Prepared by:

Abhishek Jain 10P122

Under the Guidance of Debjit Ghosh 10P134

Prof. Shailendra Kumar Rai Deepika Mangla 10P136

Kandarp Suchak 10P144
Kartik Luthra 10P147
Naveen Kr. Jindal 10P153
2

CONTENTS OF THE REPORT

1. Introduction

2. Analysis from Short Term Investment Perspective

3. Analysis from Long Term Investment Perspective

4. Analysis from Short term Lending Perspective

5. Analysis from Long term Lending Perspective

6. Strategy for future

7. Conclusion
3

8. ACKNOWLEDGEMENT

We would like to extend our gratitude to Prof. Shailendra Kumar Rai for his invaluable
guidance, support, and feedback during the course of carrying out the financial analysis of
the paints industry which helped us successfully complete the project.
4

Introduction

Corporate Financial Statements are released by companies not only for acceding to the
norms set up by the exchanges on which they are listed and to follow the rules put down by
the regulator of that country but also to provide prospective investors a brief insight into
the company and obtain valuable inputs to aid them in decision making for the future
prospects of the company.
These statements released by the company are available in the company prospectus as also
the annual and the quarterly results declared by the company. These statements by
themselves contain a lot of numbers which are in comprehensible unless a proper analysis
of such documents is carried out to arrive at a conclusion on the company's financial
health. The pages that follow, aim to provide a simplified explanation of some of the basic
analysis of a company for different objectives of the investor/lender.
The Sector provided to us for the analysis is the Paints sector. Some of the major Paints
companies in the market today are Asian Paints, ICI Paints, Kansai Nerolac, Shalimar Paints,
etc. Each of these companies has a part of the market share and adopts different policies to
remaining competitive. The financial statements released by them give a true measure of
the actual health of the company and the effect of management decisions both in the short
and long term.
While going about our analysis of the companies’ financial health, we have adopted the
following methodology:
 State the objective for performing the task

 Gather the requisite information

 Use tools like trend analysis and common size statements to achieve the objective

 Carry out Ratio Analysis for the figures given in the document

 A brief conclusion of the results of the entire analysis

1. THEORY OF FINANCIAL ANALYSIS

5

1. Short term investment

For any kind of short term investment, we have to take into consideration two
factors:

a) Risk factors: risk factors involve indicators like beta which reflects systematic
risks that cannot be diversified / hedged.

b) Return factors: like P/E ratio, EPS and price / book ratio.

2. Short term lending

The key factor to be considered for short term lending is the purpose of short term
loan. The operating cycle of the company needs to be evaluated via cashflow
turnover ratio, inventory turnover ratio and receivables turnover ratio. Faster the
cycle, better the company operates. Secondly, we should consider current ratio
which indicates how well current assets balance current liabilities. The difference of
creditors and receivables is considered.

3. Long term investment

For any kind of long term investment, we have to take into consideration two
factors:

a) Risk factors: Eg. Debt / equity ratio and interest coverage ratio

b) Return factors: like dividend per share, return on equity and price to book ratio

If the D/E ratio is high, interest coverage ratio is also high and return on equity is
high, then the company can still be considered for long term investment.
6

If one wants to go for regular income, then DPS should be considered. If one
wants to go for capital appreciation instead, then return on equity should be
considered.

4. Long term lending

Decisions should not be based on credit rating only as credit rating can be biased
with political and national risks involved. Factors should be considered are: D/E
ratio: low debt implies that the company can pay back interest and principal easily.

Expansion plans (fixed assets)

Interest coverage ratio: determines whether the company generates enough profits
to pay interest on debt.

Rate of interest being paid on existing debt: PAT / operating income

If D/E is high, interest coverage ratio is high and expansion plans exist, then the
company can be considered for long term lending.

5. Strategic

If the company shows production capacity under utilization, negative cash profit,
negative EPS, this indicates that the company requires restructuring and operating
cycle needs evaluation.

2. SNAPSHOT OF PAINTS INDUSTRY

7

The Indian paint industry has been growing rapidly since past few years. The future of
paint industry in India is even brighter as the per capita consumption of paints in India is as
low as 1.25 kg.

