Markets
In the battle for a brighter future, paint companies scout for pricing power
Summary
- Paint companies are under pressure from muted value growth and increasing competition, particularly new entrants like Grasim
- Rising raw material could strain operating margins, leaving investors concerned about the sector's future growth prospects.
Listed paint companies reported muted value growth amid price cuts—a key takeaway from the June quarter results. Underlying weakness in volumes of core products, especially premium paints, along with a weak product mix, also played spoilsport.
For the June-ended quarter, Asian Paints Ltd’s domestic decorative paints saw 7% year-on-year volume growth, falling short of the management’s double-digit growth target. Value growth was down 3%. Rival Berger Paints India Ltd did relatively better with volume growth of 11.8%, and clocked value growth of 2.4%. Kansai Nerolac Paints Ltd which has a comparatively lower exposure to decorative paints saw about 5% volume growth, while value growth was hurt due to price cuts.
Rising competition and price pressures
However, in July, paint companies raised prices by 1-2%, and further hikes may be on the horizon in the coming quarters, depending on raw material price movements. The value-volume gap is expected to gradually narrow in H2FY25 aided by price hikes. But the competitive landscape is changing and that is feared to hamper the pricing power of incumbents, especially if new entrants get aggressive in their chase for market share gains.
Read this | Poor demand, high inflation & competition threat take the gloss off Asian Paints
Plus, more supply is coming in. “These companies (Grasim Industries, Pidilite, and JSW Group) are investing heavily in capital expenditure (Rs20,000-22,000 crore over the next three-four years) to enhance capacity by 20%," said a Motilal Oswal Financial Services report.
Aditya Birla-backed Grasim is targeting double-digit market share in the decorative paints business in three years. It has commissioned three plants in April and work is progressing well for the remaining three plants, Grasim said in its Q1FY25 earnings call. Over 80% of the planned 145-product range is now available through distribution channels under the brand Birla Opus, it added.
According to Nomura Global Markets Research, Birla Opus’s product pricing and dealer margins are not materially different from leading paint players; hence any disruption to the industry thus far is limited. “Nonetheless, we await the upcoming festive season where competitive intensity is likely to pick up and may provide a more clear understanding of the extent of any disruption," said a 12 August Nomura report.
And this | Grasim’s entry sparks caution but fund managers also favour Asian Paints
For now, existing paint companies appear unfazed by the threat of rising competition. The slight slowdown in paint demand seen in Q1FY25 is not attributable to increased competition, said Asian Paints.
The Berger management is confident of competing effectively against the new market entrant (Grasim). Also, it is of the view that the initial enthusiasm/hype of the new entrant seems to be fading away, including among dealers. Further, Indigo Paints Ltd said it has observed no changes in the competitive landscape or pricing pressures from new entrants.
Entry barriers and the battle for market share
True, the high entry barriers of the Indian paints industry can make it challenging for newer companies to establish a strong brand presence. Building robust distribution networks and investing heavily in marketing and advertising are the other requirements for success here.
Existing companies score well on these parameters compared to Grasim and the latter could take time to catch-up, but the underperformance of listed paint stocks point to prevailing caution among market participants. ICICI Securities reckons that “comfortable" competitive equilibrium in paints is likely broken. In 2024 so far, shares of Asian Paints and Berger have declined 7% and 5%, respectively, lagging the benchmark index Nifty50’s 15% returns.
Going ahead, developments related to price hikes could spur some upward movement in paint stocks, but the uncertainty about how pricing trajectory shapes up remains, clouding the revenue growth outlook. Additionally, the sector’s operating margin could get strained due to increased advertising expenses, distribution costs, research & development initiatives.
Also read | For Fevicol maker Pidilite, its rich valuation could prove to be a sore spot
Unsurprisingly, despite the moderation, valuations remain a concern for investors. Shares of Asian Paints and Berger are trading at nearly 55 times and 50 times estimated earnings for FY26, respectively, according to Bloomberg data.
