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Grasim Industries Ltd. now plans to invest ₹10,000 crore in the paints industry by FY25. Note that this is double of its ₹5,000 crore investment plan to set up its paints business, which was announced last year.
Clearly, the competitive intensity in the once oligopolistic Indian paints sector is heating up, raising concerns of buisness disruption for incumbents Asian Paints Ltd. and Berger Paints India Ltd. Reacting to this development, shares of both these companies declined around 3% each on the National Stock Exchange in opening deals on Wednesday. Asian Paints is the market leader in the decorative paints segment, followed by Berger.
Grasim has also accelerated the execution of its paint's capacity of 1,332 million litres per annum with the commissioning of plants to start by Q4FY24. It aims to become the number two decorative paints company over a period of time. Analysts note that this compares with 1,700 mlpa for Asian Pants and is much higher than Berger and Kansai Nerolac India Ltd.
To be sure, the paints industry has high entry barriers and history shows that not many new comers have tasted huge success here. Scalability is among the key challenges that new companies in this sector have often faced, said analysts. For instance, international paint companies Nippo and Jotun.
Even so, Grasim pumping in more funds, does come as a sentiment dampener for existing companies. "We believe the threat from new competitors is higher than in the past, as the new entrants are domestic players that possess an understanding of the Indian commodity industry and have strong balance sheets and the drive to grow to be among the top players," analysts at Morgan Stanley India Company Pvt. Ltd said in a report on 24 May.
Concurring, analysts at Jefferies India Pvt Ltd said, Grasim may go for an aggressive strategy (pricing or otherwise) and disturb the market structure which may have a greater impact on smaller players, but Asian Paints may also be at risk. "This is reminiscent of Jio's foray into the telecom industry, with significant capacity additions, which ultimately resulted in lower industry tariffs," said the Jefferies report dated 24 May.
Recall that in the telecom sector, quite a few firms folded up after Reliance Jio Infocomm Ltd. entered the market in 2016 with cut-throat pricing and huge investments.
Meanwhile, the paints industry has been grappling with input cost inflation pressures weighing on their gross margins. Paint makers have taken several rounds of price hikes in FY22 and have guided for more to offset this impact.
