Markets
Battle Royale: Will Asian Paints come out ahead again?
Summary
- Is this stalwart of the paints industry still a stock worth holding onto, or has it lost its shine for good?
If you had asked anyone before the pandemic about the paints and coatings industry in India, the answer would have been unanimous: Asian Paints Ltd was the undisputed leader. And for good reason.
Even during the pandemic-induced lockdown, while the company initially saw a 20% dip in its stock price, it quickly rebounded, regaining lost ground and reaching an all-time high by 2022.
In those two years, the company’s sales surged by 50%, with net profit following a similar trajectory. Asian Paints seemed unstoppable.
But the tide began to shift when Grasim Industries Ltd announced its entry into the paints business—a serious challenge to the long-standing dominance of Asian Paints.
At the same time, rising raw material costs began to eat into margins, creating further pressure. Yet, between FY22 and FY24, the company managed to post a 21% increase in sales and an impressive 80% jump in net profit, aided by the easing of raw material prices.
Despite these strong financials, the stock price stagnated, frustrating investors who expected better.
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The real blow came with the September 2024 quarterly results.
Sales declined by a modest 5% year-over-year, but net profit nosedived by a shocking 44%. This rattled investor confidence, sending the stock price plummeting by more than 30%—pushing it back to 2020 levels.
In essence, the stock has offered virtually no returns over the past four years, a bitter pill for long-term investors.
The once unshakable Asian Paints is now at a crossroads. The critical question is: Can it reclaim its glory? Is this stalwart of the paints industry still a stock worth holding onto, or has it lost its shine for good? Let’s delve deeper to uncover what the future may hold for this iconic company and its investors.
India's paint industry
India's paint industry, valued at approximately ₹80,000 crore ($9.5 billion) as of 2024, has enjoyed a steady annual growth rate of 12-15% over the past decade. This growth has been driven by urbanization, rising disposable incomes, and an increasing appetite for visually appealing homes and offices.
But with signs of slowing sales growth across major companies, the question arises: Can this momentum continue?
Segments of the paint industry
The Indian paint market is broadly divided into two key segments:
Decorative paints (75%): Encompassing interior and exterior wall paints, enamels, and wood finishes used in homes and commercial spaces.
Industrial paints (25%): Comprising specialized paints used in automotive coatings, protective layers, and other industrial applications.
Market landscape and competition
Out of this market, Asian Paints, Akzo Nobel, and Kansai Nerolac dominate with a combined 75% market share, with Asian Paints alone commanding 45-47%. This significant market share is built on a foundation of strong distribution and brand equity. Asian Paints’ extensive network of 75,000 distributors and over 150,000 touchpoints gives it a clear edge over competitors like Berger Paints and Kansai Nerolac, whose networks are roughly half the size.
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Naturally, this translates to higher revenue and market dominance.
However, the dynamics are shifting with Grasim Industries (Birla Opus) entering the fray. Grasim’s planned ₹10,000 crore investment in the paints business is set to challenge the established players on multiple fronts.
Grasim’s competitive strategy
Grasim is positioning itself as a formidable competitor by addressing two critical factors in the paints business:
Distribution reach: Grasim plans to scale quickly with 55,000 distributors, leveraging its established foothold through its cement (Ultratech) and putty businesses. This overlap provides an opportunity for rapid network expansion, closing the gap with Asian Paints’ extensive network.
Tinting machine deployment: Tinting machines are vital for dealers to customize paint shades on demand. Asian Paints leads the market with 55,000 machines deployed. Grasim has promised to match this figure by FY25, sweetening the deal for dealers by offering free tinting machines—a game-changer that makes it easier for retailers to adopt Grasim’s Birla Opus brand.
Demand side: Is the market big enough?
While competition intensifies, the demand side of the equation appears promising:
Real estate growth: With India’s real estate market booming, new construction activity continues to fuel demand for paints.
Shorter repainting cycles: The average repainting cycle in India has shortened significantly, from seven years to 3-5 years, driven by rising incomes and changing consumer preferences. This trend ensures a steady stream of recurring revenue for paint companies.
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India's paint market is expected to grow from ₹80,000 crore in 2024 to ₹120,000 crore by 2029, with a CAGR of 8.5%. Additionally, India’s per capita paint consumption remains low at 3.5kg, compared to the global average of 10kg, indicating room for growth. As India progresses toward becoming a developed nation, this gap is likely to narrow, boosting paint demand further.
While the overall market growth seems healthy, it’s not without challenges.
Grasim’s aggressive entry and investment will undoubtedly carve out a double-digit market share in the coming years, adding pressure on incumbents like Asian Paints. For established players, retaining market share will require continued innovation, network expansion, and operational efficiencies.
So, can Asian Paints brush up its growth prospects?
With all these challenges swirling around, you might be asking yourself: Can Asian Paints still grow and stay on top? Let's break it down together.
Making the most of its strong distribution network
First off, Asian Paints has a massive advantage with its distribution network. They have over 70,000 dealers spread across India. That's huge! This means whether you're in a big city or a small town, you can easily find their products.
