​NDIAN ​P​AINT
I​NDUSTRY

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.

A​SIAN ​P​AINTS

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

-3-
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​.

-4-
R​ECENT ​S​ALES ​B​REAKDOWN OF ​A​SIAN ​P​AINTS​’
P​RODUCTS

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
 -5-
F​UTURE ​P​LANS

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​.

A​UDITOR​’​S ​R​EPORT

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,

-6-
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.

D​IRECTOR​’​S REPORT​, A​NALYSIS AND ITS

I​MPACT
 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.

-7-
R​EVENUE ​R​ECOGNITION
P​OLICY

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:

❖ ​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.

❖ ​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.

❖ ​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.

-8-
I​NVENTORY ​V​ALUATION
P​OLICY

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:

❖ ​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

❖ ​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

❖ ​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:

❖ ​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.

-9-
❖ ​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

❖ ​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.

❖ ​Information Technology Assets​: 4

years

❖ ​Scientific Research Equipment​: 8

years

❖ ​Furniture and Fixtures​: 8 years

❖ ​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

- 10 -
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.

A​CCOUNTING POLICY FOR ​T​ANGIBLE ​& I​NTANGIBLE

A​SSETS
 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:

❖ ​Identification

❖ ​Measurement

❖ ​Valuation

❖ ​Revaluation

❖ ​Retirements and Disposals

❖ ​Impairment

- 11 -
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,

- 12 -
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.

I​MPACT 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

- 13 -
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.

- 14 -

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.

B​ALANCE ​S​HEETS

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.

- 15 -
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
0
Liabilities & Equity Trends
30000 25000 20000 ​Million Rs
15000 10000 5000
 FY 2008 FY 2007 FY 2006 FY 2005 ​Financial Year
Other LT Liabilities Current Liabilities Total Liabilities and Equity
- 16 -
I​NCOME
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)

​ earnings before taxes ​13.48 11.794 10.67 10.663 Less:

(0.3846) (0.4224) = ​ Income

taxes ​(4.618) (4.192) (4.452) (4.143)

0.428 0.056 (0.078) 0.279

+/-Extraordinary items 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

- 17 -
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

20​
​ 00
0​Expenses 1
2008-07 2007-06 2006-05
% of total
sales

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

2468101214 ​
0​ % of total
sales
2008-07 2007-06 2006-05 2005-04

Financial Year
Income taxes
Net Income
Earning Before taxes
Net Income

- 18 -
R​ATIO ​A​NALYSIS
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
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 0.000
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
Ratios 1
1.500
1.000
0.500
FY 2008-
FY 2007- 07
06
Current ratio Quick Ratio Debt-Equity Ratio
FY 2006- 05
FY 2005- 04
Financial Year
- 19 -
Chart 6: Liquidity Ratios
0.000
Ratios 2
80.000 60.000 ​Days
40.000 20.000
FY 2008-
FY 2007-
FY 2005- 07
06
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:
❖ ​Operating efficiency, this is measured by profit margin
❖ ​Asset use efficiency, which is measured by total asset turnover
❖ ​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
- 20 -
FY 2006- 05
Chart 7: DuPont Analysis
0.000
DuPont Analysis
2.500 2.000 1.500 1.000 0.500
FY 2008-
FY 2007-
FY 2005- 07
06
04
Financial Year
ROE Profit Margin Asset turnover Equity Multiplier

C​ASH 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
- 21 -
FY 2006- 05
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.
C​OMPETITORS​’ A​NALYSIS
The following table shows the condensed cash flow statements of Asian Paints and
two of its competitors ICI India and Kansai Nerolac Limited.
Asian Paints
ICI India
Kansai 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.
- 22 -
O​THER ​A​CCOUNTING
P​OLICIES

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.

- 23 -

O​PERATING ​C​YCLE

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

- 24 -
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.

R​ECOMMENDATION
S

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

- 25 -
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.

- 26 -