Birla Opus entry may spark tough paint sector competition, margin concerns; what should investors do?

The highly competitive and rapidly growing Indian paint sector has a new player. Aditya Birla Group's flagship company, Grasim Industries, entered into the paint business with the launch of 'Birla Opus' in February.

According to media reports, Grasim Industries plans to invest ₹10,000 crore in its decorative paints business, aiming to build six manufacturing plants in India by 2025.

In February, Aditya Birla Group chairman Kumar Mangalam Birla said he expected the group's new paints business to turn profitable in three years, as the conglomerate marked its entry into the rapidly expanding ₹80,000-crore Indian decorative paints market.

As Mint reported earlier, Birla Opus products will be available in Punjab, Haryana and Tamil Nadu from mid-March and in towns with populations of at least 100,000 by July 2024. The company aims to expand the distribution of its paints business to over 6,000 towns by the end of FY25.

Also Read: 0 to 10,000 in 3 years: Birla sets ambitious target for new paints business

The paint sector is rapidly growing and its growth outlook looks robust.

According to a recent report from the rating agency Care Ratings, the industry may see a 20 per cent capacity expansion over the next three to four years. This anticipated growth is poised to escalate competition, placing significant pressure on the margins of key industry players.

"The Indian paint industry is expected to grow at a CAGR of 9-10 per cent between 2024 and 2029, primarily driven by increased activity in real estate, construction and renovation projects. This growth will particularly benefit the decorative paints segment which accounts for 70 per cent of the total paint industry consumption," said T Manish, a research analyst at SAMCO Securities.

But the stocks in this sector have not performed impressively in the last one year.

Dim returns

The majority of stocks from the pain sector have underperformed the Sensex in the last one year. Shares of Asian Paints are down about a per cent over a year while those of Kansai Nerolac and Akzo Nobel have gained just about 2 and 6 per cent respectively in the last one year.

Shares of Berger Paints (up 10 per cent) and Shalimar Paints (up 12 per cent) have gained in low double-digits in the same period.

Only shares of Indigo Paints (up 29 per cent) have been able to outperform the equity benchmark Sensex which is up 25 per cent from its last year's level.

At present, Asian Paints, Berger Paints, Kansai Nerolac, Akzo Nobel, and Indigo Paints are the top five paint companies in India, based on their market capitalization.

Also Read: Why paints companies are applying new coats of growth

Tough competition may lead to margin erosion

The road ahead does not look bright for the established players of the segment.

Although the paint industry is expected to maintain its rapid growth trajectory, it remains largely under the control of established players, making entry barriers for newcomers quite formidable.

But, the entry of Birla will exert pressure on the already established players in the segment and a price war will erode their margins.

"Grasim Industries will exert substantial pressure on players within this segment. The softening of crude oil and other raw material costs was expected to cause margin expansion in the industry. However, the price war initiated by new entrants could diminish the likelihood of margin expansion. Also, the valuations (or PE) would further shrink resulting in a prolonged period of share price underperformance," said the SAMCO Securities analyst.

Amit Goel, Co-Founder and Chief Global Strategist at Pace 360 believes the entry of Birla Opus will likely lead to price wars and marketing blitzkrieg, potentially affecting profit margins for established players.

"While Birla Opus aims for a 5-6 per cent market share in its first year, it could disrupt the established order. Asian Paints' dominance might see some erosion, but a complete dethronement is unlikely in the short term," Goel pointed out.

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What should investors do?

While the majority of paint stocks have not performed well in the last one year, the road ahead also does not look smooth. Therefore, investors with a long-term perspective should thoroughly assess the company before considering an investment.

As Parth Shah, a research analyst at StoxBox underscored that having around 57,000 retail points, a huge manufacturing capacity of 1,322MLPA, an established brand image of Aditya Birla group, and revenue projections of ₹10,000 crore over the coming three years, the Indian paints industry is set to change with this fresh entry of Aditya Birla group.

Shah said investors must closely look into the deciding factors of the paint industry such as a strong distribution network. Evaluating the reach and efficiency of a company's distribution channels, including retail partnerships and online platforms, provides insights into its ability to effectively reach customers and capitalize on market demand.

Moreover, investors should evaluate a company's capabilities for expansion. This involves examining its strategies for entering new markets, introducing innovative products, and leveraging technological advancements to drive growth. In addition healthy financials, and better market share should be properly evaluated before investing in the segment, said Shah.

Analysts advise investors should monitor this sector for a few quarters before considering adding or initiating new positions.

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