Markets
Rising competition may hit Berger, Indigo harder than peers
Summary
- This wave of new activity comes from companies such as Astral Ltd, Pidilite Industries Ltd, and JK Cement Ltd, who have all entered and bolstered their offerings in the paints sector in the fiscal 2023.
India's paints industry has recently seen a spike in competition as new entrants strive to claim their piece of the market, potentially creating price pressures that could impact incumbent profitability.
This wave of new activity comes from companies such as Astral Ltd, Pidilite Industries Ltd, and JK Cement Ltd, who have all entered and bolstered their offerings in the paints sector in the fiscal 2023.
"We note players like Astral Ltd, Pidilite Industries Ltd and JK Cement Ltd have entered the paints sector and strengthened their offerings in FY23, and Grasim is also on track to launch in FY24. The war in paints sector to likely to commence soon, in our view," said analysts at ICICI Securities Ltd in a report dated 1 June.
For the unversed, Aditya Birla group company Grasim Industries Ltd has committed a capital expenditure of Rs10,000 crore for its paints business. It aims to become the second-largest paint company in India. Adhesive maker Pidilite has entered into decorative paints with its ‘Haisha’ brand. JK Cement has acquired 60% stake in Acro Paints for Rs150 crore recently and plans to acquire additional stake over next 12 months.
"Over the next two-three years, based on announcements, the industry is expected to add about 2.4mn KL of capacity, which represents around 25% of current industry capacity," said analysts at Jefferies India Pvt Ltd in a report dated 1 June.
It may be a challenging task for newer entrants to make a mark in this business over a short period of time, because larger incumbents enjoy a strong brand recall value, according to some analysts. Even so, the repercussions of rising competitive intensity could be higher for some existing paint makers than others.
According to ICICI Securities' Paints Vulnerability Index, Kansai Nerolac Ltd and Akzo Nobel India Ltd will likely be relatively least impacted whereas Indigo Paints Ltd and Berger Paints (I) Ltd may be most impacted. It is worth noting here that Kansai has relatively higher exposure to the industrial paints segment, where competitive pressure is expected to be low.
"While success is not guaranteed, the sheer magnitude of this investment by Grasim will likely push the new competitor to adopt an aggressive stance to ramp up," added the Jefferies report. This would likely entail steps like channel push, higher discounts, and promotions for dealers and even painters, which could impact the industry's profitability, at least in the medium term, added the report.
Meanwhile, in Q4FY23, paint companies witnessed an uptick in sales due to a weak base. "For decorative paints/adhesives, four-year sales CAGR stood at 15%/13.5%/8.6%/11.6% for Asian Paints Ltd, Berger, Kansai, Pidilite, respectively," said a Kotak Institutional Equities report. CAGR is compound annual growth rate.
To conclude, while the actual impact of increasing competition on the sector's earnings outlook remains to be seen, as things stand, the valuations of key listed paint companies offer little comfort.
