Cement maker JK Cement Limited on Saturday announced foray into paint business through a wholly owned subsidiary. company wants to invest 600 crore in the first five years and target to reduce the revenue 850 crore during the same period.
On Monday, the company’s shares fell nearly 6% to hit a 52-week low 2,478.05 on the National Stock Exchange in opening deals. While India’s paint industry is estimated to have only 50% penetration, considering the high entry barriers and cut-throat competition, making a mark for a new entrant can be said to be easy.
Apart from these, it also raises capital allocation concerns for the company.
Analysts at ICICI Securities Ltd say the paint business is likely to witness minor Ebitda losses in the initial years, hence could have an overall ROCE-weakening impact. Ebitda is short for earnings before interest, taxes, depreciation and amortization. RoCE stands for Return on Capital Employed.
“In FY14, JKCE had invested approx. 800 crore in white cement business outside India in Fujairah, UAE, and that business is still incurring net loss, the company is making a cumulative loss provision of approx. 320 crore for FY20-FY21,” said an ICICI report on March 7.
Furthermore, analysts at Motilal Oswal Financial Services believe that the company may need to infuse more funds to compete with existing and new entrants such as Grasim Industries, which is committed to investing. 5,000 crore in his paint business.
“JK Cement’s investment will be on a much smaller scale than Grasim and we believe its presence will be limited to the North/Central regions. Entering this segment at such a low level does not make much business sense at a time when Competition is likely to intensify,” the domestic brokerage house said in a report on March 7. Investors believe that Grasim aims to be the number two paint company in terms of profits.
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