Grasim Industries Limited’s plans to enter the paint sector are in full swing. The capital expenditure of the company will be 10,000 crore by FY25, which is double the initial investment announced in 2021. Clearly, the competitive intensity in the Indian paint industry is heating up. In reaction, shares of Asian Paints Ltd and Berger Paints India Ltd fell 7-8% on the NSE on Wednesday.
Grasim has also accelerated the execution of its paint capacity of 1,332 million liters per annum (MLPA) with the commissioning of the plants by Q4FY24. This is compared to Asian Paints with a capacity of around 1,750 MLPA, but much higher than Berger and Kansai Nerolac India Ltd. Asian Paints is now the market leader in the decorative paints segment, followed by Berger. Grasim aims to become the number two decorative paint company over time.
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Analysts at Jefferies India draw parallels with the telecom war and point out that Grasim’s ability to hold nearly 75% of Asian Paints raises concerns. He added that Grasim may opt for aggressive strategy (pricing or otherwise) and distort the market structure. “This is reminiscent of Jio’s entry into the telecom industry with significant capacity additions, which ultimately resulted in lower industry tariffs,” analysts at Jefferies said in a report on May 24. The telecom industry witnessed massive disruption after the entry of Reliance Jio Infocomm Ltd. 2016 with jackfruit pricing and huge investments.
There is increasing competitiveness in the paint industry, but the risk of disruption is low, said Varun Singh, analyst at IDBI Capital Markets & Securities Ltd. “Unlike electronics, consumer durables or the auto sector, it is difficult to differentiate between the superiority of the two. Paint the products just by looking at the product description,” he said.
Also, for now, Grasim aims to first capture the north Indian market, which has less penetration, rather than compete with Asian Paints in the west, Berger in the east and Kansai in the south, where they have strongholds. Singh said.
The Indian paint industry has high entry barriers. Not many newcomers have tasted great success here. Analysts say scalability is one of the key challenges that companies like Nippon Paint Holdings Co Ltd and Jotun often face.
Still, Grasim’s increased thrust is likely to undermine sentiment for existing companies. Analysts at Morgan Stanley India Company Pvt Ltd said the threat from new competitors is greater than before, as the new entrants are domestic companies. Ltd. in a report on 24 May. These domestic companies have an understanding of the Indian commodity industry, strong balance sheets and a drive to be among the top companies, the report said. Plastic pipe makers Astral Limited and JK Cement Limited are also entering this space.
Meanwhile, cost inflation concerns have hit paint stocks and they are down 16-31% so far in CY22. To counteract, companies have raised prices several times in FY12 and have also indicated that there may be further increase in prices in FY13.
“Against the backdrop of increased input costs, increased competitive intensity is an additional headwind. However, it is too early to assess the impact of Grasim’s aggressive investment on existing companies. Ultimately, being successful in the paints business is about brand recall value rather than just product prices.” The data shows that Asian Paints is trading at 53 times estimated earnings for FY24, followed by Berger’s. 42x and Kansai Nerolac has a turnover of 28x.