Dated: 27 Mar 23
Company: Asian Paints Ltd.
CMP: Rs. 2803.75

Introduction

In this article we will try to analyze Asian Paints Ltd. based on previous six years of financial statements viz Balance sheet, Profit and Loss statement and Cash flow statement. With this analysis we will try to gain insight into the financial health, operating efficiency and profitability of the company and finally try to derive the intrinsic value of the stock using Discounted Cash Flow method and the price at which the stock becomes attractive for long term investment.

Note: Here we are carrying out only the quantitative fundamental analysis of the company as the qualitative analysis is more subjective and individual views may vary vastly.

Leverage Ratios

Asian Paints Ltd. - Fundamental Analysis And Intrinsic Value Calculated Using Discounted Cash Flow Method

Observations:

All the above ratios show that the company is operating with almost no leverage that is a very good sign.

Operating Ratios

Observations:

Except for Fixed asset turnover ratio all other ratios have shown a gradual decline during the period in consideration.
Company has to take steps to ensure efficient utilization of the working capital.
Company has to stringently follow up on receivables.

Profitability Ratios

Observations:

All the above ratios indicate declining profit margins. This may be due to new competitors etc. in the existing product lines. The company has to introduce new product segments wherein they can claim better margins.

Intrinsic Value

Assumptions:

The increase in cash flow is assumed to be Rs. 267.93 Crores for the first five years and then Rs 133.96 Crores from sixth to tenth year. The growth rate is projected based on the past Free Cash Flows (refer to figure below). In the past free cash flow has increased at the rate of Rs. 535.86 Crores per year, however, with a conservative outlook we have taken 50% of that figure for the first five years and 25% of that for the next five years.

Terminal growth rate is assumed to be 0%.

Discount rate is assumed to be 12%.
Free Cash Flow is extrapolated with the base value as Rs 1300 Crores which is same as 2019 level. The average of free cash flows for the previous years is Rs. 1513.77 Crores.
Increase in Revenue is assumed to be Rs.899.26 Crores per year for the first five years and then Rs 449.63 Crores per year for the next five years. This growth rate is based on analysis of previous year’s revenues (refer to figure below). In the past revenue has increased at the rate of Rs. 1798.53 Crores per year, however, with a conservative outlook we have taken 50% of that figure for the first five years and 25% of that for the next five years.

Free cash flow will be 7% of revenues in future. The FCF/Revenue ratio for the period under consideration has an average of 0.07. Here we assume that the same average will hold good for future.

Based on the above assumptions we have arrived at two levels as intrinsic value of the firm. One is based on extrapolation of Free cash flows and the other is based on Free cash flows derived from extrapolated values of revenues. Both the methods only differ in how the input values are derived; in both the cases the present value is arrived at using Discounted Cash Flow Method.

Free Cash Flow Growth Model

Intrinsic Value: Rs. 233.58

Stock Entry price with 25% margin of safety: Rs.175.19

Revenue Growth Model

Intrinsic Value: Rs.199.73

Stock Entry price with 25% margin of safety: Rs.149.79

The average of the above two stock entry prices works out to be Rs.162.49. When the stock starts trading below this price it becomes attractive for long term investment.

Author

Jibu Dharmapalan

Fundamental Analyst
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Disclaimer: This is not a stock advise. Investors must use their due diligence before buy/selling any stocks.

References:

https://www.nseindia.com/get-quotes/equity?symbol=ASIANPAINT

https://www.asianpaints.com/more/investors/investors-landing-page.html?q=financial-results

More about the Company:

Board Of Directors

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