This time it’s different or so the Dalal Street feels.
Grasim Industries has thrown down the gauntlet as the Aditya Birla Group entity said on Friday that it will commit more than Rs. 5,000 crore in capital to establish itself as the second-largest player in the lucrative domestic decorative paints market.
Investors see shades of Reliance Jio Infocomm’s disruptive entry in the telecom market nearly half a decade ago with a large capital commitment to challenge the dominance of incumbents like Bharti Airtel and Vodafone Idea at the time.
“The odds are better for Grasim as its capital commitment is much higher than the cumulative investment of all new entrants, it already reaches 35-40 per cent of the paints dealer network through distributors and stockists, and Birla White is a known brand to applicators (painters), for putty and white cement,” said brokerage firm Kotak Institutional Equities.
While for now it is aiming to grab the second spot, analysts believe that after spending 3-4 years on making a foothold in the market, it will ultimately come after the dominance of Asian Paints, which may trigger a price war especially as the shift of market share from unorganised players reaches some saturation.
Despite the large capital commitment, challenges remain for Grasim to do what others before it have failed to do. Its biggest challenge will be to establish brand loyalty in a Rs. 55,000-crore paints market that is not easy to develop.
“Market-leading paint companies have been able to protect their market shares via strong investments in branding, distribution, new products and technology,” said ICICI Securities in a note.
That said, Street is of the view that the rising competitive pressure from industrial houses with significant heft, such as Aditya Birla Group and JSW Group, will make investors reconsider the punchy valuations assigned to Asian Paints.
“In view of likely rise in competitive intensity over the next 2-3 years, valuations of paints stocks can correct a bit, especially recent absolute and relative re-rating can somewhat reverse,” said Kotak Equities.
Asian Paints is currently trading at 55 times one-year forward earnings, while the second-placed Berger Paints is quoting at a price-to-earnings ratio of 68 times one-year forward earnings.
Shares of the country’s largest paints maker tumbled nearly 3 per cent today while those of Grasim Industries soared close to 10 per cent. Berger Paints fell 2.4 per cent and Akzo Nobel India declined 1.5 per cent.
However, Asian Paints is unlikely to sit idle as new competitors like Grasim and JSW show their fangs. Analysts expect Asian Paints to step up investments in its distribution network along with the expansion of its product portfolio with a greater focus on the low-price segment.
Over the longer term, Asian Paints is looking at gaining market share as well as growing the market. The management remains focused on product innovation and cost optimisation, brokerage firm Morgan Stanley said in a note recently.
For India’s paints industry, 2020s could turn out to be a decade of roaring competition and relatively modest valuations.