Informist, Wednesday, Mar 15, 2023
By Rajesh Gajra
MUMBAI – Grasim Industries Ltd's foray into India's lucrative paints sector is likely to spur the existing players into action as they prepare to counter the large, well-capitalised entrant. There is an almost palpable sense of excitement among analysts and investors about Grasim's performance as a seller of paints. JSW Group's foray into the paints industry in mid-2019 had also created a flutter, but not as much as now.
A flagship company of the Aditya Birla Group, Grasim got attracted to the paints segment due to high market valuations of existing listed paint companies. Grasim had announced its entry into the sector in January 2021. Initially, it had announced a 50-bln-rupee capital expenditure plan, but doubled the outlay in May 2022, while setting the date of commencement of production in January-March 2024.
The domestic decorative paints industry is estimated to be 400-450 bln rupees in size, and is expected to see a compound annual growth rate of 8-10%, according to Grasim Industries. Asian Paints Ltd, which is the largest industry player in the country in terms of revenue, had a standalone turnover of 251.89 bln rupees in 2021-22 (Apr-Mar), and 223.64 bln rupees in the first three quarters of 2022-23.
"It is going to be incrementally very competitive in the paints industry with major industrialists finding the rich stock market valuations that paints players command as compared to say, steel or consumer goods sectors, very attractive," Sumit Agrawal, fund manager-equities at Bandhan Mutual Fund told Informist.
Profitability is another factor behind Grasim's grand entry into the sector. The paints industry's operating profit margin is currently estimated to be around 16%. In Apr-Dec, Asian Paints' standalone operating profit margin was 15.6%, according to data from Informist Corporate Fundamental Database.
While some analysts are very bullish about the near-term outlook for the paints industry, they are rather silent on their outlook for the medium-to-long term. In a report last month, brokerage Nuvama Institutional Equities called the earnings outlook for the paints industry over the next one year as glimmering, and predicted that paint companies will track their historical margin range from 2023-24.
UNCHARTED POST-FY24
The period of uncertainty will begin after 2023-24, by when Grasim is expected to have rolled out its first batch of paints from one of the six factories currently being set up for the purpose. In a meeting with analysts earlier this month, Grasim indicated that its presence in related segments, through Birla White and brand equity in existing cement channels, will give it a head start.
But things may still not be hunky-dory for Grasim, at least so far as retail customers are concerned. "It will not be easy to pull retail customers away from their existing preferences. Established brands who provide instant inventory turnover not only help their dealers lower working capital costs, but also enable high rates of customer retention," said Agrawal of Bandhan Mutual Fund.
Brokerage ICICI Securities said on Sunday it had provocatively asked chief executive officers of paint companies, "Do you want Grasim to succeed or fail?", even as it noted that whether Grasim gains 5% or 20% of market share by 2029-30, "the existing players are likely to lose market share as well as report EBITDA CAGR (compound annual growth rate) in mid-single digits till FY30."
Given the challenges in gaining retail market share from established brands like Asian Paints and Berger Paints, Grasim is likely to leverage group company UltraTech Cement Ltd's network and the Group's relationships with real estate developers.
Regardless of connections with the real estate sector, the industrial and projects business side of paints industry will be a low-hanging fruit for Grasim. "The projects business side of paints is more sensitive to competitive pressures with the player offering the lowest price being preferred," says Agrawal. However, paints' quality matters to industrial customers when it comes to exteriors, hard weather protection, metals coatings and other specific purposes, he added.
PRICE WARS
In theory, any rise in competition usually favours the consumers. In the case of Grasim's paints foray too, there will be a definite impact on prices for existing players.
In brokerage ICICI Securities' multi-scenario analysis, Grasim may resort to aggressive pricing action if it fails to gain more than 5% market share by financial year 2029-30, which will force existing players to retaliate.
Even if Grasim succeeds and garners over 30% market share, it will lead to a price war with existing players resorting to heavy price cuts to retain their market shares. This, according to the brokerage, will be seen particularly in paint-related commodity products such as putty, distempers, basic enamels and economy emulsions.
The only scenario where no material pricing actions will be initiated by either Grasim or existing players is if Grasim reaches a market shares of 10% by 2029-30, according to ICICI Securities. "Grasim can gain market share of up to 10% from smaller and unorganised players, and it may also gain share from its relationships with the real estate developers," it said.
The price wars, as and when they take place, will shrink the paints companies' profitability by the time the dust settles. There is also considerable uncertainty about how input costs, particularly crude prices, will move in the next 5-6 years, thus adding to the rapidly rising challenges for existing paints players. The rush to raise spend more capex and raise capacities will further lead to higher interest costs and dent the bottomline.
GETTING COMPETITION-READY
Asian Paints has said that it will invest around 87 bln rupees to raise capacities in the next 3-5 years, including the recently announced 20-bln-rupee greenfield capacity. If this goes smoothly, the company's capacity will jump 50% over this period.
Akzo Nobel India Ltd plans to expand its distribution to 35,000 dealers from the current 20,000. It aims to add around 700 retail outlets every quarter and around 2,000 tinting machines every year. Berger Paints Ltd has added around 8,000 retail sales points in the first nine months of the current financial year ending Mar 31. It has also installed around 4,300 colour bank machines in its outlets and aims to add another 1,700 by March-end.
Kansai Nerolac Paints, on the other hand, is undertaking capital expenditure of 2.0 bln rupees in the next 2-3 years. On the operations side, the company recently exited most low-margin businesses in the industrial segment and plans to increase sales to automobile sector by entering into fastener coating and alloy wheel paint. Kansai Nerolac also aims to focus on enhancing direct distribution and business-to-business segments in decorative paints.
KEEPING MUM
Meanwhile, Grasim is keeping its cards close to its chest. It has, so far, not revealed any detailed projections for its paints business beyond saying that it aims to be the second-largest paints company in the country. Analysts believe that Grasim will interpret gaining a 20% market share by 2029-30 as a success.
The company preferred not to provide any comments on the paints foray beyond what is in the public domain, a company spokesperson told Informist. Brokerage Jefferies also remarked about the recent company-analysts meeting, saying that the company "stopped short of giving any new meaningful details on the paint business." End
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