The size of the Indian paint industry is approximately 940 million litres/annum valued at
approximately $2 billion. Over the last ten years, the industry has grown at a compounded
annual growth rate (CAGR) of 12-13% and in the next five years, it is expected to grow at a
CAGR of 11-12%.

The players we have selected are:

1. Asian paints Ltd. (benchmark)

2. Shalimar paints
8

3. FINANCIAL RATIOS
Liquidity Ratios

 For industries that generally have a large portion of current assets tied up in
inventory, a ratio of 1.5 or even 2 might be a better standard.

 Compared to the industry standard of 1, KNP with 1.852 is in good position

to meet its short term obligations.

 Also with the quick ratio more than 1, it indicates that KNP, without selling
its inventory, has enough short-term assets to cover its immediate liabilities.

Activity Ratios

 A low inventory turnover implies poor sales and, therefore, excess inventory.
A high ratio implies either strong sales or ineffective buying. Also high
inventory levels are unhealthy because they represent an investment with a
rate of return of zero. It also opens the company up to trouble should prices
begin to fall. Considering this, KNP has a inventory turnover which is
comparable to Asian Paints, market leader.

 By maintaining accounts receivable, firms are indirectly extending interest-

free loans to their clients. A high ratio implies either that a company operates
on a cash basis or that its extension of credit and collection of accounts
receivable is efficient. In view of lower receivable turnover, may be KNP
should look into its credit policies in order to ensure the timely collection of
imparted credit that is not earning interest for the firm.

 Fixed Asset turnover ratio is often used as a measure in manufacturing

industries, where major purchases are made for PP&E to help increase
output. When companies make these large purchases, prudent investors
watch this ratio in following years to see how effective the investment in the
fixed assets was. A higher fixed-asset turnover ratio shows that the company
9

has been more effective in using the investment in fixed assets to generate
revenues. Since KNP’s fixed asset turnover is relatively lower as compared to
other counterparts, it should formulate the strategies to use the fixed assets
effectively to generate more revenues.

Leverage Ratios

 A high debt/equity ratio generally means that a company has been

aggressive in financing its growth with debt. This can result in volatile
earnings as a result of the additional interest expense. The debt/equity ratio
also depends on the industry in which the company operates.

 For example, capital-intensive industries such as auto manufacturing tend to

have a debt/equity ratio above 2, while personal computer companies have a
debt/equity of under 0.5. KNP borrowed loans in such a way that the cost of
this debt financing do not outweigh the return that the company generates
on the debt through investment and business activities and become too much
for the company to handle. Failing to maintain this can lead to bankruptcy,
which would leave shareholders with nothing.

 The lower the interest coverage ratio, the more the company is burdened by
debt expense.

 When a company's interest coverage ratio is 1.5 or lower, its ability to meet
interest expenses may be questionable. An interest coverage ratio below 1
indicates the company is not generating sufficient revenues to satisfy interest
expenses. Kansai is far better in covering its fixed cost with the interest
coverage ratio of 121. Also it is three times higher than its counterpart.

 Kansai is employing the long term debt option.

Profitability Ratios
10

 Profit Margin is 7.43% as compared to 9.19% for Asian Paints.

 Return on Capital Employed for Kansai is 26.16% as compared to 60.92% for

Asian Paints.

 ROCE should always be higher than the rate at which the company borrows;
otherwise any increase in borrowing will reduce shareholders' earnings.
Considering this Asian Paints is safer than Kansai.

 ROE, which measures a corporation's profitability by revealing how much

profit a company generates with the money shareholders have invested, is
higher for Asian Paints as compared to Kansai. This would imply that Asian
Paints would generate more returns on shareholders’ funds than the Kansai.

