BhavanS Executive Management Programme

Subject:Managerial Economics Faculty Name:Prof. K Ravi

Case Study on : M/s Asian Paints Limited

Submitted by Name:Umapati Y Bhat Reg No:PG121213 Date:10th Mar12

Mgl. Economics. Assignment.by Umapati Y Bhat

INDEX

Sl.No. 1 2 I I.1 I.2 I.3 I.4 I.5

Description About Asian Paints Ltd., Data & Sources Advertisement Expenses Vs. Net Sales ( Sales is a function Of Advertisement) Excel Results Interpretation Graphs / Diagrams Recommendation Growth rate & Forecast Cobb Douglas Production Function ( Production, Capital and Labour relation ships) Data Tabulation with log values Excel Results Interpretation Asian Paints - it's position in paint industry (Industry Type & Market Structure)

Page 3 4

5 6 7 8 9

II II.1 II.2 II.3

10 11 12

III

13

Mgl. Economics. Assignment.by Umapati Y Bhat

About Asian Paints:

Asian Paints is Indias largest paint company and Asias third largest paint company, with a group turnover of Rs 7700 Crore. The group has an enviable reputation in the corporate world for professionalism, fast track growth, and building shareholder equity. Asian Paints established in 1942 at Mumbai, today operates in 17 countries and has 24 paint manufacturing facilities in the world servicing consumers in over 65 countries. Besides Asian Paints, the group operates around the world through its subsidiaries Berger International Limited, Apco Coatings, SCIB Paints and Taubmans. Forbes Global magazine USA ranked Asian Paints among the 200 Best Small Companies in the World for 2002 and 2003 and presented the 'Best under a Billion' award, to the company. Asian Paints is the only paint company in the world to receive this recognition. Forbes has also ranked Asian Paints among the Best under a Billion companies in Asia In 2005, 06 and 07. Product Range covers both Decorative and Industrial use. In Decorative paints, Asian Paints is present in all the four segments v.i.z Interior Wall Finishes, Exterior Wall Finishes, Enamels and Wood Finishes. Introduced many innovative concepts in the Indian paint industry like - Colour Worlds (Dealer Tinting Systems), Home Solutions (painting solutions Service), Kids World (painting solutions for kids room), Colour Next (Prediction of Colour Trends through in-depth research) and Royale Play Special Effect Paints, just to name a few. Vertical integration has seen it diversify into products such as Phthalic Anhydride and Pentaerythritol, which are used in the paint manufacturing process. Reg Joint Ventures Asian Paints also operates through APPG (50:50 JV between Asian Paints and PPG Inc, USA, one of the largest automotive coatings manufacturer in the world) to service the increasing requirements of the Indian automotive coatings market. Another 50:50 JV with PPG has been proposed which will service the protective, industrial powder, industrial containers and light industrial coatings markets. Asian Paints achieved sales Rs 6322.2 Crore with PBDIT as Rs.1232.7Crore ( excluding group companies).

Mgl. Economics. Assignment.by Umapati Y Bhat

Data & Sources:

Data for this study is down loaded from companys website http://www.asianpaints.com/applications/financial_result.aspx. Data available for 7 Finacial Years starting from 2003-04 till 2010-2011. For current Financial Year past 3 quarter results are available however as the Financial year shall complete on 31st Mar12, the same is not considered here for the study. 2002-03 data is obtained from 2003-04 result for Production-Labour- Capital function study. Figures are converted to single numbering forms i.e in Crore as prior to 2007 fin. Results are in Millions and later in Crores.

Sales as a function of advertisement expenditure Table 11 Sales Revenue and Advertisement Expenses in Crore
Currency INR Sl.NO Financial Year 1 2 3 4 5 6 7 8 200304 200405 200506 200607 200708 200809 200910 201011 Advertisement Net Sales Expenses 'X" Revenue "Y" 68.24 69.92 90.97 110.98 164.85 197.05 244.25 282.35 1696.65 1941.52 2319.16 2821.29 3419.06 4270.05 5125.08 6322.24

Production as a function of two variable Capital & Labour Table 21 Production, Capital and Labour in Crore
Currency INR Sl.NO 1 2 3 4 5 6 7 8 Financial Year 200304 200405 200506 200607 200708 200809 200910 201011 Production in MT 352381.00 416082.00 417233.00 486896.00 559586.00 602922.00 726437.00 849056.00 Capital in Crore Labour in Crore 531.54 101.56 572.22 117.93 622.28 128.98 744.07 154.96 928.50 194.67 1094.47 238.90 1557.22 260.84 1975.32 300.45

Mgl. Economics. Assignment.by Umapati Y Bhat

SUMMARY OUTPUT Regression Statistics Multiple R R Square Adjusted R Square Standard Error Observations ANOVA Regression Residual Total 0.993146664 0.986340296 0.984063679 206.5552154 8 df 1 6 7 Coefficients 438.3904961 19.8662354

