Grasim is not Jio; investors in paint stocks minimize threat of competition

Shares of major paint companies Asian Paints Ltd and Berger Paints Ltd have fallen 7% and 5%, respectively, since Grasim Industries Ltd announced plans to enter the sector in January.

The expensive valuations of the two firms have remained more or less intact.

“A new business is unlikely to disrupt the paint industry like Reliance Jio did in the telecommunications industry,” said Mahesh Anand, president of the Indian Paints Association. “The buying model is different and is influenced by painters and contractors, and quality and brand also play an important role,” he said at a conference.

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Indian per capita consumption of paintings ??4 one kg per person is almost half of the ??7-8 a kg per person consumption in developed countries. “This leaves a huge opportunity for new companies to come and take a piece of the pie,” he added.

“Although the threat of loss of market share exists for incumbent paint companies with the arrival of a new player, competition or irrational disruption seems unlikely. As seen historically, scalability has been a challenge for new entrants to the industry, although we recognize that Grasim could potentially become a significant player in due course, ”said Manoj Menon, chief research officer and analyst at consumer, ICICI Securities Ltd.

Meanwhile, shares of Kansai Nerolac Ltd and Akzo Nobel India Ltd have seen double-digit declines of 12-15% each since January 22.

Investors will believe that the Aditya Birla group company, Grasim Industries, will invest ??5,000 crore in this business. It aims to become the second largest manufacturer of decorative paint.

“In the paints business, Grasim’s entry could mean higher risk for numbers two and three, Berger and Kansai, than market leader Asian Paints,” Menon added.

Along with growing competition from a new player with generous pockets, there are other short-term headwinds facing the industry.

The continued increase in the prices of crude and monomer derivatives could result in a compression of the gross margin in the coming quarters. Brokerage channel checks show paint companies have yet to announce price increases. Note that the last price increase dates from 2018.

But as previously reported, investors continued to dismiss concerns and paint inventory valuations remain elevated relative to the rest of the market.

Based on consensus estimates of one-year earnings, Berger is the most expensive paint inventory that trades with a one-year PE of 76 times. The Asian Paints and Kansai peers are trading at PE multiples of 61 times and 45 times, respectively.

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