Grasim has also accelerated the execution of its paints capacity of 1,332 million litres per annum (mlpa) with the commissioning of plants to start by Q4FY24. This compares with around 1,750 mlpa capacity for Asian Paints but is much higher than that of 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 paints company over a period of time.
Analysts from Jefferies India have drawn parallels with the telecom war and point out that Grasim’s capacity at about 75% of Asian Paints raises concerns. Grasim may opt for an aggressive strategy (pricing or otherwise) and disturb the market structure, they said. “This is reminiscent of Jio’s foray into the telecom industry, with significant capacity additions, which ultimately resulted in lower industry tariffs," said Jefferies’ analysts in a report on 24 May. The telecom industry saw massive disruption after Reliance Jio Infocomm Ltd entered in 2016 with cutthroat pricing and huge investments.
Competitive intensity is rising in the paint industry but the risk of disruption is low, said Varun Singh, analyst at IDBI Capital Markets & Securities Ltd. “Unlike the electronics, consumer durables or auto sector, it is difficult to differentiate between the superiority of two paint products just by looking at product description," he said.
Also, for now, Grasim aims to capture the north Indian market first, which has low penetration, instead of competing with Asian Paints in the west, Berger in the east, and Kansai in the south where they have a stronghold, Singh said.
The Indian paints industry has high entry barriers. Not many newcomers have tasted huge success here. Scalability is among the key challenges that companies such as Nippon Paint Holdings Co. Ltd and Jotun have often faced, said analysts.
Nevertheless, Grasim’s increased thrust is a sentiment dampener for existing companies. The threat from new competitors is higher than in the past, as the new entrants are domestic companies, said analysts at Morgan Stanley India Co. Pvt. 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 grow to be among the top companies, said the report. Plastic pipes maker Astral Ltd and JK Cement Ltd are also making an entry into the sector.
Meanwhile, cost inflation worries have hit paint stocks and they have fallen 16-31% so far in CY22. To cope, companies have raised prices several times in FY22 and have also indicated that there could be further price increases in FY23.
“Against the backdrop of elevated input costs, heightened competitive intensity is an additional headwind. However, it is too early to gauge the impact of Grasim’s aggressive investments on incumbents. After all, succeeding in the paints business has a lot to do with brand recall value rather than just product prices," said an analyst requesting anonymity. That said, paint stocks are trading at expensive valuations, which need to correct, he said. Bloomberg data shows that Asian Paints trades at 53x estimated earnings for FY24, followed by Berger’s 42x and Kansai Nerolac’s 28x.