Regression Analysis Using Excel for Sales v/s Advertisement

SS 18484558.52 255990.3421 18740548.86 Standard Error 163.7638278 0.9544369

MS F 18484558.52 433.2481852 42665.05701

Significance F 8.00592E07

Intercept Advert. Expenses 'X" RESIDUAL OUTPUT Observation 1 2 3 4 5 6 7 8

t Stat 2.6769678 20.8146147 Residuals 97.46 114.14 73.47 178.13 294.28 82.98 165.64 274.62

Pvalue 0.0366841 0.0000008

Lower 95% 37.6748459 17.5308125

Upper 95% 839.1061463 22.2016582

Lower 95.0% 37.6748459 17.5308125

Upper 95.0% 839.1061463 22.2016582

Predicted Net Sales Revenue "Y" 1794.10 1827.38 2245.68 2643.17 3713.34 4353.03 5290.72 6047.62

Mgl. Economics. Assignment.by Umapati Y Bhat

Interpretation Sales as a function of Advertisement

RSquare: InReferring to Regression results, R Square value is 0.9863 =98.63% which means that 98.63% of the total variation in firms sales is accounted for by the variation in the firms advertising expenditure. Hypothesis: Null Hypothesis : There is no significant influence of advertisement on Net Sales. Alternative Hypothesis: There is significant influence of advertisement on Net sales. t cal = t stat = 20.814 (from the regression result for independent variable. t tab = 2.447 (from the T Distribution table based on deg of freedom 5 and probability 0.05 and ) Since t cal value 20.814 well exceeds t tab value 2.447 for the 5% level of significance with 6 df, we reject the Null Hypothesis that is that there is no relation between advertisement and sales and we accept Alternative Hypothesis that there is statistically significant relationship between advertisement and sale at the 5% level. That means we are 95% confident that such relationship exists. In other words that the Advertising Expenses independent Variable has High Significant influence on the Sales dependent variable. The linear equation of Net Sales and Advertisement expenses can be represented as S = a0 + a1(advertisement) Where S is Net Sales Revenue (Dependent variable) a 0 is Intercept calculated thru Regression using XL tool = 438.390 a1 is Slope i.e. co-efficient of Advertisement expenses = 19.86 Advt is Advertisement Expense (Independent variable) Replacing the appropriate values from Data Analysis obtained from Excel sheet in previous step, the equation is =a0 +a1(advt) S=438.390 + 19.86 (adv) Sales revenue shall increase by 438.390+19.86 times advertisement Expenses.

Mgl. Economics. Assignment.by Umapati Y Bhat

Net Sales Revenue in Crore V/s Representation by Scatter Diagram:

By taking Sales Revenue and Advertisement Expenses in Crores

Advertisement

expenses

Sales Revenue in Crore on Y axis Adertisement Expenses in Crore on X axis By Taking Log Values for Sales Revenue & Advertisement Expenses

Sales Revenue Log Values on Y axis Adertisement Expenses Log Vales on X axis We can observe a high influence of advertisement on sales revenue.
Mgl. Economics. Assignment.by Umapati Y Bhat

Recommendation: 1. Going by the above study, regression analysis, we got R Square value as 98%. It means the 98% variation in sales is explained / related by variation in its advertisement expenditure. Hence It is recommended to increase the advertisement expenditure to an optimum scale as required to reach sales growth rate. 2. As the RSquare value covers 98% variation of sales in relation with advertisement, in the mean time Tcal is greater than t Tab we are convincingly recommending to increase advertisement expenses by 438.39+19.86 (advt) to achieve desired sales revenue.

Mgl. Economics. Assignment.by Umapati Y Bhat

Growth Rate & Forecast:

Sl.NO Financial Year Advertisement Net Sales Expenses Revenue Sales Growth rate 1696.65 1941.52 2319.16 2821.29 3419.06 4270.05 5125.08 6322.24 6608.47 6888.88 7169.39 7449.70 8021.73 Advt Exp Increase Rate 2.40% 23.15% 18.03% 32.68% 16.34% 19.32% 13.49% 10.00% 15.00% 20.00% 25.00% 35.00%

1 2 3 4 5 6 7 8 9 9 9 9 9

200304 200405 200506 200607 200708 200809 200910 201011 201112 201112 201112 201112 201112

68.24 69.92 90.97 110.98 164.85 197.05 244.25 282.35 310.59 324.70 338.82 352.9375 381.1725

14.43% 19.45% 21.65% 21.19% 24.89% 20.02% 23.36% 4.53% 8.96% 13.40% 17.83% 26.88%

Forecast Using S=a0+a1(advt.) Advertisement expense is 310.585 =438.39+19.866(310.585) =438.39+6170.08 =6608.47Crore Advertisement Expenses is 324.70Crore =438.39+19.866(324.70) =438.39+6450.49 =6888.88Crore Advertisement Expenses is 338.82Crore =438.39+19.866(338.82) =438.39+6730.99 =7169.388Crore Advertisement is 352.93Crore =7449.697Crore Advertisement is 381.172 =8021.739Crore

