Asian Paints DCF Analysis

Paints Industry Overview

Indian Paints industry has grown by leaps and bounds over the last decade, largely supported by government's focus on housing and infrastructure development. The industry is mainly organized (~75%) and is expected to grow with double digit CAGR in the years to come. 

However, paints industry is heavily correlated with the economy's growth and is expected to witness a slowdown in case India's GDP growth rate fizzles out.

Broadly speaking, there are two segments within the paints industry -
  1. Decorative segments - Paints used to paint our home's interior/exterior walls
  2. Industrial segment - Coatings using for cars, heavy machinery etc.
Unlike international markets, Indian market is dominated by decorative paint segment, contributing about 75% to the total market size.

Major capex news in the industry:
  1. Aditya Birla's Grasim to invest Rs.100 bn to enter into the paints segment
  2. Asian Paints announced Rs. 87 bn capex for greenfield, brownfield expansion and acquisitions
  3. JSW paints announced a capex of Rs.10 bn 

Here is a brief one pager on the industry to help you understand the key drivers, market size and companies operating in the space.

Asian Paints Company Profile

Asian Paints was established back in 1942 (81+ years!) and during the initial days, the company focused keenly on the rural markets (for decorative paints) while the other players were more concentrated on the industrial segment. Over the decades, Asian Paints carved out a niche in the decorative paints segment and is currently the market leader with about ~55% market share in this segment.

The company has been an epitome of corporate governance and the fact that Asian Paint's ownership structure has not changed since decades showcases the seriousness towards running the business. 

Asian paints has nearly doubled its retail points (~1.5 lakh) over the last few years. This is mainly to consolidate its position in the market and to keep competition at bay. The company also focuses keenly on supply chain efficiencies to increase their margins. 

Here's an interesting article on some facts and milestones of the company. The one pager profile below also gives a brief idea regarding the company and how it has been growing across India and abroad.

Asian Paints DCF Valuation

When I performed the valuation, the company was trading roughly around Rs. 2800 per share. Is it fairly valued? overvalued? undervalued? 

Zomato at the time of listing was priced at ~Rs.75 per share while Aswath Damodaran came up with a valuation of about Rs.40. That's a steep discount to the listing price!. The stock rose up to the levels of about ~Rs.120 and has corrected by over 50% since.

The point is - valuation is an estimate of share price based on fundamentals of the company and can highly vary from the actual market price. Every analyst /investor will have different opinions regarding the growth rate, margins etc. and hence it is next to impossible to predict the share price of an asset with accuracy.

My findings from the model are summarized as:
  • Base Case: Rs. 1,782
  • Upside case: Rs. 2,385
  • Downside Case: Rs. 1,344

In the excel file embedded below, you can navigate through the tabs to understand the growth projections and various assumptions for each of the cases. Here's a brief navigation guide through the file-
  • Valuation Tab: Lists out various assumptions, computes WACC, FCF etc. for valuation purpose. You can change across the three cases via cell D12
  • AP_ Drivers: Lists out the various drivers for the company and assumptions
  • AP_Projections: 3 statement model for Asian Paints (not aways required in DCF, but good to have)

You can download the model from this link.


In case I missed anything or if you have some other comments regarding the approach, feel free to comment below! 

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