Market Ratios

 With the P/E ratio of 13, any investor is willing to pay Rs. 13 for Rs. 1 current
earnings in case of Kansai. On the other hand, the same investor is willing to
pay Rs. 24.4. This would imply that Asian Paints is more lucrative option
compared to Kansai
11

4. COMPARITIVE FINANCIAL
ANALYSIS

4.1. Short term investment

Objective: Short Term Investment

Short term investment comprises of high quality and low risk investments with the goal of
protecting capital and providing a return that beats a benchmark rate, such as Treasuries.
It includes cash, notes and other short term debt. They are commonly used by investors to
temporarily store funds while arranging for their transfer to another investment vehicle
that provides higher returns. The various ratios and factors to be taken into consideration
are:
 Beta Value

 P/E ratio

 P/BV ratio

 EPS

Parameter Company 2010 2009 2008 2007 2006

EPS Asian Paints 76.23 34.80 36.23 26.51 17.72
Shalimar Paints 58.92 34.55 42.41 40.48 51.52
Price to book ratio Asian Paints 16.86
Shalimar Paints 3.07
P/E Ratio Asian Paints 2.13 3.28 2.67 2.93 3.66
Shalimar Paints 4.87 7.03 5.19 4.94 3.09
Beta Asian Paints 0.3275
Shalimar Paints 0.3784

1. Beta Value: Beta value is the measurement of the risk concerning the market or the
volatility of a particular stock. A stock with a beta of 0 means that its price is not at all
correlated with the market; that stock is independent. A positive beta means that the stock
12

generally follows the market. A negative beta shows that the stock inversely follows the
market; the stock generally decreases in value if the market goes up and vice versa. A low
beta is safe when market is in down slide but gives low returns when the market is surging
up.
The short term risk is slightly lower in case of Asian Paints.

2. P/E ratio: The P/E ratio expresses the relationship between the price per share and the
amount of earnings attributable to a single share i.e., the P/E ratio tells us how much an
investor in common stock pays per rupee of current earnings. A higher P/E ratio means
that investors are paying more for each unit of net income, so the stock is more expensive
compared to one with a lower P/E ratio. The P/E ratio has units of years, which implies the
number of years of earnings to pay back the purchase price, ignoring the time value of the
money.
Price-earning ratio (P/E) = Market price per share/Earnings per share (EPS)
Where, EPS = (PAT-Dividend on preference shares)/Weighted average number of equity
shares

4 Asian Paints
Shalimar Paints
3

0
Mar 10  Mar 09  Mar 08  Mar 07  Mar 06 
13

OR
Price-earning ratio (P/E) = Market capitalization/Total annual earnings

Also P/E ratio i.e price per earnings is also lower for Asian Paints as compared to Shalimar
Paints which reflects shareholders’ expectations.

3. P/BV ratio: Price to book value is the ratio of price of stock to book value of the share.
This ratio is an indicator of market judgment about the relationship between a company’s
required rate of return and its actual rate of return. Assuming that the book values reflect
the fair values of the assets, a price to book ratio is an indicator that the company’s future
returns are expected to be exactly equal to the returns required by the market. A ratio
greater than one would indicate that the future profitability of the company is expected to
exceed the required rate of return, and values of this ratio less than one indicate that the
company is not expected to earn excess returns.
Price-to-book multiple (P/B) = Market price per share/Book value per share
Where, Book value = Total Assets – Intangible Assets and Liabilities

Conclusion:

Considering the above parameters it can be concluded that Asian Paints would be a better
company to invest in for short term. EPS i.e earnings per share of Asian Paints are around
33% more than that of Shalimar Paints. Also P/E ratio i.e. price per earnings is also lower
for Asian Paints as compared to Shalimar Paints which reflects shareholders’ expectations.
The short term risk is slightly lower in case of Asian Paints. Therefore Asian Paints is our
recommendation for short term investment.
14

4.2. Long Term Investment

Objective: Long Term Investment

Long Term Investing refers to the fact that investment is made for a period greater than 1
year. The various factors to be considered are:
 Debt to Equity Ratio

 Interest Coverage Ratio

 Return on Equity

 Dividend Per Share

 Price to book ratio

 Gross Block

Parameter Company 2010 2009 2008 2007 2006

Debt/Equity Ratio Asian Paints 0.04 0.07 0.10 0.17 0.15
Shalimar 0.14 0.14 0.16 0.21 0.27
Paints
Interest Coverage Asian Paints 62.02 38.91 46.09 39.30 43.82
Ratio Shalimar 236.73 97.63 149.93 203.63 297.63
Paints
Dividends per share Asian Paints 258.98 167.86 163.06 124.70 119.90
Shalimar 40.42 32.34 32.34 30.99 51.02
Paints
Return on Equity Asian Paints 0.76 0.57 0.67 0.63 0.57
Shalimar 0.37 0.27 0.36 0.38 0.57
Paints
Price to Book ratio Asian Paints 16.86
Shalimar 3.07
Paints