This extensive reach helps them tap into both urban and rural markets. It's not easy for new players to build such a vast network overnight. So, even with new competitors like Grasim Industries stepping in, Asian Paints has a head start.
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Also, Asian Paints' dependence on select distributors is less. They generate just 0.9% revenue through top 10 distributors. This figure is 23% for Grasim and 3.3% for Kansai Nerolac.
Expanding and innovating product offerings
Asian Paints isn't just about paint anymore—they're transforming into a complete home décor brand. Have you heard about their Beautiful Homes Stores?
These stores are like a one-stop shop for all your home makeover needs. You can walk in and find not just paints, but also furniture, furnishings, and even design consultancy services. It's a holistic approach to home décor that goes beyond just colouring your walls.
They've also made strategic moves by acquiring companies like White Teak, which specializes in premium decorative lighting and fans. Then there's Weatherseal, offering high-quality uPVC doors and windows. By bringing these products under their umbrella, Asian Paints is aiming to provide a comprehensive suite of home improvement solutions.
Now, you might be wondering how big this part of their business is.
Currently, these new ventures—collectively part of their décor business—account for about 4.5% of their overall revenue. But here's the exciting part: they have ambitious plans to double this to 10% in the coming years. That's a significant leap and shows how serious they are about this direction.
So, why is this a smart move?
Well, think about it from a customer's perspective. When you're planning to repaint your home, you're often also thinking about updating furniture, lighting, or maybe installing new windows and doors. By offering all these products and services, Asian Paints can cater to multiple needs at once, making it convenient for customers.
For their distributors and dealers, this expansion is a big win too. They can now offer a wider range of products to their customers, which can increase their sales and profitability. It's like having more items on the menu at a restaurant—the more you offer, the more likely customers are to find something they want. Plus, with a broader product line, dealers can negotiate better terms with the company, effectively pushing for collective bargains that can benefit them financially.
Financial stability and investor confidence
One of the most compelling strengths of Asian Paints lies in its financial stability, which could serve as a formidable moat in the years ahead. While there’s considerable chatter about the potential for a price war triggered by Birla Opus’s entry into the paints market, it’s worth examining the nuances of such a scenario.
The price war dilemma
Yes, a price war could lead to some loss of market share for Asian Paints, but let’s consider this: what stops Asian Paints from reducing prices too?
Historically, Asian Paints has demonstrated exceptional pricing power. Speaking with distributors reveals that Asian Paints typically sells at a 15-20% discount to MRP, whereas competitors often discount as much as 40%. This highlights the strength of Asian Paints’ brand equity and its ability to maintain a premium despite aggressive competition.
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If pushed, Asian Paints has the resources and brand loyalty to engage in price adjustments. With its strong cash reserves, it can sustain lower pricing for extended periods, ensuring it retains its market leadership. This is a strategic lever that the company has yet to pull—a potential ace up its sleeve that competitors like Birla Opus may not be fully prepared for.
Surplus cash and asset efficiency: A competitive edge
Asian Paints' financial health is underscored by its surplus cash position, as highlighted in the FY24 annual report. This financial cushion could prove critical if the company decides to defend its market share through strategic discounts or increased marketing spends.
Moreover, Asian Paints boasts the highest asset turnover ratio in the industry, a testament to its operational efficiency. With most players pushing for capacity expansion, industry-wide asset utilization may decline in the short term. Maintaining high utilization will likely depend on robust sales growth—further fueling the possibility of a price war. Here, Asian Paints’ financial muscle could be a significant advantage, enabling it to navigate this challenging phase more effectively than its competitors.
Timing and strategy: The waiting game
Asian Paints appears to be taking a calculated approach, observing how Birla Opus navigates its initial market entry. This deliberate strategy allows Asian Paints to gauge the true impact on margins and market share over the next two quarters before responding decisively.
Such prudence could buy the company valuable time to explore new business avenues, refine its strategy, and consolidate its leadership position. The current situation is not about immediate gains but about long-term sustainability and market dominance.
Valuation and investor implications
At a current price-to-earnings (P/E) multiple of 50x, Asian Paints is trading in line with industry peers. However, if the company can hold its margins and market share without major disruptions over the next two quarters, who knows it may reclaim the premium valuation it has historically commanded too.
In the near-term however, the company has to deal with a lot of issues. This may not prove to be great for its share price. However, Asian Paints is far from a write-off. With the market expected to stabilize and the competitive dynamics clearer by FY25, the company has the potential to do well, riding on broader market growth and its strategic advantages.
Note: We have relied on data from the annual reports for this article. For forecasting, we have used our assumptions.
The purpose of this article is only to share interesting charts, data points and thought-provoking opinions. It is NOT a recommendation. If you wish to consider an investment, you are strongly advised to consult your advisor. This article is strictly for educational purposes only. The views expressed are my own and do not reflect or represent the views of my present or past employers.
Parth Parikh has over a decade of experience in finance and research, and he currently heads the growth and content vertical at Finsire. He has a keen interest in Indian and global stocks and holds an FRM Charter along with an MBA in Finance from Narsee Monjee Institute of Management Studies. Previously, he has held research positions at various companies.
Disclosure: The writer and his dependents do not hold the stocks discussed in this article.
