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Business News/ Industry / Retail/  Asian Paints, Kansai Nerolac, others face challenge from Grasim’s entry with Birla Opus
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Asian Paints, Kansai Nerolac, others face challenge from Grasim’s entry with Birla Opus

Market analysts predict that the heightened competition may lead paint companies to resort to price reductions and increased advertising expenditures, ultimately impacting their profit margins.

Paint stocks are likely to face margin pressures amid increased competitive intensity with the entry of Grasim Industries, analysts said. (Photo: iStock)Premium
Paint stocks are likely to face margin pressures amid increased competitive intensity with the entry of Grasim Industries, analysts said. (Photo: iStock)

Grasim Industries, the Aditya Birla group company, has forayed into the paint business with the launch of a new decorative paints brand “Birla Opus", committing an investment of 10,000 crore. The company has an ambitious goal of becoming the number two player with a double digit market share in decorative paints in the medium term.

The company is targeting 10,000 crore revenue from the paints business and expects it to turn net profit positive in FY28. Grasim Industries has commissioned three plants and plans to operationalise three others in the next 12-15 months. 

At full capacity, all the six plants of Birla Opus will have a total commercial capacity of 1,332 million litres per annum, becoming the second in terms of capacity, only after Asian Paints.

The company plans to have a high single-digit market share and secure the second position in the decorative paints market at the end of FY25.

Read here: 0 to 10,000 in 3 years: Birla sets ambitious target for new paints business

At present, the Indian paints sector is ruled by Asian Paints, which is the market leader with the biggest market share of over 50% in decorative paints, followed by Berger Paints with around 19% market share and Kansai Nerolac at around 12%.

The entry of the new player in the industry has stirred concerns among established players in the industry, particularly Asian Paints.

Market analysts predict that the heightened competition may lead paint companies to resort to price reductions and increased advertising expenditures, ultimately impacting their profit margins.

“Paint stocks are likely to face margin pressures amid increased competitive intensity with the entry of Grasim Industries. Asian Paints being the leader in the industry, will also see an impact on margins," said Amit Purohit, Vice President at Elara Capital.

The brokerage firm has a negative view on the sector and a ‘Sell’ rating on all the paint stocks.

Also Read: Red sea trade disruptions to affect the fertiliser, capital goods sectors the most: Crisil report

Impact on Asian Paints

While Kotak Institutional Equities analysts do not foresee a collapse in EBITDA margins for existing paint players, they anticipate a 200-400 basis points drop from FY2024 levels.

“The incumbent players are expected to step up A&P spends (say 100 bps increase), trade schemes (say 100-150 bps increase) and cut prices/compete aggressively to defend market share in the B2B/institutional market. In a nutshell, we expect negligible (or nil) earnings growth for incumbents over FY2024-26E," Kotak Equities said in a report last month.

Meanwhile, in the third quarter of FY24, Asian Paints reported a consolidated net profit of 1,448 crore, registering 35% year-on-year (YoY) growth. Its consolidated revenue from operations in Q3FY24 grew by 5.4% YoY to 9,103 crore.

The company recorded a 12% volume growth and 5.5% value growth in the decorative business in India and also saw a double-digit revenue growth in the industrial business. The coatings business registered a 6% revenue growth.

At the operational level, EBITDA for the December quarter rose nearly 28% YoY to 2,056 crore, while the operating margin expanded 393 basis points (bps) to 22.59%.

The company has maintained its EBITDA margin guidance in the 18-20% range. This decision aligns with its strategy to continue investing in brand-building initiatives. 

Asian Paints’ structural moat driven by market share gains in decorative paints, sustained increase in distribution, high growth in waterproofing/ wood finishes/ projects business and scalability plans in home décor from 4-5% to 8-10% of sales by FY26 remains intact, noted brokerage firm Prabhudas Lilladher.

It expects stunted growth in the medium term given near-peak EBITDA margins, the likelihood of price cuts and the entry of Grasim in decorative paints. 

“We believe valuations at 52.5xFY26 EPS don’t factor in the slowdown in profit growth and increase in competitive intensity fully," the brokerage had said in its earnings review note.

It cut the target price for Asian Paints to 3,159 from 3,466 earlier and rated ‘Hold’ from ‘Accumulate’.

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Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before taking any investment decisions.

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Published: 23 Feb 2024, 12:19 PM IST
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