Branded Consumer facing Non-FMCG: Best Buys

Investing Strategies
21

Donald,

The only case I can think here is if the company is highly leveraged (high D/E). In this case the interest component added to the PAT to arrive at CFO can inflate the CFO/PAT. So if a company is not highly leveraged, I think greater the CFO/PAT > 1, better it is. This won’t last long though once most of the working capital has been freed.

Please share your thoughts.

Thanks,Atul

2). âCan

22

Working Capital/Sales gives an overall measure. Cash in/out ratio focuses on just debtors & receivables vs Liabilities and excludes all other current assets incl Cash and Marketable Securities.

So you are just focusing on how long the company is able to hold on to cash - Giving out vs Taking in. It’s like how slow your cash-out tap is running! The lower the ratio the better. We get a better handle/ finer granularity on this aspect than the working capital ratio can reveal.

This ratio should be a lot more revealing for working capital heavy business. As we look through many more examples we will know better.

23

Excellent explanation Donald. I recollect the ‘Leaky Bucket’ problem :slight_smile:

24

Atul,

The CFO can be inflated because of increase in current liabilities or decrease in current assets.The company can keep its current liabilities (like wages payable,creditors etc) on hold just before the presentation of accountsor liquidate its old inventory faster and not purchase new inventory.This willin turn inflate CFO/PAT.

Regards,

Shrey.

25

Just some riders. So it is seen in the larger context.

The key is in seeing consistently low/lowering cash in/out ratio. A sudden change may or may not indicate other things too - company not able to/extending creditor payables, etc.

Please note this may seem to be going against the conventional wisdom of Liquidity. Current Ratio =CA/CL where a higher level of current ratio (atleast 1.5) is preferred, which indicates a company’s ability to pay off all its liabilities at once, if so needed. Since we are excluding CASH and Marketable Securities, etc from the Current Assets, this is really a different measure not a Liquidity measure.

I have checked Nestle e.g. with great cash in/out ratios like 0.2 or 0.3, they usually have Current Ratio of 1.4 to 1.6 over the years.

:))

Working Capital/Sales gives an overall measure. Cash in/out ratio focuses on just debtors & receivables vs Liabilities and excludes all other current assets incl Cash and Marketable Securities.

So you are just focusing on how long the company is able to hold on to cash - Giving out vs Taking in. It’s like how slow your cash-out tap is running! The lower the ratio the better. We get a better handle/ finer granularity on this aspect than the working capital ratio can reveal.

This ratio should be a lot more revealing for working capital heavy business. As we look through many more examples we will know better.

26

@Donald, Thanks. Yes, I need to see more data to justify new ratio.

@Shrey,

I am learning on the job, so need to get this doubts cleared.

large currentliability:

Due to wage increase: can we assume this will get reflected in D/E as well. for a company not paying wages should be on steroids.

Due to creditors: As far as I understand. This is good in light of low D/E. No financial distress.

Inventory Sale before purchase: can that be a reason for financial distress…how ?

Thanks,

Atul

27

Hi Atul,

Yes, the increase in current liability(wages payable) will increase the D/E Ratio. you are probably saying it from the perspective that the company is getting to hold cash for a longer period of time.This might be the case with firms that have strong solvency position.But what about a firm that has a lot of debt and little earnings?The company might be of the second type and hence the creditors are hanging in B/S because the company does not have the capacity to repay and probably is some how is rolling over the short term loan. purchase:Its not sale of inventory before purchase(Just in case you meant that) it is selling old inventory and not purchasing new inventory.This may not distress,but it certainly is a way to boast the gross margin as the company in this way sells the old inventory which has lower prices (assuming inflationary situation,which generally prevails).This process is called as LIFO liquidation.

Regards,

Shrey.

28

Thanks Shrey.

