ERPM PROJECT

Security Valuation & Technical Analysis of Asian Paints

Radhika 14PGDMBFS14
Rohan 14PGDMBFS15
Ronak 14PGDMBFS16
Saurabh 14PGDMBFS17
Tofique 14PGDMBFS18

ASIAN PAINTS
We issue a SELL recommendation as intrinsic value of the stock is substantially lower than the
current market price.
Valuation Approach
To reach to the value of Weighted Average Cost of Capital, Risk free rate is assumed to be
return on 10 year GOI bonds. Cost of equity and cost of debt is taken as 15.2% and 10%
respectively. Beta is calculated by regressing daily closing price of Asian Paints stock on BSE and
that of BSE Sensex. Result of all the exercise is WACC, which comes out to be 14.8% considering
companys Debt Equity Ratio.
FCFF approach has been used to estimate the intrinsic price of the stock, Rs. 812.77, which is
lower than the current market price of the stock, 901.25 (Refer Excel File for detailed
calculations).

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

manufactures paints for decorative and industrial use. It is India's largest paint company and
third largest in Asia. It has a turnover of Rs 140 billion. Besides Asian Paints, the group operates
around the world through its subsidiaries Berger International Limited, Apco Coatings Limited,
SCIB Paints and Taubmans.

History
Asian Paints was established on 1 February 1942 by Champaklal H. Choksey, Chimanlal N.
Choksi, Suryakant C. Dani and Arvind R. Vakil. They name their company 'The Asian Oil & Paint
Company', a name that was randomly picked from a telephone directory.

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Products & Services Offered:

Asian Paints manufactures and markets industrial and decorative coatings along with home
painting services and solutions. Its key products and brands include:

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

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

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

Joint Venture between Asian paints and PPG Industries made a foray in automotive paints in
the year 1997. The JV is called PPG Asian paints. The company manufactures body coatings and
plastic coatings.

Few paint brands owned by the company are:

Interior products: Ustav, Tractor Emulsion, Premium Emulsion, Royal sensation,Royal
Glitter,Royal Aspira,Royal play,Royal play neu,Stucco,Dune,Safari,Textile,Kids world,Magneeto.
Exterior products: Ace,Apex,Apex ultima,Ultima protek,Ultima metalics,Ultima vibrants. Asian
Paints, Colour Next,
Wood & Metal paint & polish: Premium glossy enamil,Satin enamil,Touch wood,Melamine,Pu
Aqadur,Pu Polish,Pu Emporio,Polyester.

Competitive Position of the Company:

FY14 was tough for the Indian paint sector. Hopes of a revival in demand after a good monsoon
and during the festive season were dashed by high inflation. The demand for paint, being a
discretionary expenditure, is typically hurt during periods of rising inflation. However, to their
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surprise, paint makers have found that while demand remained tepid in cities, consumption
was rising in rural areas. The increasing reach of media in villages has also helped paint makers,
making easier for them to advertise their products in these regions. Companies have also
discovered that demand for premium paints is high even in remote locations.

Asian Paints has belied fast-sobering consumer sentiments with its financial results. The volume
growth of decorative paints, which brings in most of Asian Paints' revenue, has come down to
8-9 per cent in April-June, 2013. However, Asian Paints bucked the trend and grew at 10 per
cent. In fact, it went up from its average growth last fiscal of 7.5 per cent.

In contrast to industrial paints, decorative paints comprises interior and exterior wall finishes,
enamel paints and wood finishes, and enjoy higher margins. They account for 75 per cent of the
overall paints market in India. Asian Paints and Berger Paints get 80 per cent of their revenue
from the segment, while Kansai Nerolac and Akzo Nobel derive about 53-55 per cent.

The company's strong brand equity, robust distribution network of over 30,000 dealers (double
of that of Berger's 15,000) and operational efficiencies are the key differentiators that protect
its position.

With a market share of 52-53 per cent, Asian Paints remains the undisputed leader. The gap
between Asian Paints and the next competitor, Berger Paints (with an estimated market share
of 17 per cent), is large enough to not be bridged anytime soon.

Growth Prospects:

The market for paints in India is expected to grow at 1.5 times to 2 times GDP in the
next five years. With GDP growth expected to be between 5-6% levels, the top three

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players are likely to clock above industry growth rates in the future, considering they
have a strong brand and good reach.

The market size of the paint industry in India is estimated at around Rs 290 bn. Industry
players expect close to 12% growth in business volume and 10-12% rise in sales in FY15.

Decorative paints segment is expected to witness higher growth going forward. The
fiscal incentives given by the government to the housing sector have immensely
benefited the housing sector. This will benefit key players in the long term.

Although the demand for industrial paints is lukewarm it is expected to increase going
forward. This is on account of increasing investments in infrastructure. Domestic and
global auto majors have long term plans for the Indian market, which augur well for
automotive paint manufacturers like Kansai Nerolac and Asian-PPG. Increased industrial
paint demand, especially powder coatings and high performance coatings will also
propel topline growth of paint majors in the medium term.