Each of these factors has a role to play in the selection of the company for investment.
However the degrees to which they affect the returns vary in response to the other factors
as well. Hence for arriving at a decision for the investment, the entire basket needs to be
considered. Following is a brief discussion for each of them:
15

1. Debt to Equity Ratio (D/E):

0.3

0.25

0.2

0.15 Asian Paints

Shalimar Paints
0.1

0.05

0
Mar 10  Mar 09  Mar 08  Mar 07  Mar 06 

The debt-to-equity ratio measures the amount of debt capital relative to equity capital. A
high D/E ratio generally indicates a higher financial risk and thus weaker solvency. A ratio
of 1.0 would indicate equal amounts of debt and equity. This ratio indicates the amount of
equity that a company possesses to pay for the debt it has taken. For e.g., a D/E ratio of 2:1
indicates that the company has Rs. 2 of Debt for every 1 Rs of Equity. Clearly, as the assets
are not able to fully satisfy the Debt requirements, when long term investments are to be
made the company would not be in a better position to pay of the debts taken and hence it
would not be a good bet for this purpose. However other factors like, the nature of the
company (Power, FMCG etc) determines the gestation period and the time it would take for
that company to pay off the debt and hence it would have a high D/E ratio at the beginning.
Debt/Equity ratio of Asian paints is lesser than Shalimar Paints which goes in favour of
Asian paints. D/E for Asian paints is only 0.4 as compared to 0.14 for Shalimar Paints.

2. Interest Coverage Ratio:

16

350

300

250

200
Asian Paints
150 Shalimar Paints

100

50

0
Mar 10  Mar 09  Mar 08  Mar 07  Mar 06 

This ratio measures the number of times a company’s PBIT could cover its interest
payments. A higher interest coverage ratio indicates stronger solvency, offering greater
assurance that the company can service its debt (i.e., bank debt, bonds, notes) from
operating earnings.
Interest Coverage Ratio = (PAT + Interest)/ Interest
Although Interest coverage ratio of Asian paints is lower than that of Shalimar paints but
low debt/Equity ratio makes up for it. Therefore even with lower interest coverage ratio
Asian paints is preferred for long term investment.

3. Return on Equity:
17

0.8

0.7

0.6

0.5

0.4 Asian Paints

Shalimar Paints
0.3

0.2

0.1

0
Mar 10  Mar 09  Mar 08  Mar 07  Mar 06 

Return on equity measures the return earned by a company on its equity capital. Higher
ROE indicates better returns for the shareholders.
ROE or RONW = (PAT / Net Worth) * 100
Return on Equity for Asian Paints is higher than Shalimar Paints so this factor favours
Asian paints for long term investment. Return on Equity for Asian paints is 0.76 while for
Shalimar Paints is 0.37.

4. Dividend Per Share:

18

300.00

250.00

200.00

150.00 Asian Paints

Shalimar Paints
100.00

50.00

0.00
Mar 10  Mar 09  Mar 08  Mar 07  Mar 06 

For long term investment person might consider dividend per share as an important factor.
But the dividend declared by the company is based on the dividend policy of the company.
The company is under no compulsion to declare dividends and it can invest all of its profits
back into the business. In many cases, the investors and shareholders are willing to let go
off the dividend receivable in favour of the capital appreciation expected from the
reinvestment of the profits. Another factor that governs the dividend declaration policy is
that the returns from dividends are taxable while capital appreciation is non-taxable.
Dividends per share also favours Asian Paints as its value is 258.98 while foe Shalimar
Paints it is 40.42.

