Recently AkzoNobel has announced its plan to exit India. Netherlands based AkzoNobel is one of the leading paint and coating manufacturers in the world. They were doing business in India in the brand name ‘Dulux Paints’. This company constitutes 16% of the India’s premium paints market. There are various tailwinds for the Indian paint industry. But the company has stated the increase in competition as the reason for their proposed exit. So, they mean that the Indian paint industry has become highly competitive.
Flat q2 results:
The q2 results of various paint companies in India have shown a poor performance. The revenue growth is getting flat. They have performed below the analyst expectations. In the India’s paint industry, about a half ( more than half) is dominated by a single entity ‘Asian Paints’. Even for such a big company, the quarterly revenue is almost flat for the past 2 years. The year on year growth was also very negligible. Even when the paint sector has good growth prospects, the paint industry has been in consolidation phase because of the increase in the competition.
Heating competition with the entry of Birla Opus:
With the entry of Birla Opus Paints, the industry has become even more competitive. Being a part of Aditya Birla Group, it is easy for them to do all the initial investments, increasing the number dealers, and establishing new plants. In fact, they aim to achieve 5-6% in the Indian paint industry initially, and they have made significant investments into it. Their goal is to become the second largest paint company in India it seems.
How did Asian Paints became market leader?
Now if we should know how can Birla Opus gain market share, we should look at how Asian Paints reached this high. Firstly, they tried to increase their profit margins by eliminating the wholesalers and distributors. Secondly, Asian Paints tried to forecast demand for paint products using supercomputers very long back in 1970! Then the third important thing which they did was, introducing ‘tinting machines’. Customers would require various combinations of paints. This tinting machine will mix the available paints injected in the machines to make the required colour. There is a software which runs this machine. This helped the shopkeepers to use less storing space. Due to mixing, the customers could also get their required paint colours immediately, saving their time also. The company also tried to increase the number of dealers for their products. Further, it is said that their dealer network is twice larger than the Berger Paints [second largest paint company]. The strong dealership network, and the tinting machines will decide whether a company could dominate or influence the ‘paint’ industry. This is how Asian Paints became the market leader.
How could Birla Opus disrupt the Indian paint industry?:
Birla Opus is planning to build six manufacturing units by 2025 and has made an investment of Rs 10,000 crores in its decorative paint industry as per the Mint report. Initially they are majorly focusing in Punjab, Haryana, and Tamil Nadu. Birla Opus has introduced a tinting machine which is smaller in size compared to that of the Asian Paint’s. It was said that, the company gives it free to its dealers! For any paint or cement companies to succeed, the number of distributors is the crucial factor. For Birla Opus, increasing the dealer network is not a big deal. They are already into the ‘white putty business so they can ask their putty dealers to sell their paint products also. Further, we should note the point that, all the paint materials, cement products, housing hardware, tools, building bricks, etc. are mostly sold by the same dealer. The Grasim Industries is the parent company for both Ultratech Cement and Birla Opus paints. Ultratech has more than one lakh dealership network across India. So they can encourage their cement dealers to sell their paint products also. Moreover, Opus focus mainly on decorative paint market, which constitute almost 75% of the entire paint industry.
Jefferies compares the entry of Birla Opus to that of Jio’s entry into the telecom industry. They still believe that, Birla Opus could influence the Indian paint industry by their aggressive strategies, as reported by the Mint.
Even JSW Paints is also gearing up. In future, even more players are expected to enter the market.
From all these, it is clear that the paint industry has become more competitive.
Factors which pressure the profit margins:
First it was the price of the crude which impacted the margins of paint companies, but now it should be the ‘price war’ between the paint companies. There are two categories of paints – water based, and solvent based. For the solvent based paints, about 50% of the raw materials come from crude it seems. Substances like pentaerythritol, methyl methacrylate, aromatics, etc. come from crude. So, during 2022 and 2023 the rise in crude prices impacted their profit margins.
But now, due to increasing competition, the paint companies are forced to slash their prices. This decreases their profit margins. This is what is called as ‘price war’.
Even the climatic change could impact the sales of paint companies. In the recent quarterly results of Grasim Industries stated that, due to heavy monsoon the sales volume was negatively impacted. So the paint industry is cyclical, as they are expected to underperform during rainy season.
What is the future of paint industry in India?:
The future outlook of the industry is positive. After the Covid-19 pandemic, the industry has revived well. The CAGR expectation of this industry remains 8-9% in the next five years. Presently, the rising infrastructure activities [ related to construction], government Schemes like Awas Yojana, strong automobile demand [expectations], and the growing interest in repainting the buildings are the factors that are expected to boost the demand for paint in India. Now paint companies are focusing more on eco friendly paints. Even this development in the industry is also expected to fuel the growth of the industry.
Is it worth investing in paint companies?
Still the main question remains, is it worth investing in paint companies? We cannot appropriately answer this now. Even though the Asian Paints is the largest player in the paint industry, I feel the company’s capacity to generate increasing cashflows has reduced. Since they are the largest player, as of now there is no scope for them to grow more. Same applies to Berger Paints also. Many are expecting that, Asian Paints would win the bid for acquiring AkzoNobel. But I don’t think this could happen! This is because, companies like JSW Paints or even the Birla Opus would approach the Competition Commission of India [ CCI] to prevent Asian Paints acquiring AkzoNobel. This is because, if the acquisition happens that way [ with Asian Paints], other growing companies like Birla Opus and JSW Paints would be pushed out of the market. As Asian Paints already have more 50% of the market share, with acquisition [ if ] their market share would approximately become 70%. This is almost like a monopoly, which the CCI would never entertain.
CCI will always expect a healthy competition in the market. So, most probably JSW Paints or Birla Opus would be winning the bid, I guess.
The shares of these companies are not traded directly in stock exchanges. Their holding companies are traded. But, if we want to purchase their holding company then we should analyze all other businesses which the company undertakes. Only then we could determine the value and make a forecast.
Conclusion:
So in my view, we can make investments in other futuristic sectors like banking, finance, green energy, etc.[not recommending]. The paint stocks are ‘overheated’, I believe. So it is safe to be without touching any of these paint stocks like Asian Paints or Berger Paints as of now. The same thing applies to smaller players like Shalimer Paints also.
Disclaimer: All the share and industry information discussed above are only for knowledge purposes. Do consult a SEBI registered advisor for taking any investment decisions or I request the readers to do their own research before taking any investment decisions.