Why Analysts Say Grasim May Do A Jio In Paints Sector

Grasim Industries Ltd. has doubled its planned capex on its paints business to Rs 10,000 crore within a year of launch, raising stakes even as other new entrants target the market. Analysts say the Aditya Birla Group has what is needed to disrupt the sector.

“We have every reason to believe that we will be a very strong second player in the next five years in the [paints] business,” Kumar Mangalam Birla, chairman at parent Aditya Birla Group, told BQ Prime in Davos. Apart from capacities, according to him, the focus will be on innovation, disruption and technology.

Birla will have to overcome entry barriers to the market that others have failed to break into to challenge the dominance of Asian Paints Ltd. Analysts, however, see a parallel between Grasim's aggressive foray into paints with Reliance Jio Infocomm Ltd.'s pricing-driven disruption in the telecom industry.

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“While brand and distribution are barriers [in paints], the oligopoly structure may be at risk, similar to the telecom sector. This time Aditya Birla Group appears to be the aggressor,” said Jefferies in a note.

Grasim is building six well-spread greenfield paint plants across the country and plans to achieve a capacity of 1.3 billion litres in 12-15 months versus six-seven years earlier. In FY22, the company incurred a paint capex of Rs 3,580 crore on acquisition of land parcels for five sites, while registration is pending for the sixth.

“Grasim's stated capacity is fairly significant when compared with 1.7 billion litres for Asian Paints and is much higher than Berger (0.7 billion litres) and Kansai Nerolac (0.6 billion litres),” Jefferies said.

According to Berger Paints' Managing Director and Chief Executive Officer Abhijit Roy, “Grasim's impending entry will increase competition, but we believe our growth will continue”.

“In the paints business capacity is not a constraint for most players, it can be built at a reasonable cost as and when required. What is of importance is to build brand strength, distribution strength and consumer connect,” Roy told BQ Prime. “Over the years, we have managed to strengthen our position in the Indian paints market and will be able to withstand competition. We will continue to innovate and increase our distribution reach, spend more on our branding efforts to connect better with consumers.”

The company, Roy said, has been steadily expanding capacity.

“We are on the verge of completion of expansion of our Lucknow plant. Once this completes, we will begin work at our Panagarh plant in West Bengal. We are also looking at another unit which will probably be bigger than the Lucknow plant in the east,” he said.

Grasim said it plans to commission plants in phases starting January-March 2024, along with a nationwide launch of its products.

It also has the benefit of an established distribution network of 38,000 paint dealers from the white cement business of its subsidiary, UltraTech Cement Ltd., according to analysts at Morgan Stanley.

That's 70% of its 54,000-dealer network, compared with 70,000-plus for Asian Paints and 30,000 for Berger Paints.

“The threat from new competitors is higher than the past as the new entrants are domestic players that possess an understanding of the Indian commodity industry and have strong balance sheets and the drive to grow to be among the top players,” Morgan Stanley said.

According to the financial services provider, Grasim will likely force existing firms to compete hard on product pricing, dealer compensation, brand building and talent retention, while new entrants focus on dealer reach and brand marketing. “Existing players are also more likely to focus on the top line, not margins.”

Still, it won't be easy to challenge incumbents like Asian Paints.

“While the capex guidance [of Grasim] is way above the gross block of Asian Paints (historical capex), Grasim's pan-India capacity spread, which is 75% of Asian Paints, raises concerns,” Jefferies said in a note.

According to Kotak Institutional Equities, challenges also remain in terms of building brand loyalty.

“Historically, new entrants have struggled to scale up owing to distribution, brand barriers,” said Kotak. “Consumers trust in existing brands and an infrequent purchase cycle makes it difficult for new entrants to gain share in mid-to-premium emulsions, that command bulk of the profit pool.”

Strong volume-led growth potential, pricing power, improving return ratios despite inflationary pressures, and high valuations of the decorative paints industry have attracted JSW Paints, Grasim and JK Cement, Kotak said.

Yet JK Cements' capex commitment indicates growth aspiration similar to that of JSW Paints and not as ambitious as Grasim, Kotak said.

Both JSW Paints and JK Cements have announced investments of Rs 600 crore. Grasim had initially committed a capital of Rs 5,000 crore, and then increased it to Rs 10,000 crore.

“JK Cements has some access to the paints dealer network through putty distribution. However, it won't be easy to establish itself in decorative paints in view of rising competition,” Kotak said.

The brokerage doesn't expect any immediate worry for Asian Paints.

The new entrants are not likely to materially impact Asian Paints' growth prospects or market share for three-four years but competitive intensity could deteriorate industry profitability, return ratios and valuations, on the margin, it said.

Smaller, regional players, Kotak said, are more vulnerable to rising to competition. Multinationals such as Akzo Nobel and Nippon Paints will have to reevaluate their India strategy to stay afloat.

Jefferies concurred. “Grasim may go for an aggressive strategy (pricing or otherwise) and disturb the market structure which may have a greater impact on smaller players.”

It may not escape fully unscathed though. Asian Paints has been expanding its portfolio beyond paints to bath, kitchen and lighting. But these segments, Jefferies said, were still at early stages to offset any potential disruption in paints.