5. Price to Book Ratio: Price to book value is the ratio of price of stock to book value of the
share. This ratio is an indicator of market judgment about the relationship between a
company’s required rate of return and its actual rate of return. Assuming that the book
values reflect the fair values of the assets, a price to book ratio is an indicator that the
company’s future returns are expected to be exactly equal to the returns required by the
market. A ratio greater than one would indicate that the future profitability of the company
is expected to exceed the required rate of return, and values of this ratio less than one
indicate that the company is not expected to earn excess returns.
19

Price-to-book multiple (P/B) = Market price per share/Book value per share
Where, Book value = Total Assets – Intangible Assets and Liabilities

Price to book ratio is 16.86 for Asian Paints while its 3.07 for Shalimar Paints.

Conclusion:
For long term investment considering the risk factors person must go for Asian Paints
which has better debt/equity ratio and high interest coverage ratio. Although interest
coverage for Shalimar Paints is higher than Asian Paints but still returns and dividends are
far better in case of Asian Paints. So to conclude Asian Paints seems a better proposition for
investing in long term.
20

4.3. Short Term Lending

Objective: Short Term Lending

The analysis of short term will depend on how much returns our investment will give us in
the short run. A bank will thus lend only to the company, which is more efficient in running
business, and will have higher sales in the near future that will ensure that the loan will be
repaid on time.
Thus we must analyze why the company is borrowing money and what will be the
application of funds. We must find out whether the company will apply the funds to pay
back loans (principal or interest) or to raise fixed assets or to increase current assets.
For short term lending the primary concern for any bank are the liquidity ratios of the
company(s) concerned. So the parameters that we will take into consideration are:
 Current Ratio

 Quick Ratio

 Cash flow ratio

 Inventory Turnover Ratio

Parameter Company 2010 2009 2008 2007 2006

Inventory Turnover Asian Paints 7.57 9.20 7.58 7.79 8.01
Ratio Shalimar 7.97 9.75 9.30 8.22 6.88
Cash flow Ratio Asian Paints 0.58 0.34 0.48 0.48 0.40
Shalimar 0.38 0.62 0.59 0.56 0.48
Receivables turnover Asian Paints 10.49 9.08 8.82 8.84 9.14
Ratio Shalimar 7.21 6.62 6.18 6.00 6.08
Current Ratio Asian Paints 0.92 1.28 1.10 1.33 1.27
Shalimar 1.41 1.52 1.85 2.29 1.72
Quick ratio Asian Paints 0.40 0.71 0.53 0.66 0.62
Shalimar 0.79 1.00 1.17 1.37 0.95

1. Current ratio:
21

2.5

1.5
Asian Paints
Shalimar Paints
1

0.5

0
Mar 10  Mar 09  Mar 08  Mar 07  Mar 06 

2. Quick ratio:

1.6

1.4

1.2

0.8 Asian Paints

Shalimar Paints
0.6

0.4

0.2

0
Mar 10  Mar 09  Mar 08  Mar 07  Mar 06 

3. Cash flow ratio:

22

0.7

0.6

0.5

0.4
Asian Paints
0.3 Shalimar Paints

0.2

0.1

0
Mar 10  Mar 09  Mar 08  Mar 07  Mar 06 

4. Inventory turnover ratio:

12

10

6 Asian Paints
Shalimar Paints
4

0
Mar 10  Mar 09  Mar 08  Mar 07  Mar 06 

The first thing we need to check is whether the companies need short term loans and know
the purpose behind it. Usually Short term loan is required for the purpose of satisfying the
working capital requirements. Inventory turnover ratios are similar for the two companies
but cash flow turnover ratio for Asian Paints is much higher than that of Shalimar Paints.
Moreover, receivables turnover ratio is also higher for Asian Paints. However, the current
23

ratio for Shalimar Paints is almost twice as that of Asian Paints. Hence, considering the
short term risk factor, Shalimar Paints is the more appropriate company to invest in.
24

4.4. Long Term Lending

Parameter Company 2010 2009 2008 2007 2006

Debt/Equity Asian Paints 0.04 0.07 0.10 0.17 0.15
Shalimar 0.14 0.14 0.16 0.21 0.27
Interest Asian Paints 62.02 38.91 46.09 39.30 43.82
Coverage Ratio

