Indian paints sector– attractive but not a cakewalk for entrants, says Nuvama

This suggests there is plenty of space for new entrants to coexist, claims brokerage Nuvama Institutional Equities. Asian Paints will however maintain its position as the industry leader, and domestic brokerage firms do not anticipate new entrants to materially alter market dynamics in the following three years.

Construction chemicals and waterproofing have seen significant growth as a result of the residential housing and construction industries’ recovery, and this sector is now one of the main growth drivers for most paint manufacturers.

Asian Paints had the strongest results in Q4FY23, according to the brokerage. This supports its belief that the leader still has the superior execution strategy.

“Asian Paints outclassed both on a 1Y and 4Y-basis. Pidilite and Berger Paints also did well on a 4Y-basis. On volumes, the company is leading the pack with 16% YoY decorative volume growth; 4Y volume compound annual growth rate (CAGR) is also in high-teens,” said the report.

Despite its size, Asian Paints is ahead of the competition on a four-year and five-year CAGR basis. Pidilite and Berger Paints also performed well, but they fell behind Asian Paints. Additionally, the company has routinely reported the highest EBITDA margins among paint companies.

In FY24, the brokerage expects that decorative volume growth will continue to be in the double digits. Asian Paints not only kept up its leadership in the sector but also continued to grow market share throughout the year. The brokerage has maintained “buy” with a target price of ₹3,880.

Indian paints industry – Attractive but not a cakewalk for entrants

Non-paint players have begun exploring the paints market in recent years. Grasim (yet to debut), JSW Paints, JK Cement, and Astral have all expressed a strong interest in expanding their paint businesses. Brokerage claims that while the Indian paint market is appealing, the entry is not a cakewalk for the new ones.

According to the brokerage, many companies have attempted to enter the paints business in the past using aggressive branding and advertising campaigns, but they have not been successful in gaining any sizeable market share. Building consumer brand recall took Indigo eight years of intensive promotional work.

“In our view, a new paints player would have to struggle for five–six years before it begins to impact other players meaningfully. While the anticipated new player can utilise cement depots for selling paints, most retail buyers usually go directly to paint dealers. Depots lack direct connect with the market; hence, any new player will have to build a dealer network from scratch, which is time-consuming,” said the brokerage.

New foray in Q4FY23 

Indigo Paints

Indigo Paints has announced its debut into the building chemicals and water-proofing markets. Additionally, 51% of Apple Chemie was bought, opening up a B2B market for chemicals used in building and water proofing.

The brokerage claims that with this sector, Apple Chemie will concentrate on B2B while Indigo would concentrate on retail. In the next two to three years, Indigo wants the new segment to contribute 8–10% of the top line.

Pidilite

‘Haisha’ brand interior paints were the company’s entry into the market, the report said. The company has always had a foothold in exterior paints.

With the introduction of Haisha, it has expanded into the interior emulsion, wall priming, and floor coatings segments. This venture is more focused on range completeness than a full-fledged ornamental business.

“Entry of players such as Pidilite (into interior paints) and Grasim could pull away some market share from other players. But, we do not believe it to be a significant risk for large players,” said the report.

Market share

After market leader Asian Paints, which has a 53% market share, Berger (approximately 19%) and Kansai Nerolac (about 12%) are in second and third position, respectively, according to the brokerage. The brokerage expects MRF Paints’ market share to be relatively low due to the company’s focus on southern markets, smaller scale of operations, lower customer awareness, and fewer options in contrast to industry titans.

Nearly 92% of the organised market is taken by Asian Paints, Berger, Kansai, Akzo, and Indigo Paints, the country’s top 5 paint manufacturers. The remaining 8% is made up of small players, and MRF Paints is one of them. MRF Paints adopts a systematic strategy. Only Indigo Paints (2% market share), one of the tiny players, has managed to generate more than ₹10 billion in annual income during the past 20 years.

Updated: 19 Jun 2023, 10:32 PM IST