Can Grasim's aggressive entry disrupt a market dominated by Asian Paints, Berger Paints?

Aditya Birla group flagship Grasim Industries commenced operations at three manufacturing plants for its new decorative paints brand, Birla Opus, on Thursday as part of its strategic foray into the segment, first announced in January 2021. The group is targeting an initial revenue of Rs 10,000 crore and profitability within three years of full operations of its new venture of decorative paints business, its chairman Kumar Mangalam Birla said, as he inaugurated the plants located in Haryana's Panipat, Punjab's Ludhiana and Tamil Nadu's Cheyyar.

Birla said the company has a clear goal of clocking revenue of Rs 10,000 crore and turning profitable "not later than the third year of full-scale operations".

Analysts say factors such as the company's pan-India reach and wide product offering are likely to boost its profitability while disrupting the paints industry, currently dominated by Asian Paints and Berger Paints.

Grasim’s entry into decorative paints has the potential to disrupt the industry, with huge capex, strong distribution plans, six plants, and presence across decorative paints, wood coatings, waterproofing and wallpapers make a strong entry statement, wrote analysts at Prabhudas Lilladher in a research report dated February 23. The company plans to have a total capacity of 1,332 million litres per annum (MLPA), with three other plants planned in Karnataka, Maharashtra and West Bengal set to commence production in FY25. 

"Birla Opus has already made its intent clear by offering one-year warranty for enamels/wood finishes, incentives for contractors, free tinting machines and 10 per cent higher volumes for consumers in water-based paints," they added.  

How will Birla Opus disrupt the decorative paints industry?

The capacity goal Grasim has set for itself is higher than the combined capacities of the second, third and fourth players in the industry, according to Prabhudas Lilladher.

"We believe there is significant scope to increase capacity by around 40 per cent through brownfield expansions and debottlenecking," according to the brokerage.

Grasim has already spent more than Rs 6,000 crore, which is 60 per cent of its target capex earmarked for the paints business.

"The company has already enrolled 3,00,000 paint contractors and is planning the second largest network of dealers with free tinting machines, 40 per cent reduced footprint, four hour delivery and more than 150 depots," wrote analysts at Prabhudas Lilladher, which has a 'reduce' rating each on Asian Paints and Kansai Nerolac with targets of Rs 2,702 and Rs 288, respectively. 

The brokerage expects trade credit, and higher discounts and benefits to push product and establish the Birla Opus brand. 

Grasim Industries has positioned its plants at strategic locations to ensure a strong pan-India reach, and its sales and distribution network is in place to support the launch of Birla Opus, according to Motilal Oswal Financial Services.

In the new business, the company will focus on customer satisfaction, product quality, better incentives to contractors, and faster delivery of products (within four hours of placing orders at most of the locations), the brokerage highlighted. 

Meanwhile, the company has plans to cover all towns with a population of over 1,00,000 in the country by July 2024, and 6,000 towns by the end of the FY25. 

How analysts view Grasim's entry into paints

Motilal Oswal Financial Services has maintained a 'buy' on Grasim while largely retaining its FY24-FY26 earnings per share (EPS) estimates for the Aditya Birla group flagship. It has a target of Rs 2,670 per share for Grasim, assigning a discount of 40 per cent owing for its holding in subsidiaries and valuing the standalone business at a multiple of 7x EV/EBITDA. The target implies an upside of more than 21 per cent from the previous close. 

Without changing its assumptions for Birla Opus, as analysts await clarity in terms of the scalability of operations, the brokerage is of the view that the value of the paints business is not captured in the current price. 

"The viscose staple fibre (VSF) segment’s margin is expected to remain stable, and caustic soda prices appear to be bottoming out. Grasim will benefit from the capacity expansion of Epoxy, where margins are better than caustic soda. This would help the company improve margins of the chemical segment," wrote analysts at the brokerage in a report dated February 23.

Grasim is one of the largest producers of caustic soda in the country. 

The brokerage has listed five factors that are likely to drive Grasim's success in the paints business:  

• Pan-India reach 
• Vast product offering
• Distribution prowess
• Manufacturing excellence
• Established ecosystem

Read more on how analysts view Grasim's aggressive paints foray 

How you can expect main rivals to react

Prabhudas Lilladher expects Asian Paints and other major players in the industry, such as Berger Paints and Kansai Nerolac, to take an aggressive stance on Grasim's entry into the segment, with higher trade discounts and consumer offers that may curtail growth in the near term. 

The brokerage recommends avoiding paint stocks "until the dust settles in the aftermath of Grasim’s entry". 

Margin

While Asian Paints looks vulnerable, with margins close to record levels, Kansai Nerolac seems better placed as its margin stands 400 basis points (bps) below peak, according to the brokerage. 

Kansai Nerolac's industrial paints unit, which contributes 45 per cent to its total sales, appears to be doing well, according to the brokerage. 

Market share

Asian Paints' leadership is not under threat, as it is set to project its market share of per cent 52-54 per cent in decorative paints, with a huge advantage over incumbents in terms of distribution, brand strength and presence across price points, according to Prabhudas Lilladher, which does not rule out the impact on volume growth depending upon the strategy of Birla Opus.

"We note that even a 100 bps loss of market share in decorative paints can significantly impact its growth rates. Given strong outlook in Industrial paints and a war chest of Rs 1,000 from the sale of land, Kansai is ready to face the market onslaught of Grasim," said Prabhudas Lilladher.   

Meanwhile, Jefferies has maintained a 'buy' call on Grasim with a target of Rs 2,600 and Morgan Stanley retained an 'overweight' rating with a target of Rs 2,430 per share.

ALSO READ: What Jefferies makes of Grasim’s big paints bet

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