Paint cos set to beat competition blues with capex, branding

Paint companies are not only expanding their production capacities but also entering adjacent product categories such as water proofing and home decor. Photo: iStockphoto
Paint companies are not only expanding their production capacities but also entering adjacent product categories such as water proofing and home decor. Photo: iStockphoto

Summary

  • The sector has seen an oligopolistic structure for many years, but will see increasing competition now as companies with robust financial muscle enter the market

Listed paint companies should sail through the December quarter (Q3FY24) with decent volume growth aided by the festive and wedding season. The litmus test for paint stocks would be in Q4, though, when competition woes spike. Grasim Industries is scheduled to make its paint launch under brand Birla Opus next quarter.

The paint sector has high entry barriers. But lately, companies with robust financial muscle, such as Grasim and Pidilite Industries, have entered the sector, which has seen an oligopolistic structure for many years now with a handful of companies dominating the market. Some of the new entrants also have a distribution channel, a key factor for penetration and success in this business.

In response, incumbent listed paint makers have increased thrust on capital expenditure. Recent management commentaries indicate that capacity addition plans are progressing well. For instance, of the Rs3,400 crore outlined for brownfield expansions in the medium-term, Asian Paints has already spent close to Rs1,500 crore, the management said in its Q2 earnings call. The decorative paints major plans to invest around Rs8,750 crore over the next three years to boost capacity, backward integration, and acquisitions.

Berger Paints India, Kansai Nerolac Paints and Akzo Nobel India are also focussed on capex and increasing production capacities. Grasim too is bracing up with three out of its six paint plants to become operational in Q4, the management said in its Q2 earnings call. Grasim has committed Rs10,000 crore of capex towards its paints business.

“Incumbent paint companies are gearing up to protect their turf with large capex. Our analysis shows that existing (top five companies) and new entrants are likely to incur a total capex of about Rs12,000 crore in fiscals 2023 and 2024 against about Rs7,000 crore incurred in the four fiscals through 2022," said Anuj Sethi, senior director, Crisil Ratings.

Not just capex, brand building too is crucial to grab customers attention. Interestingly, Fevicol-maker Pidilite, which enjoys strong brand recall value, launched an interior paint named Haisha. “Advertisement spends to boost brand recognition are expected to stay elevated at 9-10% of revenue going ahead. This metric has already risen in the current fiscal and is expected to rise in the next as well," Sethi added.

Further, to cash-in on existing brand value, paint companies have entered adjacent product categories of water proofing/home decor through the same distribution network.

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