A new picture unfolds in paints biz

Rising competition has become a niggling worry for investors in paints stocks, amid fears that the entry of newer companies with deeper pockets could hit the growth prospects of incumbents. Last week, Aditya Birla Group company Grasim Industries Ltd unveiled the much-anticipated brand name of its paints business—Birla Opus. The commercial launch is scheduled for the March quarter (Q4FY24).

Grasim has big ambitions. Remember it has pledged to invest 10,000 crore for its paints business and till Q1 had spent around 3,600 crore. It aims to become a profitable number two player in the coming years.

The allure of the paints sector is understandable. Over the last two decades, Asian Paints Ltd and Berger Paints (India) Ltd—have posted double-digit volume growth in most of the years, which is even faster than the growth clocked by consumer staples companies, pointed out a Nuvama Research report dated 14 September. During this time, many companies—global as well as domestic —had entered the paints sector. But given the high entry barriers, the past tells us that new companies have found it challenging to establish a significant foothold in this industry.

Graphic: Mint

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Graphic: Mint

But this time around, the competitive scenario could shape up differently. Apart from Grasim, the other big companies that have forayed into the paints business lately are JSW Paints, JK Cement Ltd and Pidilite Industries Ltd. Notably, some also have a distribution channel in place, which is a key element for success in the sector.

“These financially sturdy entrants are anticipated to disrupt the market over the long haul. On the supply side, the industry is expected to augment its capacity by 20% of the current levels over the next three to four years,” said Yogesh Shah, senior director, CareEdge Ratings. However, on the demand side, the industry’s growth trajectory is projected to ease to 9-10% in FY24, after pent-up demand kept growth elevated in the previous two years, he added.

Simply put, the chase for market share could get intense. So, companies might have to sacrifice on margins to protect volumes and this could ultimately hurt the industry’s profit pool. Eventually, this may pave the way for increased consolidation in the sector.

“With multiple companies entering the paint business, we believe the somewhat oligopolistic structure of the paint industry will likely change to a perfect competition structure,” said Manoj Menon, head of research at ICICI Securities Ltd. Grasim has showcased intent to win, so a disruption is inevitable and that could force incumbents to invest more in brand building or advertising, he added.

To be sure, the actual impact of new capacities and new product launches on the market share and margin profile of incumbents will be known only gradually. Until then, paint stocks are unlikely to shine. For now, valuations do not provide much comfort. The shares of Asian Paints and Berger are trading at FY25 price-to-earnings multiples of around 50 times each. The spectre of elevated competition is likely to put the sector’s rich valuations multiple to test as some investors could be prompted to book profits. In the near term, investors would focus on the September quarter (Q2FY24) earnings. On the volume front, expectations are not high in Q2 as the monsoon season impacts the sale of exterior paints. Some analysts are pencilling in a mid-to-high single-digit volume growth for key paint makers. A favourable base is expected to support margin growth in Q2. That said, with the recent uptick in crude oil prices, management commentary on the trajectory of input prices for crude-based monomers and titanium di-oxide will be important.

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