Home / Markets / Mark To Market /  Grasim is no Jio; investors in paint stocks downplay competition threat

Shares of top paint companies, Asian Paints Ltd and Berger Paints Ltd, have declined by 7% and 5%, respectively, since Grasim Industries Ltd announced its plan to foray into the sector in January.

The pricey valuations of the two firms have more or less remained intact.

“It is unlikely for a new company to disrupt the paint industry like Reliance Jio did in the telecom industry," said Mahesh Anand, president, Indian Paints Association. “The purchase pattern is different and is influenced by painters and contractors, and the quality and brand also play an important role," he said while speaking at a conference.

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India’s per capita consumption of paints of 4 a kg per person is nearly half of the 7-8 a kg per person consumption in developed countries. “This leaves a huge opportunity for new companies to come and get a share of the pie," he added.

“While the threat of market share loss is there for incumbent paint companies with a new player making an entry, irrational competition or disruption appears unlikely. As seen historically, scalability has been a challenge for new entrants in the sector, though we recognize that Grasim may potentially become a large player in due course," said Manoj Menon, head of research and consumer analyst, ICICI Securities Ltd.

Meanwhile, shares of Kansai Nerolac Ltd and Akzo Nobel India Ltd have seen double-digit decline of 12-15% each since 22 January.

Investors would reckon that the Aditya Birla group company, Grasim Industries, will invest 5,000 crore in this venture. It aims to become the second largest decorative paint maker.

“In the paints sector, entry of Grasim could mean higher risk for number two and three players—Berger and Kansai— than market leader Asian Paints," Menon added

Apart from rising competition from a new player with deep pockets, there are other near-term headwinds facing the sector.

The ongoing increase in prices of crude-derivatives and monomers could translate into gross margin compression in the coming quarters. Dealer channel checks by brokerages show that paint companies are yet to announce price hikes. It should be noted that the last price hike was taken in 2018.

But as pointed earlier, investors continued to brush aside the concerns, and valuations of paint stocks remain high relative to the rest of the market.

Going by the consensus earnings one-year forward estimates, Berger is the most expensive paint stock trading at a one-year PE of 76 times. Peers Asian Paints and Kansai are trading at PE multiples of 61 times and 45 times, respectively.

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