Clipped from: https://economictimes.indiatimes.com/prime/money-and-markets/grasims-paints-industry-dream-is-alright-but-what-about-companies-already-painting-the-town-red/primearticleshow/92528005.cms
SynopsisGrasim’s entry into the paints business with a truckload of cash is likely to impact the industry’s dynamics. Experts, however, are of the view that the giants of the industry may not feel the ripples. But two questions still loom large. Is there enough space for everyone? And will this impact industry-wide margins?
An inquisitive, pestering neighbour, portrayed by Jameel Khan, congratulates Sunil Babu on his naya ghar, nayi gaadi, and nayi Mrs.
Badiya hai, he says. As the years go by, the neighbour continues to congratulate Sunil Babu and his next generation about the “new” house as it stands in mint condition even though Sunil Babu is no more.
The advertisement hit home as the message of Asian Paints’ long lasting exterior paints was well delivered. This iconic ad, among a number of good decisions, helped Asian Paints cement and multiply its lead further in the next two decades. It remains unchallenged even today.
But there’s one business group looking to change that.
Aditya Birla group’s flagship company Grasim Industries is entering the paints business with INR10,000 crore of investment. Grasim intends to take on Asian Paints and new entrants such as JSW Paints to become the second largest player in the business with its range of products within the next three years.
Entering the Indian market is not easy. Indian paints industry is worth over INR62,000 crore (USD8 billion). It is the fastest-growing major paints market the world over, with a consistent double-digit growth over the last two decades. It has over 3,000 paint manufacturers, with nearly all global majors present in the country.
It’s worth noting here that the Asian Paints’ return-on-equity has been under pressure, declining from 37.81% in FY13 to 22.95% in FY22. Its operating profit margin has remained stagnant during the same period. Even if we assume the company will not be affected over the long run, it will have to spend on brand-building or capacity expansion and that will take some toll on its balance sheet.
But is that all it takes to shake the market leaders?
The right mix
According to an Elara Securities report, “While the development may hit the smaller players more than Asian Paints, expect the leader to preemptively accelerate its aggressive stance to combat Grasim”.
But it doesn’t take away anything from Asian Paints.
One of the reasons why broking firms are not very bullish on the paints industry is because of volatile oil prices, while some still consider them to be very expensive at present earnings multiples.
Asian Paints has a present PE of 60x and Berger Paints is at 52x. Smaller players might see their market-share getting affected and some of them might come in serious trouble.
“There are lots of people who are going to have a go at the paint market. That’s nothing wrong with that. But it is difficult to see a credible challenger out there. The (Asian Paints) company has gained more market share in the last 12 months as compared to the previous five years,”, says Sourabh Mukherjea, founder and chief investment officer, Marcellus Investment Managers.
That leaves us with a question: Is the market big enough for everyone to grab a pie?
The entry of Grasim Industries is expected to change the dynamics of the Indian paint-and-coating manufacturing industry by the end of 2023.
The paints market can be broadly categorised in two sectors — decorative and industrial. Grasim is looking to carve out its niche in the decorative paints sector.
The decorative paints segment has outperformed the growth in industrial paints over the last decade.
While the decorative paints industry grew at a CAGR of 11%, the industrial paints segment advanced at a CAGR of 9% over FY14‐FY21.
Although the market already features established brands, Grasim’s initial focus is on becoming one of the leading players.
The Big Four of the paints industry (Asian Paints, Berger Paints, Kansai Nerolac Paints, and AkzoNobel India) account for more than 65% of the overall paints-and-coating market and 75% of the decorative paints market.
Of the overall paints market, these four companies account for 51% of the market share. These are well-established industry players and are regular participants in mergers and acquisitions to maintain their dominant position.
Indigo Paints is one of the new entrants. The company manufactures a complete range of decorative paints including emulsions, enamels, wood coatings, distempers, primers, putties, and cement paints.
For the quarter ended March 31, 2022, it reported a standalone total income of INR290.88 crore, up 8.63% from the last quarter and a total income of INR267.78 crore, up 13.70% from the same quarter last year.
The company reported a net profit after tax of INR34.59 crore in the latest quarter. In eastern India, Indigo Paints has made good inroads and is challenging Asian Paints and Berger Paints. The company’s growth momentum has been strong but high input-cost pressures and risks of moderation in demand limit upside to earnings, according to analysts.
Entry of large conglomerates
Like Aditya Birla Group through Grasim, JSW Paints, backed by another conglomerate, aims to be among the top three paint companies by 2025.
According to company executives, decorative paints’ contribution in its business will be 70% by FY25.
JSW as a group has a presence in the steel and cement business. However, these two businesses have no direct synergies with JSW Paints in terms of their raw material linkages.
AS Sundaresan, joint managing director and CEO, JSW Paints, mentions how the company aimed to deploy a hub-and-spoke model to build its retail network, which was an industry innovation in FY20. But unfortunately, the way the market dynamics have been, competition has proved to be a hurdle.
Whenever a retailer took to such a model, there was pressure from competition in terms of them not dealing with JSW Paints and, because it was asset light, it was then easy for them to be blocked.
On the emergence of new players as competition in the Indian paints market, he acknowledges, “Paints industry has regularly seen new entrants and Grasim will be a significant new competitor in the industry”.
The big players
New entrants from large business houses such as Grasim have ambitious expansion plans in the space, but there’s limited scope for differentiation on either price or quality.
Industry experts continue to maintain that sector leaders are not likely to face any significant disruption.
In fact, the incumbents are turning more aggressive in ramping up distribution and hiking marketing spends to capture the less penetrated markets before the competitors come into the market.
Over the long run, Asian Paints should be the least affected. The company is a volume player and has gained market share over inflationary scenarios. Since 2019, the company has increased its dealer network by 34% at 1,45,000 for FY 2022.
The new entrant, Grasim, endeavors to invest in businesses that have the potential to make them a leader in addressable markets, thereby achieving scale and generating consistent and attractive returns in the long term.
The struggle areas
While it is good to have more competition in any business, there may not be enough room in the market for everyone’s ambition.
AkzoNobel (Dulux), Asian Paints, and Berger Paints have already created strong brands. Moreover, there is limited scope from the tinting-machine point of view. A tinting machine is what dealers keep in stores to mix and tint different colours as required by the customers.
All dealers need to have a tinting machine and keeping more than two of them would only increase logistics costs and space issues.
So from that perspective, it will be challenging for the new entrants.
The growth path
AkzoNobel and Asian Paints enjoy the highest profit share in the paints business. Can new entrants like JSW Paints which aims to achieve a market share of 20% by FY30? And can Grasim end the dominance of legacy giants like Asian Paints?
A veteran analyst in the paint industry says, “No one has any idea where will Grasim be. In the interim, what will happen is that the sector will get affected because it’s still growing at about 10%-12% from a growth perspective. Grasim’s INR10,000 crore investment will either impact the sector margin or sector growth”.
Adding to this, the analyst believes that JSW will not be spending too many sleepless nights, whereas for Grasim, there will definitely be a point of worry.
Grasim may or may not succeed. For now, the lure is its INR10,000 crore investment. Further, there is no brand equity for the company when it comes to paints.
But whether Grasim succeeds or not would have a deep impact on industry profitability and earnings for a few years.
(Graphics by Manali Ghosh)
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