NEW DELHI: Aditya Birla Group firm Grasim’s aggressive expansion into the paint business is touted as the next big thing in the industry, with experts going as far as calling it a ‘Jio moment’. Analysts at research and brokerage firm Jefferies India said Grasim may go for an aggressive strategy (pricing or otherwise) and disturb the market structure, which may have a greater impact on smaller players, but Asian Paints, the current market leader, may also be at risk. “This is reminiscent of Jio’s foray into the telecom industry, with significant capacity additions, which ultimately resulted in lower industry tariffs,” said Jefferies in a report earlier this week.
Jay Gandhi, institutional research analyst at HDFC Securities, feels Grasim’s plans will impact the number 2 and number 3 players. He, however, believes it would be difficult for a new player to shake up Asian Paints’ dominant position, especially the widespread dealership network it has.
“Grasim’s big Ultratech network, though different from a paint dealership, can play an important role in denting the market share of the number 2 and number 3 players,” said Gandhi. On the impact of Grasim’s entry on Asian Paints, he said, “What is likely to affect Asian Paints is incremental growth. 75% of the decorative paint business is organised, in which Asian Paints enjoys 53-54% share. Everyone is eyeing to capture the remaining 25% and entry of a deep-pocketed player means slowing down growth for existing players.”
According to industry estimates, currently, the paint industry in India is worth over Rs 62,000 crore ($8 bn), and is one of the fastest-growing paint economies with double-digit growth over the past 2 decades. The decorative paint category accounts for nearly 75% of the overall market, while the industrial paint category accounts for the remaining 25%. Even as this sector has many players, the big four – Asian Paints, Berger Paints, Kansai Nerolac, and Akzo Nobel India – have formed an oligopolistic structure, with Asian Paints emerging as a strong leader.
The industry is notorious for having high entry barriers and the failure of big global names in the past shows it is a difficult task for a new player to gain scalability, have efficient inventory management in place and a strong dealership foothold. Besides, external factors such as crude prices (accounts for 50% of raw materials), inflation and the performance of client industries have noticeable impact on the sector. This, however, hasn’t stopped new players from entering this fast-growing space, be it JSW Group or Grasim.
The latter on Tuesday said it has doubled the Capex for its foray into the paints business to Rs 10,000 crore and expects to start production from the fourth quarter of 2023-24. In August last year, Grasim Industries’ board had approved a Rs 5,000 crore capital expenditure (CAPEX) plan to set up a paints business. Market dynamics of the sector have changed with new capacities being announced, backed by strong growth and outlook, said Grasim, adding that it has accelerated the execution of its capacity of 1,332 million litre of paints per annum (mlpa) with the commissioning of plants by Q4FY24. According to Jefferies, “The 1.3-bn-litre capacity expansion outlook for Grasim is meaningful and comparable to 1.7 bn litre capacity for Asian Paints and much higher versus smaller peers like Berger (0.7 bn litres) and Kansai Nerolac (0.6 bn litres).”
Since Grasim’s announcement, share prices of Asian Paints and Berger Paints have come under pressure, falling 9-10% each in past 5 sessions. Gandhi said the market was looking for a catalyst to punish the stock (Asian Paints) as it was expensive. This (Grasim’s announcement) is the catalyst for valuation correction, he added. Brokerage firm ICICI Securities gave REDUCE rating to Berger Paints. “In 4QFY22, Berger’s revenue growth of 8% YoY was lower than Asian Paints (+18.4%) and Indigo (+13.4%). Berger has lost some market share with likely mid-high single-digit volume decline, in our opinion.”
“Apart from competition from larger players, North India based regional players like Sirca Paints and Kamdhenu have strengthened product line and distribution...With a likely rise in competitive intensity with entry of Grasim, JK Cements and Astral Poly, likely turnaround of Akzo, the paint firms operating largely in value-for-money products are likely to be more impacted.”