Presented By:

Akshi Bhagia
Amanpreet Singh
Dolker Bhotia
Gunpreet Singh
Singh Manpreet
Prateek Singh Sidhu
Richa Arun
Shilpa Chawla
MBA General Section A
About the Company:
 India's largest paint company, founded in 1942
 Headquartered in Mumbai, India.
 Ranked among the top ten Decorative coatings companies in the
world.
 Has a turnover of INR 66.80 billion.
 Operates in 17 countries across the world with 23 paint
manufacturing facilities.
 Serves consumers in 65 countries through Berger International, SCIB
Paints – Egypt, Asian Paints,
Apco Coatings and Taubmans.
About the Company: Asian Paints (contd)

 MD & CEO : P M Murty

 Products : Ancillaries , Automotive,
Decorative paints, Industrial, Paint selector
 Revenue : 6,680.94 crore (US$ 1.45 billion)(2009-10)
 Profit : 1,256.09 crore (US$ 272.57 million)(2009-10)
 Employees: 4,382 (2009-10)
A) Financial Data – Asian Paints
Number of equity shares 95919779
Market price of share at the end of the trade on
25/01/2011 was `2622.30
Book value of share as on 31/03/2010 was ` 162.34
Book value of equity ` 1557.22 Crores
Market value of equity ` 25153.04 Crores
 Book Values (Figures in Crores )
Secured and Unsecured `68.59 `(118.16) Net Current
Loans Assets
Deferred Tax Liability `47.90
Equity `1557.22 `1791.87 Long-term
Assets
Total Value `1673.71 `1673.71 Total Assets

Market Values(Book Values (Figures in Crores )

Secured and Unsecured `68.59 `(118.16) Net Current
Loans Assets
Deferred Tax Liability `47.90
Equity `25153.04 `25387.69 Long-term
Assets
Total Value `25269.53 `25269.53 Total Assets
 Pecking Order of Financing Choices
 Asymmetric information : Managers know more about their
firm than outsiders about prospects, risks and values.

 Dividend signaling : Investors interpret increase in dividend as

sign of management confidence in future earnings.

 Asymmetric information affects choice between

internal vs external financing
issuing debt vs equity
 Pecking Order
 Pecking Order Theory - Theory stating that firms prefer to issue debt
rather than equity if internal finance is insufficient.

 Leads to following Pecking Order

 Internal funds
 Debt
 Equity
 Pecking Order Theory
The announcement of a stock issue drives down the stock price because investors
believe managers are more likely to issue when shares are overpriced.

Therefore firms prefer internal finance since funds can be raised without sending
adverse signals.

If external finance is required, firms issue debt first and equity as a last resort.

The most profitable firms borrow less not because

they have lower target debt ratios but because
they don't need external finance.
 B) Debt Ratios
Year Total Debt Total Assets Debt Ratio
2010 `68.59 `3134.15 0.021

2009 `74.53 `2180.65 0.034

2008 `94.70 `2005.77 0.047

2007 `125.66 `1540.15 0.081

2006 `91.08 `1282.66 0.071

Debt Ratio = Total Debt

Total Assets
No, Asian Paints doesn’t have a stable Debt Ratio. The
debt ratio of Asian paints has varied over the past 5
years & has decreased continuously since 2007.

We can see the implication of Pecking Order on the

Capital Structure of Asian Paints. Asian Paints has
used internal finances to reduce the debt on its balance
sheet.

The company has not issued any fresh equity since

2003.
 TRADE OFF THEORY
The Trade-off theory of capital structure refers to
the idea that a company chooses how much debt
finance and how much equity finance to use by
balancing the costs and benefits.

Trade-off theory of capital structure basically entails

offsetting the costs of debt against the benefits of debt.

The purpose of trade-off theory of capital structure

is to explain the fact that corporations usually are
financed partly with debt and partly with equity.
 BENEFITS OF DEBT
 Tax Benefit of debt: Modigliani and Miller in 1963 introduced the tax
benefit of debt.
 The tax deductibility of interest increases the total income that can be paid
out to bondholders and stockholders.
 For Example: There are 2 firms U and L ,U is unlevered and L is levered.

Income statement of firm U Income statement of firm L

EBIT 1000 1000
Interest paid to Bondholders 0 80
Pretax income 1000 920
Tax @ 35% 350 322
Net income to stockholders 650 598
Total income 0+650=650 80+598=678
Interest tax shield (.35*0)=0 (.35*80)=28
 As shown, the total income in case of a levered firm is more than the
unlevered firm because of interest tax shield in case of a levered firm.

 Debt adds Discipline to Management

 Equity is a cushion; Debt is a sword.

 The management of firms which have high cash flows left over each year
are more likely to be complacent and inefficient.
 The firms which take debt are more likely to be efficient as they have an
obligation of debt.
 Costs of Debt

 Bankruptcy Costs :These are the increased costs of financing with debt
because investors require a higher rate of return when investing in bonds of a
firm that has a higher probability of bankruptcy. It includes legal costs also.

 Non Bankruptcy Costs : For Example- staff leaving, suppliers demanding

disadvantageous payment terms, bondholder/stockholder infighting.

 Agency costs: The conflicts of interests between managers and shareholders

and between debt holders and shareholders lead to Agency Costs.

 Cost of insolvency: Once the proceedings of insolvency starts, the assets of

the firm may be needed to be sold at distress price, which is generally much
lower than the current values of the assets.

 Loss of future financing flexibility: When a firm borrows up to its capacity,

it loses the flexibility of financing future projects with debt.
C) Would the trade off theory predict share repurchases for a
conservatively financed company like Asian paints ?

YES, the trade off theory predicts share repurchases for Asian
paints as
 Asian paints doesn’t have a trade off because it uses only
equity and no debt, so in order to comply with trade off theory
it would repurchase its shares to decrease its equity and
increase its debt. And debt would -
 Provide income tax shield: The tax deductibility of interest
increases the total income that can be paid out to bondholders
and stockholders.
 Repurchase of shares would transfer the control from
shareholders to the company.
Thank You !!!