Markets
Berger Paints eyes bigger canvas to take on competition
Summary
- Huge capacity additions by newcomers could lead to a pricing war to capture market share
Competition is set to heat up in the paints sector, with the entry of Grasim Industries Ltd. The Aditya Birla group company has committed to invest ₹10,000 crore in the paints business.
Against this backdrop, Berger Paints India Ltd is upping its ante via network expansions, increased advertising spends, and new product launches. It aims to add as many as 6,000-7,000 dealers annually, the Berger management said during the June quarter (Q1FY23) earnings call, against the earlier annual run rate of 4,000-4,500 dealer additions.
It takes years, even for existing decorative paints companies, to break in to someone else’s market and gain a few percentage points of market share, said analysts at Kotak Institutional Equities. As such it will be an uphill task for Grasim to scale up, the analysts said.
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However, there is a worry that huge capacity additions by newcomers could lead to a pricing war to capture market share. That does not bode well for Berger’s margin outlook.
“Berger’s execution consistency is impressive and it has held its ground notwithstanding Asian Paints’ aggression. We stay cautious as we expect rising competition (Grasim) to weigh on margins/valuations," said the Kotak report dated 25 August.
Grasim plans to enter the North market first where things haven’t been particularly rosy for Berger. In Q1, Berger maintained its market share in the South and West and its leadership position in the East.
However, its performance in the North and Central markets was moderate, the management said.
Meanwhile, because of severe cost inflation, shares of paint companies have of late lost sheen, nosediving to their 52-week lows. Both Berger and close competitor Asian Paints Ltd have recouped a part of those losses, but the former is lagging. From its 52-week low, the Berger stock is up 21% and Asian Paints has risen 30%. So far in CY22, the performance of Berger’s shares has been dull vis-à-vis Asian Paints.
Accordingly, the Berger stock trades at FY24 price-to-earnings multiple of 47 times, lower than Asian Paints’ 60 times multiple, showed Bloomberg data.
Berger’s valuation is expensive though it is lower than that of Asian Paints, according to Varun Singh, analyst, IDBI Capital Markets and Securities.
The valuation gap between the two is likely to remain given the better earnings profile of Asian Paints, especially on a three-year compound annual growth rate basis and also because rising competition in the sector is not worrisome for Asian Paints, Singh said.
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