But as Grasim’s entry takes the sheen off most of the incumbents, their stocks, too, could lose colour. Grasim had announced its foray in the paints business a little over 3 years ago with an initial investment of ₹5,000 crore, which it then doubled to ₹10,000 crore.
Shares of most players have underperformed broader benchmarks since then. Apart from Asian Paints, which is the market leader, shares of several other paint makers are lower as compared with three years ago. The Nifty 50, meanwhile, has surged more than 48% in the same period.
Agencies“It is a reasonable assumption that the overall profit pool may see a marginal dip, as players are forced to up their ad spends to protect market share,” said George P Thomas, fund manager at Quantum Asset Management Company.
The impact of higher spending on advertising will be felt more by tier-2 and tier-3 players, from whom Grasim is expected to take a market share, said Thomas.
Grasim Industries will be launching its paints business under the ‘Birla Opus’ brand, with six manufacturing facilities and a capacity to produce 1.3 million liters of paint each year. The business will be launched today, and the conglomerate is expected to step into the market with an aggressive pricing strategy and a value proposition for the dealer network.Shares of Grasim Industries hit their lifetime high of ₹2,222 on Tuesday, before closing at ₹2,194 on the NSE on Wednesday, flat from the previous close. The shares have gained 80% in three years.The Big Bang Entry
While Grasim has clocked in big gains, the paints sector, which has almost always enjoyed rich valuations, saw a de-rating, and earnings multiples moderating during this period. Uncertainty around what Grasim’s strategy will be is seen keeping the shares in the sector from registering sharp gains in the near term.
“We have a ‘reduce’ rating on most names in the sector currently. Valuations of the sector have been rich, and there is still uncertainty as to how much of a disruption we could see from Grasim,” said Amit Purohit of Elara Capital. He also sees a slowdown in demand in the sector in the near term impacting prices.
Existing players – especially the large ones – though, are seen stabilizing over the long term given the opportunity size for the domestic paints industry, which is seen growing at a robust pace, analysts said.
While it will not be easy to destabilise Asian Paints because of its strong dealer networks, Grasim will have an advantage compared to other players given its brand, existing dealer network, and ‘Birla Putty’ which is well-established, and is currently being sold across 60,000-70,000 outlets.
“Spending on infrastructure by the government and strong demand in real estate will drive demand for the industry, but there will definitely be some impact on profitability,” said Preeyam Tolia of Axis Securities. He has a ‘hold’ rating for shares of Asian Paints.
(You can now subscribe to our ETMarkets WhatsApp channel)