Shalimar 236.73 97.63 149.93 203.63 297.63

Sales Asian Paints 5,776 5,027 4,086 3,381 2,801

Shalimar 1,972 1,664 1,613 1,484 1,226

Profit after tax Asian Paints 708.09 363.48 374.86 270.9 207.6

Shalimar 162.63 96.11 110.16 103.62 99.93

1. Debt/Equity:

0.3

0.25

0.2

0.15 Asian Paints

Shalimar Paints
0.1

0.05

0
Mar 10  Mar 09  Mar 08  Mar 07  Mar 06 

2. Interest Coverage Ratio:

25

350

300

250

200
Asian Paints
150 Shalimar Paints

100

50

0
Mar 10  Mar 09  Mar 08  Mar 07  Mar 06 

3. Sales:

7000

6000

5000

4000
Asian Paints
3000 Shalimar Paints

2000

1000

0
Mar 10  Mar 09  Mar 08  Mar 07  Mar 06 

4. Profit After Tax:

26

800

700

600

500

400 Asian Paints

Shalimar Paints
300

200

100

0
Mar 10  Mar 09  Mar 08  Mar 07  Mar 06 

The Debt/Equity ratio of Asian Paints is lower than that of Shalimar Paints. However, the
inventory turnover ratio of Shalimar Paints is much higher than that of Asian Paints. Hence,
D/E cannot be a differentiating factor.
27

4.5. Strategy
Management decisions are most important because they affect the future course of the company.
These decisions can either make or break the company. Efficiency and profitability are the two
important factors affecting management decisions of the company. Management also takes
decisions on credit policy and dividend policy (after discussions with shareholders).

The industry average ratios are:

Parameters 2010 2009 2008 2007 2006

Fixed asset turnover 7.46 8.13 7.88 8.72 8.65
ratio
Inventory turnover 7.24 7.56 8.64 7.20 6.91
ratio
Debt / equity ratio 0.29 0.07 0.34 0.39 0.48
Interest coverage 29.73 53.51 26.58 27.08 36.90
ratio
ROCE 4.88 8.20 4.53 3.93 4.69
ROE 0.52 0.48 0.50 0.49 0.69

The company ratios are:

Parameters  Company  2010 2009 2008 2007 2006

Fixed asset turnover Asian Paints 8.17 8.07 9.53 10.10 9.32
ratio Shalimar 6.81 7.01 7.79 7.82 7.67
Paints
Inventory turnover Asian Paints 7.57 9.20 7.58 7.79 8.01
ratio Shalimar 7.97 9.75 9.30 8.22 6.88
Paints
Debt / equity ratio Asian Paints 0.04 0.07 0.10 0.17 0.15
Shalimar 0.14 0.14 0.16 0.21 0.27
Paints
Interest coverage Asian Paints 62.02 38.91 46.09 39.30 43.82
ratio Shalimar 236.73 97.63 149.93 203.63 297.63
Paints
ROCE Asian Paints 12.35 6.45 6.47 4.88 3.73
Shalimar 10.54 6.67 7.84 7.25 9.10
Paints
ROE Asian Paints 0.76 0.57 0.67 0.63 0.57
28

Shalimar 0.37 0.27 0.36 0.38 0.57

Paints

Asian Paints

Positives

 Asset turnover ratio is higher as compared to industry average.

 Lower debt—equity ratio as compared to industry average.
 Higher ROE as compared to the industry average.
 Higher ROCE as compared to the industry average.
 Higher interest coverage ratio as compared to the industry average.
 Higher inventory turnover ratio as compared to the industry average.

Future Outlook:

 It has been able to pay up its interest easily and also has a low D/E ratio which means that
the company can look forward to expand its business by taking some long term loans.

Shalimar Paints

Positives

 Lower debt-equity ratio as compared to industry average.

 Higher ROCE as compared to industry average.
 Extremely high interest coverage ratio as compared to industry average.
 Higher inventory turnover ratio as compared to the industry average.

Negatives

 Asset turnover ratio is lower as compared to industry average.

 Lower ROE as compared to industry average.

Future Outlook:
29

 Should look to improve the efficiency of fixed assets.

 Should look to increase investment and enhance R&D.
30

5. CONCLUSION