Paints: One brush at a time to beat competition blues

Paint manufacturers are taking it slow amid the looming threat of heightened competition and tepid demand trends. Grasim Industries Ltd, part of the Aditya Birla Group, is preparing for its product launch, expected in the March quarter of the current fiscal year (Q4FY24), which has existing paint makers concerned about market share impacts from new entrants.

“Grasim has not rolled out any plan for dealers, they are currently meeting dealers and trying to build a network," said a report from IIFL Securities on 5 January, based on dealer interactions. Despite high entry barriers in the sector, companies like Grasim with deep pockets might adopt aggressive pricing to attract customers.

Although clarity in this yet to emerge, incumbent companies have begun defending their market positions. “As per dealers, price cuts of ~2 3% were undertaken by Asian Paints Ltd and Berger Paints India Ltd to push sales, while sales of economy and premium products were similar," added the IIFL report.

Also, dealers highlighted that the intensity of discounts has risen, particularly in the economy range of products, due to increased competition from local players. Note that, Grasim has committed to invest 10,000 crore in its paints business, aiming to become a profitable number two player. Other major entrants in the paint sector include JSW Paints, JK Cement Ltd, and Pidilite Industries Ltd.

As such, listed companies also face challenges from regional manufacturers in the unorganized sector. Lower input costs is said to have provided these smaller players with enhanced pricing flexibility, particularly in the economy paint segment. Therefore, management commentary on pricing strategies will be pivotal when companies announce their December quarter results (Q3FY24).

Analysts warn that the shift towards economy paints and recent price reductions could affect the Q3 value growth. Meanwhile, the pick up in festival season demand fell short of expectations, so volume offtake was muted in October and November, as per dealers' channel checks by brokerages. December showed improvement, but Q3 is unlikely to impress.

Analysts expect mid to high single digit year on year volume growth for leading listed paint companies, supported by a favourable comparison base. Kotak Institutional Equities estimates Asian Paints to see volume growth of around 9%, partly aided by commodity products such as putty and tile adhesives and economy range of products.

Close competitor Berger is expected to marginally underperform Asian Paints in domestic decorative paints after five six consecutive quarters of outperformance with 7% volume growth in Q3. On the gross margin front, prices of titanium dioxide and crude oil crucial for monomers have softened y o y.

This should result in expansion. ICICI Securities expects the correction in raw material prices to result in gross margin expansion of around 150 200 basis points y o y for all paint companies. “We assess Q3FY24 to be the last quarter for low base effect led margin expansion; we model normalisation from Q4FY24," added the ICICI report.

That said, going ahead, a healthy project launch pipeline in the real estate sector can boost decorative paints demand. Even so, the overhang of competition and likely pricing pressure remains a risk to the sector's FY25 earnings estimates as margins largely remain range bound on a high base. This may contain steep upside in the stocks.

In 2023, shares of key decorative paints makers Asian Paints and Berger appreciated 10% and 25%, respectively. Valuations offer little respite with Asian Paints and Berger’s stocks trading at FY25 price to earnings multiples of around 55 times and 48 times, showed Bloomberg data..