Paints: A sector forced to exit its complacency zone

India's paints industry is seeing increasing competition, particularly with the entry of Birla Opus. (iStockphoto)
India's paints industry is seeing increasing competition, particularly with the entry of Birla Opus. (iStockphoto)

Summary

The entry of Aditya Birla Group in the paints sector puts pressure on leading incumbents to stay ahead, but this could be a strain on margins

Aditya Birla Group led-Grasim Industries Ltd is set to disrupt the oligopolistic Indian decorative paints industry with its strong distribution strategy and manufacturing prowess. Under its paints brand, Birla Opus, six plants are set to come on stream by the end of FY25. Collectively, these plants would expand the domestic paints industry’s current capacity of 1,332 million litres per annum by about 40%.

Plants at Punjab's Ludhiana, Haryana's Panipat and Cheyyar in Tamil Nadu were commissioned last week. The company aims for rapid distribution expansion to over 6,000 towns by end-FY25. This will be the fastest and widest pan-India launch by any paint brand, the management said last week.

Birla Opus has set ambitious financial targets as well. The company eyes 10,000 crore in gross revenue and profitability within three years of full-scale operations. While there was no clear indication on whether it will break even at Ebitda or profit after-tax level, analysts caution that the company seems prepared to give incumbents, especially smaller ones, a run for their money. 

“We reckon, [comfortable] competitive equilibrium in paints is likely broken," ICICI Securities said in a report. 

Birla Opus will have more than 145 products and 1,200 product lines, or stock keeping units. The actual product launch is slated for March. Details on pricing will be a crucial distinguishing factor to gauge the company’s aggression in chasing incumbents' market share. 

Birla Opus will offer 10% additional quantity in most water-based paints during the promotional period. To establish its brand value, the company will also be offering a one-year warranty for enamels/wood finishes, incentives for contractors, and free tinting machines.

The company is yet to finalize a brand ambassador, but its advertisement and promotional expenses in absolute terms would be at par with the market leader. 

Counter moves in pricing, mainly by Asian Paints and Berger Paints India, dealer incentives, and increased ad budgets by incumbents cannot be ruled out. This could put the sector’s margins at risk as tailwinds from easing input costs fade, thus driving earnings downgrades by analysts.

Jefferies India notes that all large paint companies are generating 15-20% Ebitda margins currently and have a net cash balance sheet. 

“Asian Paints is also at near-life-high margins of >21%. We see a period of heightened investments and lower margins for large companies, as unorganised/smaller players are gradually squeezed out of the market," Jefferies’ analysts said in a report on 23 February.

Plus, valuations of key listed paint makers are expensive and will be soon put to test amid rising competitive pressures.

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