The proposed foray by Grasim Industries into the paints sector would lead to an increase in competitive intensity and need for additional capital, as pricing would be the key. The expansion plans of Asian Paints, the country’s largest decorative paints manufacturer, would also raise barriers in the industry.
In October, Asian Paints earmarked a capex of about Rs 6,750 crore over the next three years, including Rs 3,400 crore for capacity addition, Rs 2,550 crore for backward integration and Rs 800 crore for acquisitions.
At present, Asian Paints has a production capacity of 1,700 MLPA, while that of Kansai Nerolac Paints stands at 583 MLPA, JSW Paints at 125 MLPA and Indigo Paints at 110 MLPA.
“It is not clear to us whether Grasim is planning a similar backward integration, compelling Asian Paints to invest as well. Nonetheless, Grasim’s entry has definitely triggered an increase in capital intensity (and dilution in return ratios). Separately, backward integration projects appear attractive in a commodity upcycle but may not yield the desired IRR (internal rate of return) benefits in a downcycle,” Kotak Institutional Equities said in a note.
“It looks like Asian Paints and Grasim are eyeing to become lowest-cost producers. Competitive pricing would be the next step. Asian Paints’ aggression and strategy ahead of Grasim’s entry indicates that it is not prepared to cede market share and Grasim’s growth will likely be at the cost of others,” it added.
Earlier on May 24, Aditya Birla Group’s flagship company Grasim Industries announced plans to invest Rs 10,000 crore for its paint foray by FY25, double of what was initially earmarked when the firm announced its entry into the sector in January last year. It intends to set up plants with production capacity of 1,332 million litre per annum (MLPA) and commission operations by the fourth quarter of FY24.
In 2019, the Sajjan Jindal-led JSW Group forayed into the paints segment, starting with coil coatings and offering a complete range of decorative paints.
“The company’s (Asian Paints) revenue growth strategy is aggressive, led by a structurally attractive category and consistent market share gains, both from organised and unorganised competitors. Margins seem to have bottomed,” HSBC Securities and Capital Markets (India) said in a report.
“Asian Paints’ aggressive distribution expansion and rollout of AP Homes are investments in consumer centricity and experiences, which further raises barriers to entry in the industry,” it added.
According to a report by ICICI Securities, an increase in focus on the water proofing and building chemical category, a `6,000-crore industry, will continue to drive revenue growth for Asian Paints.
The Asian Paints management also reiterated a strong demand outlook for the second half of FY23 for both decorative and industrial paint, led by festive and wedding season and a revival in automotive industry. Good monsoons will help in a recovery in rural demand of decorative paints, and the company’s B2B project business is also likely to gain traction as a result of a pick-up in construction projects.