Abhay Doshi, a Gujarat-based dealer of unlisted shares, who also tracks grey market premiums, said there has been no change in the premiums the grey market is assigning to Indigo Paints so far.
“Premiums are largely stable at Rs 895. No change has been seen whatsoever after Grasim’s foray news,” he said.
Mumbai-based Narottam Dharawat of Dharawat Securities said: “For now, it’s an investment proposal. They’ll have to set up plants. It is not a one-day affair,” he said, suggesting no impact of the news on Indigo’s listing prospects.
Dharawat said that the Indigo Paints IPO had an attractive 117-times strong subscription and even if the ongoing selling in the secondary market were to continue, he sees grey market premiums for the stock impacting only marginally.
Investors, especially the leveraged HNIs, would be keenly awaiting listing gains as the quota for non-institutional investors (NIIs) was subscribed 263.05 times during the IPO and a low listing premium may or may not make up for the leveraged positions.
In the past, many new entrants tried their luck in the industry. JSW Paints entered the market in 2019 with an initial investment of Rs 600 crore with a commitment to increase it to Rs 1,000 crore. Nippon Paints entered the market in 2006. It is globally the number 4 player. Sherwin-Williams Paints entered the domestic market in 2006. Globally, it is number 2. Also, Norwegian Jotun entered the Indian market in 2005; it is at the tenth spot globally.
“They all have made little headway in the Indian paints market, given its strong moats such as distribution, placing of tinting machines, and brand trust. However, such a large capex commitment from a marquee business group is largely unprecedented,” Nomura India said.
As per Indigo’s own draft red herring prospectus, 33 per cent of the paints industry is still catered by unorganised players. Emkay said it provides an opportunity for the entry of a serious branded player. The decorative paints industry is pegged at Rs 40,000 crore.
Grasim already has an inherent presence in a related segment through Birla White under Ultratech Cement. The company plans to leverage that brand equity and distribution network in existing channels, which could provide a significant head start to the company.
“Birla White is the market leader in White/Putty segment and has access to the same influencers as are for Paints. Grasim plans to enter into formal agreement with Ultratech to discuss ways to generate synergies from existing distribution networks on an arms-length basis. Management targets to have multi-location plants and already are in discussion with state governments,” said Antique Stock Broking.
Emkay Global said that the capacity commissioning does not guarantee instant acceptance of a new brand and there have been instances when few players, such as Akzo Nobel and Nippon Paints, found it difficult to achieve a reasonable market share initially.
That said, the brokerage said that the strong brand identity of the Birla group and UltraTech’s presence in the white cement/wall putty would help Grasim establish reasonable market share sooner than later.
“Birla White division of UltraTech has a dealer network of 54,000 and there exists a 70 per cent overlap between the distributors of paints and white cement/putty, which may help Grasim create a distribution network,” Emkay Global said.
Indigo has a network of 11,230 active dealers. Asian Paints has a dealer network of over 70,000 dealers.
Emkay said that UltraTech Cement also has a Building Solutions division with a network of 2,300 outlets and plans to double it over next 3-4 years, which could help Grasim initially.
Nomura said incremental supply capacities of this magnitude can aid in expanding the addressable organised paints market and could be negative for established players if Grasim starts to wrest some market share or demand growth falls behind the additional supply, creating downward pressure on industry pricing and margin structures.
“We believe industry margin trajectory will need to be closely watched over the next couple of years as Grasim scales up operations, as any pressure on margins could act as aP/E de-rating event for decorative paint players,” Nomura said.
The allotment of Indigo Paints’ IPO is likely to be finalised on Thursday. The company, whose IPO ran from January 20 to January 22 in the price range of Rs 1,488-1,490, is likely to list on Tuesday.