Grasim’s entry sparks caution but fund managers also favour Asian Paints

This as Aditya Birla Group’s flagship company Grasim launched products and services under its new decorative paints brand, Birla Opus, on 22 February.

The aggressive approach of Grasim, keeping in mind the scale of launch and the company’s readiness to scale up business ahead, has sparked caution among fund managers. The management has already guided for a ₹10,000 crore gross revenue and a breakeven in three years for the paints business.

While the paints industry is dominated by one single player, there is a lot of potential for a strong second player, as per Grasim’s management. During the launch, Kumar Mangalam Birla, chairman, Aditya Birla Group, had said, “Birla Opus, therefore, is poised to transform the paint industry with a 40% addition to current capacity. No paint company globally has ever launched in one shot—factories, operations, products, and services, at the scale that we are about to undertake".

 

Against this backdrop, it is only reasonable to expect some disruption in the space, particularly with the entry of a big player. This certainly warrants caution when delving into investments within the paints sector, at least in the near term, believe fund managers.

The announcement of Birla Opus has made fund managers edgy considering the disruptive nature, therefore making the paints space less attractive. Moreover, the stocks were already in the overvalued territory even before the announcement, some said.

Currently, Asian Paints stock is trading at nearly 44 times estimated FY26 earnings, while Berger Paints is at about 46 times. Even Motilal Oswal Financial Services remains cautious as the paints segment may not enjoy higher multiples of the past.

That said, a cautious stance on the sector in the near term is also because of the rising expenses on advertising, promotions, and dealer incentives.

In January 2024, mutual funds purchased 2.1 million shares of Asian Paints valued at ₹618 crore, but this decreased to 0.5 million shares worth ₹155 crore in February, according to Abhilash Pagaria, head at Nuvama Alternative & Quantitative Research.

Similarly, Indigo Paints saw a shift from buying ₹15 crore worth in January to selling ₹0.4 crore in February, while Berger Paints experienced a drop from ₹2 crore in buying to ₹6 crore in selling during the same period. Pagaria highlighted these changes as cautionary signs in the paints sector.

Having said that, fund managers expect Asian Paints to remain the market leader, making it a strong investment bet.

Despite the influx of new competitors, Saurabh Mukherjea, the founder and chief investment officer of Marcellus Investment Managers, remains confident that Asian Paints' profit compounding at 20-25% is unlikely to slow down.

There is buoyancy in the real estate sector and the repainting cycle is shortening, while the informal paint sector is dying down, Mukherjea highlighted at the Mint Investment Summit 2024. He believes there is ample room for well-run companies like Asian Paints to enhance volumes by 10-11%, revenue by 13-14%, profits by 17-18%, and cash flow by 20%.

Over the past three years, there is a material increase in number of dealers of Asian Paints in Chennai, and many hardware shops have started selling paints now, said an ICICI Securities report dated 31 March. As a result, the decline in revenue per dealer has prompted dealers to consider adding new brands, with a particular interest in testing Birla Opus paints.

Meanwhile, in a highly disruptive paints sector, Neeraj Gaurh, fund manager at Axis Securities, sees Asian Paints potentially losing some market share to Grasim but still commanding the market leader position, while other competitors may be significantly impacted. Nonetheless, he believes Grasim still has a long road ahead for value creation.

Having said that, other competitors may bear the brunt of intense competition.

Kotak Institutional Equities does not expect earnings before interest, tax, depreciation, and amortization margins of the incumbent paint players to collapse, but sees a 200-400 basis point drop from estimated FY24 levels. That is because it expects the incumbents to step up advertising and promotional spends, trade schemes and cut prices or compete aggressively to defend market share in the B2B/institutional market, said Kotak analysts in a report dated 24 January.

“In a nutshell, we expect negligible (or nil) earnings growth for incumbents over FY2024-26E," the report said.