Mgl. Economics. Assignment.by Umapati Y Bhat

Production as a function of two variable Capital & Labour Table 21 Production, Capital and Labour in Crore
Log Values Sl.NO 1 2 3 4 5 6 7 8 Financial Year 200304 200405 200506 200607 200708 200809 200910 201011 Production in MT 352381.00 416082.00 417233.00 486896.00 559586.00 602922.00 726437.00 849056.00 Capital in Labour in Crore Crore 531.54 101.56 572.22 117.93 622.28 128.98 744.07 154.96 928.50 194.67 1094.47 238.90 1557.22 260.84 1975.32 300.45 Production Q 12.77247 12.93864 12.9414 13.09581 13.23495 13.30954 13.49591 13.65188 Capital K 6.27578 6.349524 6.433397 6.612135 6.83357 6.998026 7.350657 7.588486 Labour W 4.62061 4.770091 4.859626 5.043148 5.271306 5.476045 5.563907 5.705281

Excel Results Cobb Douglas Production Function

Mgl. Economics. Assignment.by Umapati Y Bhat

10

SUMMARY OUTPUT Regression Statistics Multiple R R Square Adjusted R Square Standard Error Observations ANOVA

0.994570807 0.98917109 0.984839526 0.036956711 8

Regression Results using XL Cobb Douglas Production Function:

df Regression Residual Total 2 5 7 Coefficients 9.066486 0.387248 0.286282 Predicted Production Q 12.81956718 12.89091779 12.94902977 13.07078478 13.22185275 13.34415086 13.50586019 13.63843157

SS MS 0.623797038 0.311898519 0.006828992 0.001365798 0.63062603 Standard Error 0.206207 0.129151 0.155002 t Stat 43.967830 2.998417 1.846964

F 228.363496

Significance F 1.22029E05

Intercept Capital K Labour W RESIDUAL OUTPUT Observation 1 2 3 4 5 6 7 8

Pvalue 0.000000 0.030154 0.124032

Lower 95% 8.536413 0.055255 0.112162

Upper 95% 9.596559 0.719240 0.684727

Lower 95.0% 8.536413 0.055255 0.112162

Upper 95.0% 9.596559 0.719240 0.684727

Residuals 0.047098922 0.04771984 0.00762967 0.025021044 0.013099754 0.034607746 0.009953149 0.013448849

Mgl. Economics. Assignment.by Umapati Y Bhat

11

Interpretation Cobb Douglas Production Function

RSquare: InReferring to Regression results, R Square value is 0.989 =98.9% which means that 98.9% of the total variation in firms goods produced is accounted for by the variation in the firms capital and labour deployed. Hypothesis: Null Hypothesis : There is no significant influence of Capital K and labour-W on Production Q. Alternative Hypothesis: There is significant influence of Capital & Labour on Net goods produced.

Fcal = 228.36 (as per our excel analysis) Ftab = 5.79 (from F distribution table of 5% Significance, taking numerator as 2 and denominator as 5) Since Fcalculated value F Statistic 228.36 >exceeds critical value of F distribution with 2 and 5 df, we
reject the null Hypothysis and accept alternative hypothesis that there is statistically significant relation between independent and dependent variables Labor W Coefficient = 0.28 It Indicates that with 1% increase in labour, Quantity of goods produced (roduction) will increase by 0.28%% Kapital Coefficient = 0.38 It Indicates that with 1% increase in Capital, Quantity of goods produced (roduction) will increase by 0.38%% Since Capital Coefficient > Labour Coefficient, we conclude that the organization is a Capital intensive. Coefficient of Labor & Capital = alpha + beta = 0.28 + 0.38 = 0.66 which is less than 1, hence we can say that the industry is on decreasing return to scale. Cobb Douglas Production Function Q = ln A + a In K + b ln L = 9.06 + 0.28+ 0.38 = 9.72

Company needs to imprrove on production technology process technology and back hand integration to bring on return to scale side.

Mgl. Economics. Assignment.by Umapati Y Bhat

12

Market Structure Analysis: Market Structures arePerfect Competiton Monoplistic Comptn. Monopolistic Comptn. Oligopolistic Comptn

Asian Paints is 13th largest in the world in paints industry, 3rd largest in Asia and largest in India. In India even though there are many small brands in paints, howver few branded competition namely Kansai Nerolac, Berger Paints, Akzo Noble and Shalimar Paints who have recognisible imprints in market. Among all Asian Paints is showing over 20% annual growrth rate since 2005 and is one of the company identified as Future Prospective. ( source Stock shastra .com). Fewer sellers, many buyers applies here. Asian Paints is 13 th in international market with considerable global presence in developing countries, middle easta nd African countires. Revnue wise they stand globally at 13th with 1.9Bln against the worlds largest paint company Akzo noble with sales revnue of 13Bln UD. From our study we found Asian paints is Capital intensive industry and has lost of assests in terms of plant and machinery. It is having barriers to resource mobility and needs reasonably long time planning for building capacities / making adjustments Products are homogeneous as well as differentiated. But BRAND NAME carries weightage in market. Asian paints has Price Leader ship they cansell their goods at marginally higher prices over competition as they have established tehir brands well ahead of others. Also Asian paints has Scal of production and they can continue to produce till P=AVC.

Thus Asian Paints is categoriesd as OLIGOPOLISTIC.

Mgl. Economics. Assignment.by Umapati Y Bhat

13

Mgl. Economics. Assignment.by Umapati Y Bhat

14