Can competition kill Asian Paints?

In April 2004, we advised Equitymaster subscribers to buy shares in this paint company. At that time, Asian Paints was beginning to feel the pinch of rising crude oil prices on its profit margins, facing stiff competition from rivals like Goodlass Nerolac, Berger Paints, and Sherwin Williams. Moreover, its international subsidiaries were suffering losses due to currency fluctuations.

Yet, the company’s successful strategy in both domestic and international markets through acquisitions was clear. A pivotal moment came with the adoption of tinting machine technology, revolutionizing the decorative paints sector. The foresight of Asian Paints’ management was also evident in its partnership with US paint giant PPG and its timely expansion into industrial and automotive paints, which bolstered the company when the decorative segment slowed.

Notably, Asian Paints was among the first companies to invest in a supercomputer. However, its capital expenditure plans sometimes faced setbacks during economic downturns. For instance, after announcing heavy capex in April 2008, Asian Paints saw its stock price crash by 44% between May 2008 and March 2009.

This narrative serves as a reminder that even stalwarts like Asian Paints can experience temporary setbacks that affect shareholder value. Yet, the question arises: should these challenges be viewed as permanent setbacks?

Reports suggest Grasim Industries, under the Aditya Birla Group, is poised to shake up the oligopolistic Indian decorative paints industry with its brand, Birla Opus. By 2025, it plans to increase the industry’s capacity by about 40% with six new plants, which could pressure margins and market share for existing companies, including Asian Paints.

However, is the entrance of a new competitor reason enough to dismiss a business that has navigated cycles and competition for decades? The rush to discount Asian Paints’ stock seems unfounded, especially when considering its resilience and history of overcoming challenges.

And how exactly do they feel confident of the incumbent (Grasim) grabbing market share and be very profitable in doing so.

Well, Warren Buffett, in his latest letter to shareholders, once again, explained such situations, with his trademark historical references.

I could have not explained the frenzy to dump the stock of Asian Paints any better.

He wrote:

Occasionally, markets and/or the economy will cause stocks and bonds of some large and fundamentally good businesses to be strikingly mispriced. Indeed, markets can – and will – unpredictably seize up or even vanish as they did for four months in 1914 and for a few days in 2001.

If you believe that American investors are now more stable than in the past, think back to September 2008.

Speed of communication and the wonders of technology facilitate instant worldwide paralysis, and we have come a long way since smoke signals. Such instant panics won’t happen often – but they will happen.

Though the stock market is massively larger than it was in our early years, today’s active participants are neither more emotionally stable nor better taught than when I was in school.

For whatever reasons, markets now exhibit far more casino-like behaviour than they did when I was young. The casino now resides in many homes and daily tempts the occupants.

One fact of financial life should never be forgotten. Wall Street – to use the term in its figurative sense – would like its customers to make money, but what truly causes its denizens’ juices to flow is feverish activity.

This observation applies not just to American markets but to Indian ones as well, where “casino-like behaviour” has become more prevalent.

Grasim’s ambitious entry into the paint sector, with plans to offer a broad range of products and aggressive marketing strategies, will indeed impact the industry.

The Birla group has made attempts to dethrone the largest players in the telecom business in the past. And may try doing so in the paint business too.

There are speculations that Birla Opus will have more than 145 products and 1,200 stock keeping units. Also, the brand could offer 10% additional quantity in most water-based paints during the promotional period.

To establish its brand value, the company will also be offering a one-year warranty for enamels, wood finishes, incentives for contractors, and free tinting machines.

There is no doubt that such moves will hurt margins and volumes for most large paint companies in the near term. Especially Asian Paints.

Yet, Asian Paints has not stood still, diversifying into related home decor segments over the past decade and focusing on environmentally friendly paint technologies and innovative products.

It has signed a definitive agreement to acquire a majority stake in a specialty chemical and next-generation nanotechnology player. This tie-up will enhance the company’s technological capabilities across all products.

So, Grasim may certainly be a company to watch out for in the paint sector. But write off Asian Paints at your own risk.

Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such.

This article is syndicated from Equitymaster.com