29
Asian Paints Ltd.
ASIAN PAINTS LTD. SALES GROSS PROFIT EBIT PAT DIVIDEND EPA MKTCAP CFO FCF NETWORTH TOTAL RETURNS
9 YR CAGR 20.72% 19.24% 24.39% 27.13% 21.36% 31.05% 34.37% 16.19% 16.19% 22.86% 34.10%
5 YR CAGR 21.49% 18.69% 22.66% 24.68% 23.86% 21.07% 32.42% 13.52% 13.52% 29.33% 32.29%
3 YR CAGR 20.01% 13.62% 11.01% 8.78% 21.72% 3.78% 44.77% -11.84% -11.84% 26.78% 44.38%
1 YR GROWTH 25.06% 22.70% 16.74% 17.25% 25.00% 1.12% 23.22% 8.55% 8.55% 25.65% 23.24%
ASIAN PAINTS LTD. 31-03-2012 31-03-2011 31-03-2010 31-03-2009 31-03-2008 31-03-2007 31-03-2006 31-03-2005 31-03-2004
Financial Leverage 1.17 1.16 1.19 1.31 1.32 1.45 1.47 1.50 1.45
Long term debt/Earning 0.34 0.28 0.27 0.75 0.63 1.02 1.14 1.27 1.17
Current liablility/Earning 2.38 2.19 1.83 2.60 2.49 2.50 2.81 3.12 0.00
Total liability/Earning 2.72 2.47 2.11 3.35 3.12 3.53 3.96 4.38 4.44
Debt/Equity 0.12 0.11 0.13 0.25 0.26 0.37 0.38 0.39 0.32
Interest Coverage 39.15 51.18 32.98 20.48 25.02 18.98 31.63 27.63 17.15
Working Capital/Sales 7.20% 2.85% 1.13% 8.12% 5.59% 9.88% 9.08% 9.62% 6.07%
Debtor Days 16 16 17 18 19 20 20 20 23
Inventory Days 106 115 99 86 105 102 99 112 80
Inventory turnover 3.43 3.16 3.67 4.25 3.47 3.57 3.68 3.27 4.54
Cash In/Cash Out Ratio 0.40 0.21 0.23 0.42 0.29 0.40 0.36 0.31 0.34
Current Ratio 0.94 0.79 0.73 0.95 0.82 1.01 0.94 0.92 0.79
CFO/PAT 0.84 0.90 1.27 0.98 1.22 0.92 0.84 0.64 1.72
Gross Margin 51.34% 52.33% 57.29% 53.99% 56.36% 54.85% 54.88% 53.16% 56.66%
EBITDA Margin 16.15% 17.41% 18.66% 12.88% 15.66% 13.46% 13.96% 14.06% 14.59%
Net Margin 9.89% 10.54% 12.03% 6.93% 8.91% 7.32% 7.02% 6.79% 6.53%
Free Cash Flow/Sales 8.26% 9.52% 15.31% 6.78% 10.84% 6.72% 5.91% 4.33% 11.22%
Capital Turns 3.49 4.97 4.93 3.83 4.50 4.11 3.85 3.47 3.33
Fixed Asset Turns 7.69 6.11 7.63 6.65 7.38 7.29 6.53 5.37 4.20
Total Asset Turns 3.11 3.16 3.42 3.64 3.54 3.41 3.19 3.01 2.89
RoA 30.70% 33.31% 41.14% 25.21% 31.53% 24.96% 22.36% 20.44% 18.85%
RoE 35.97% 38.55% 48.87% 33.07% 41.65% 36.13% 32.83% 30.69% 27.36%
RoCE 25.61% 27.76% 33.24% 24.57% 29.69% 24.70% 23.55% 22.06% 21.22%
RoIC 36.52% 55.20% 58.38% 30.10% 44.05% 31.81% 29.28% 25.60% 24.12%
RoIncNW(1yr) 13.07% 0.94% 91.95% -2.82% 51.55% 39.31% 26.01% 46.09%
RoIncNW(3yr) 11.40% 42.31% 67.43% 23.61% 59.43% 44.83% 45.97%
RoIncNW(10yr) 49.84%

Growth Rates: The sales growth has been flat and near 20% corridor,except in the current year in which the company has posted an excellent growth of 25%.The profits however been deceleratingbeginningwith gross profit indicating increase in raw material prices,The 3Yrs EBIT and PAT growth rates have declined significantly.However the currentgrowthrate hint that the company is back on growth trajectory.

Solvency & Liquidity: The company's solvency and liquidity condition has improved gradually over the years.