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

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Industry Analysis

ANNUALIZED RETURN
TELECOM
AUTO

IT

FMCG
HEALTHCARE

CONSUMER DURABLES

CONSUMER DURABLES

HEALTHCARE
IT

FMCG

TELECOM

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

Sensitivity to business cycle beta = .353751

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

Fundamental Analysis
COST OF EQUITY
Risk Free Rate - Rf
Rm - Market Return
Beta (B)
Cost of Equity (ke) %
Cost of Debt (Kd) %
After Tax Cost of Debt (Kd) %
Debt
Equity
Debt/Equity
WACC
Tax
Long Term Cash Flow Growth rate
(g)

8.60%
10 year
15% government
1.04 bond data
15.2%
14%
10%
418.17
4742.36
0.09
14.8%
32%
11%

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VALUATIONS
FCFF METHOD
PV
FCFF1
FCFF2
FCFF3
TERMINAL VALUE

1596.479647
2363.052572
2899.16314

1456.19
1877.64
2006.76

98788.9164

68380.3

VALUE TO THE FIRM

INTEREST EXPENSE FY15
VALUE TO EQUITY HOLDERS

73720.9
42.24
73678.7

OUSTANDING SHARES

95.92

INTRINSIC VALUE PER SHARE

768.126

VALUATIONS
FCFE METHOD
PV
FCFE1
FCFE2
FCFE3

1684.361911
2432.0514
2942.659105

1532.43
1920.16
2016.16

TERMINAL VALUE

87741.20756

60115.8

VALUE OT EQUITY HOLDERS

OUTSTANDINS SHARES
INTRINSIC VALUE

65584.6
95.92
683.743

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Technical Analysis

The below graph shows the candlestick pattern and the moving average lines. The black
candlestick body indicates the bearish trend and the white candlestick body indicate the bullish
trend. The data taken is across 6 months for building up the candlestick pattern. Three types of
moving averages are taken: 7 day SMA of Closing price, 14 day SMA of closing price and 28 day
SMA of closing prices.
Whenever a SMA of smaller duration crosses the SMA of a longer duration a signal is
generated. The signal can be of the following two types:
1. Whenever the 7 day SMA crosses above the 28 day SMA, a buy signal is generated. For
example: on 22nd April 2015 we see the 7 day SMA crossing the 28 day SMA, which is
indicating the sell signal.

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2. Similarly a sell signal is generated when the 7day SMA crosses below the 28 day SMA.
For example: on 27th June 2015 the crossing of 7 day SMA over the 28 day SMA
indicates bullish trend.

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Candlestick signals:
1. Double top: We see there is a formation of double top between the dates 27th Feb to
25th March, after which the trend goes into a bearish cycle.
2. Three black crows: There is formation of three black crows bearish candlesticks, this
indicates the bearish trend to follow next
3. Hammer: A hammer is formed on 17th June, which indicates the end of bearish trend
and the beginning of bullish trend.
4. Bullish Engulfing: On 29th June bearish candle was formed which was engulfed by a
bullish candle which indicates that the sellers are no more in the markets.

Dow Theory:
We see that the chart also shows a primary trend, secondary trend and a minor
trend. Which satisfies the basic need of the proof for this theory. The Dow theory
detects the start of a major movement and analyse the aggregated market. Hence
there exist a chance for major movements in the coming days.

Support and/or Resistance:

We see that between the price band 790 and 815 a resistance is formed initially
and resists the movement between 14th march and 18th march. But these prices
are surpassed between 7th to 13th June. We can now consider that this resistance
line once surpassed has become a support line.

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Bollinger Bands:
Bollinger bands indicates the oversold and over-bought conditions of the markets.
Bollinger Band
Close Price

BB Upper

BB Lower

950
900
850
800
750
700
650
600
13-Feb-15

13-Mar-15

13-Apr-15

13-May-15

13-Jun-15

13-Jul-15

MACD & Signal

65

1000

55

900
800

45

700

35

600
25
500
15
400
5

-15
-25

10-Aug-15
4-Aug-15
29-Jul-15
23-Jul-15
17-Jul-15
13-Jul-15
7-Jul-15
1-Jul-15
25-Jun-15
19-Jun-15
15-Jun-15
9-Jun-15
3-Jun-15
28-May-15
22-May-15
18-May-15
12-May-15
6-May-15
29-Apr-15
23-Apr-15
17-Apr-15
10-Apr-15
6-Apr-15
27-Mar-15
23-Mar-15

-5

300

Histogram

MACD

Signal

Close Price

BB Upper

BB Lower

200
100
0

Bollinger Bands are calculated using the formula:

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We draw a graph of Closing price, Upper BB and Lower BB. We also take the
MACD line and generate the signal line with MACD data. The following are the
interpretations:
1. When the closing price approaches the lower BB it indicates the stock is in
oversold condition and buying will take place. This is also substantiated by
the movement of MACD line moving above the signal line at the same time.
i.e. the MACD line has moved above the signal line which indicates buy
signal.
2. When the closing price approaches the upper BB it indicates the stock is in
overbought condition and selling will take place. This is also substantiated
by the movement of MACD line moving below the signal line at the same
time. i.e. the MACD line has moved below the signal line which indicates
sell signal.
3. The movement of the prices is also indicated by the Histogram.
SMA Vs. EMA:
14 day SMA & EMA
14 day SMA

12 day EMA

750
550
350

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