Contact Hour 17

Valuation (contd.)
08/10/2017
FIN ZG519: Business Analysis and Valuation
BITS Pilani Instructor: Prof. Mahalakshmi Mudliar
Estimating Cash Flows

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Asian Paint the story

Started in 1942 by Champaklal H. Choksey & 3 others as a result of

temporary ban on paint imports then.
The company has in its portfolio:
Interior Paints
Exterior Paints
Metal Finishes (Enamels)
Wood Finishes Range
SmartCare Range of Waterproofing products
Nilaya Range of Wall coverings
Adhesives Range
Range of Bath Fittings
Revenue from operations has grown by 7.7% in 2017
Net Profit has grown by 11.1% in 2017
Dividend Payout Ratio is 65.9%

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Asian Paint Market Share

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Asian Paints

Firm size / market size Firm is one of the largest players in paint industry. It also has
garnered some share in home improvement. The business is
being redefined and expanded.
Current excess returns Firm earnings are higher than the cost of capital
Competitive Has increased its share in painting industry through series of
advantages acquisitions and expansions (JV with PPG Industries Inc. USA for
automotive coating, Delmege Paints Lanka in 1999, Berger
International Limited. Singapore in 2002, 51% stake in Sleek
International Pvt. Ltd. In 2013, Ess Ess Bathroom Products Pvt.
Ltd. In 2014, Kadisco Paint and Adhesive Industry Share Co,
Ehtopia in 2015,Casuseway Paints Lanka (Pvt) Ltd. In 2017.
Length of high- Ten years mainly because of its strong competitive position.
growth period
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Ingredients that determine value

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Estimating FCFF for Asian Paints

EBIT *(1-tax rate) 2768.47 Reinvestment Return on

-(CapEx-Dep) 224.24 rate capital
- Chg in WC 844.54 38.61% 38.81%
Expected
=FCFF 1699.69
Growth rate
Reinvestment rate 38.61%
14.98%
Return on capital 38.81%

Year 1 2 3 4 5 6 7 8 9 10
EBIT *(1-tax rate) 3183.29 3660.25 4208.69 4839.30 5564.39 6398.13 7356.79 8459.09 9726.56 11183.93
-Reinvestment 1228.92 1413.06 1624.78 1868.23 2148.15 2470.02 2840.12 3265.67 3754.98 4317.60
FCFF 1954.37 2247.20 2583.91 2971.07 3416.24 3928.11 4516.67 5193.43 5971.58 6866.33

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Estimating Cost of Capital: Asian Paints
International operations 12.90%
Domestic operations 87.10%

Revenue Weighted
Region proportion Weights ERP ERP
Carribbean
Middle East & Africa
10.40%
51.80%
1.34%
6.68%
13.92%
10%
0.19%
0.65%
2017 Forecast
Asia
South Pacific
31.20%
6.60%
4.02%
0.85%
7.12%
20%
0.29%
0.17% Cost of Equity 16.62% 15.8%
India 87.10% 7.39% 6.44%
Total 100.00% 7.73% Cost of Debt 6.00% 8.00%
2017 Forecast
WACC 16.06% 9.16%
Risk free rate 6.57% 6.00%
Beta 1.3 1.3
ERP 7.73% 7.50%

Weights 2017 Proportion Forecast

Debt 387.35 5.28% 15%
Equity 6950.98 94.72% 85%
Total 7338.33 100% 100%

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 Valuation of Firm: Asian Paints
Stable
Year 1 2 3 4 5 6 7 8 9 10 Growth
EBIT *(1-tax rate) 3183.29 3660.25 4208.69 4839.30 5564.39 6398.13 7356.79 8459.09 9726.56 11183.93 11966.81
-Reinvestment 1228.92 1413.06 1624.78 1868.23 2148.15 2470.02 2840.12 3265.67 3754.98 4317.60 4619.833
FCFF 1954.37 2247.20 2583.91 2971.07 3416.24 3928.11 4516.67 5193.43 5971.58 6866.33 7346.977
PV 1683.92 1668.29 1652.80 1637.46 1622.27 2321.36 2445.14 2575.53 2712.87 2857.53
Discount Factor 16.06% 16.06% 16.06% 16.06% 16.06% 9.16% 9.16% 9.16% 9.16% 9.16% 8.00%

Terminal Value 161828

PV-FCFF 21177
PV- TV 74958
Firm Value 96135
+ cash 157
-Debt 387
Value to Equity 95905
Equity 96
Value per share 1000

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Experiential Learning Component

Step 1:
Choose 3 companies from the same industry. You will be analysing all the
three companies to understand the differences in strategy and its implication
on valuation.

You can either do this individually, in a group of maximum 3 participants.

Send an email with the companies chosen by Sunday 9am.

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Experiential Learning Component

Step 2:
Strategy Analysis
Industry analysis (for major customer segment): five forces and expected
changes therein
Competitive strategy analysis (at least 2 models to be used): Nature of
competitive advantage (if any); sustainability of advantage in the future
Corporate strategy analysis: Is value created across the various business
units?

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Experiential Learning Component

Step 3:
Accounting Analysis
Identify key accounting policies and estimates given the firms industry and business
strategy: which accounting lines capture them
Accounting flexibilities and the likely motivations of choosing accounting policies and
estimates used by the firm
Assess the depth and quality of a firms disclosures. Is accounting strategy hiding or
revealing
Identify red flags.

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Experiential Learning Component

Step 4:
Financial Analysis
Ratio analysis: how various line items in a companys financial statements
relate to one another.
Cash flow analysis to examine the companys liquidity and opine on how
the company is managing its operations, investment and financing cash
flows.

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Experiential Learning Component

Step 5:
Prospective Analysis
Sales and Revenue forecast (3 to 10 years)
Sales forecast should include:
Initial benchmark
Market growth forecast
Company competitiveness forecast (relative performance on key future buying
criteria)
Conclusion on sales forecast (adjustment of initial benchmark)
Margin forecast (per segment) using ratio analysis
Baseline forecast: what set of assumptions is consistent with the current stock
price?

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Experiential Learning Component

Step 6:
Valuation
Determine the Free Cash Flow
Determine Hurdle rate or Discount rate.
Define terminal value and years until terminal year
Forecasting performance until terminal year
Valuation (using most suitable approach and justify)

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Final Project

Final project presentation will be on 28th October 2017 from 9am to 11am.
Each group will have 15 minutes to present followed by 5min of Q & A.
A maximum of 3 page report needs to be submitted by one person in the
group with all the group names by 27th October 2017.
The final review session will be on 29th October 2017.

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 BITS Pilani

Thank you