Efficiency:The efficiency as a whole seen by net WC/Sales has marginallydeteriorated over the years,the current increase in net working capital is huge.The company now takes approx a month more to turn inventory into sales than it took a decade ago.

Cash backing:The company's earnings are adequately backed by cash.

Margins,Turnover & Returns:The Gross margin has dropped by little over 5 percentage points over the last 10 year period following anerratic trend.The EBIDTA and Net margin have improved over the years,but both have followed a declining trend in the last 3 years.The fixed asset turnover has improved steadily declining just once in FY09 in the last decade.The capital turnover has improved marginally over last 10 years,this too has followed an uptrend and has declined twice in 10 years,once in FY09 and again in the current year.The return ratios have improved over the 10 year period barring decline in FY09 and last two years.

Distribution Network:The company'sgreatestcompetitive advantageis itsamazing distribution network consisting of 6 regional distributors,80 sales locations,27000 dealers having 21000 tintingmachines.On an average the company adds 1,000 dealers in a year, helping it to grow further in terms ofreach in the country.The company has strong presence in Tier 2 and Tier 3 cities and has witnessed stable growth in thesetowns.

(Tintingmachine-With the use of tinting machines, adealer can tint over 1,800 shades onthe spot and provide it to thecustomer as per his/her requirement.This helps theDealer avoid stocking differentvarieties of paints in various packsizes,thereby reducing his inventory)

By introducing a concept of tinting machine, the company has createdanbarrier toentry, as economically it is not viable for a dealer to have two tinting machines from differentcompanies.What makes the company's distribution network even more powerful is the fact that its second largest competitor has adistribution network of 15000 dealers,which is almost half of what Asian Paints has! :)

Unique raw material Source:Asian Paints has achieved backward integration through in-house production of twoimportant raw materials, pentaerythritol and phthalic anhydride.It is the only paint company in India to have this backwardintegrationand this has helped it save a great deal of money and hence in acompetitive advantage.

Types of Businesses: The company is thedominant player in the Indian paint industry.It operates in two segments,they are as follows:

1)decorative-Decorative Paints business contributes around 81% to total revenue and 94% to total paint revenue.The decorative paint segment constitutes 75% of the Indian paint market.This segment is pricesensitive and is a higher margin business as compared to industrial segment.About 65% of the demand for decorative paints stems from repainting, mainly after the monsoon rainsand before the festive season, while the remaining is constituted from new housing. Rapid urbanisation,easing housing finance and rise in disposable income are the drivers of growth in the decorative paintssegment.

2)Industrial-It contributes 6% to total revenue and includes automotive and protective segment.

Automotive segment-The growth of this segment is highly correlated with the growth in Auto Industry.The automotive coatings market is bifurcated into OEMs and auto refinishes and is one of the fastestgrowing sub sectors in the Indian Industrial paint segment.With Major automobile companiessetting-up manufacturing operations in India ,Vibrant demand for new automobiles and second-handused vehicle market represents significant opportunities.It is most probably the future growth engine.

Expansion of Production :The current installed capacity stood at 644,000 tons, which rose by 50,000MT (expansion atRohtak). Capacity is expected to increase to over 1.2mn MT by FY15, which will include thenew plant of 0.4mn tons at Khandala; the first phase of 0.3mn tons of this plant would becommissioned by the end of FY13.The company is also makinginvestments in modernizing the field operations by opening new depots andautomating the operations at the field locations.

30

Hello Shrey,

Excellent work on Asian paints. This Company, in addition to superior destribution network,occupies teriffic mind share among the consumers.I dont believe that any other Companycan match it over a very long period of time.

There is not a single year in the last 10 years in wich the revenue less than 15% years. Even in this era of infrastructure slowdown, the Company has posted excellent financials. Just imagine the kind of growth it can post if all-is-well in the economy.

It is currently trading at a PE in excess of 40 which is very expensive.A year back it was trading at a PE multiple of ~30 which was considered expensive then. Can some one guide as to at PE can one enter this stock?

31

dear all

why the discussion is not continued in this thread. ?

32

How common are these tinting machines? How many dealers have it? I don’t think it’s very common at all in India. And I am asking this 5 years after you wrote this. I am not sure that is the barrier to entry as far as Asian Paints is concerned.