A strong growth outlook for the paints sector has Grasim Industries hooked as it looks to identify new growth engines. However, analysts believe the path to success in the oligopolistic Indian paint market will not be an easy feat to achieve.
Grasim on Friday announced that it will foray into the paints business with an initial investment of Rs 5,000 crore over the next 3 years. This is part of the company’s endeavours to invest in businesses that have the potential to be a leader in their addressable markets and generate consistent and attractive returns in the long term. READ MORE
Following this announcement, shares of the firm rose nearly 9 per cent to hit a 52-week high of Rs 1,094.40 on the BSE on Monday.
What works in Grasim’s favour?
The company aims to be a strong number two player in terms of both market share and profitability over a ‘reasonable’ period and targets 20 per cent IRR. For the purpose of expansion, the firm has allocated Rs 5,000 crore which will be funded through internal accruals and debt.
Prior to the demerger of cement division, Grasim’s VSF cashflows were used to fund its cement expansion and now the same is intended to be utilised for high-growth paints business, ICICI Securities said, adding that with this move key investor concerns about capital allocation may get addressed and holdco discount may narrow to 50 per cent from 60 per cent earlier.
Global brokerage Jefferies shared the view and said: “This improves visibility on capital allocation in the context of heightened pressures in its telecom arm.”
The firm also intends to leverage the distribution network of its subsidiary UltraTech Cement’s putty brand of 54,000 dealers, of which 70 per cent have an overlap with paints.
“Birla White is the leader in the segment and has strong brand equity among applicators, contractors and dealers. UltraTech already runs a training and loyalty program for the painters, like the paint companies,” highlighted Jefferies, which will benefit Grasim.
What are the challenges?
Creation of stronger brand equity and investment in tinting machines remain two challenges for the company, according to the analysts at ICICI Securities but considering Rs 5,000 crore investment, it can also invest in and/or subsidise tinting machines, it added.
Meanwhile, Jefferies believes that given the strong presence of already well-established players in the paint sector, Grasim would need to advertise heavily, to gain market share.
What’s the sectoral outlook?
The Indian paint industry is valued at approximately Rs 54,500 crore and is expected to grow to Rs 97,100 crore by 2024, according to the estimates of Indsec Research.
“There is a strong correlation between the Indian paint industry and the GDP growth of India. It has historically almost doubled India’s GDP growth rate. Going forward, the decorative paint market is expected to grow at a CAGR of 13 per cent while the industrial paint market is expected to grow at a CAGR of 9.9% by 2024,” it said.
Grasim, which is looking to foray into the decorative paint segment, should benefit from the same. “As Grasim plans to enter decorative paints, we believe there will be negligible impact on industrial paint business, however, the profitability of entire sector may move a notch lower,” ICICI Securities said.
Should you buy?
The shares of the company have risen over 160 per cent from March lows of Rs 380 per share. Going ahead, analysts at ICICI Securities see a further upside of nearly 14 per cent in the stock from its previous close of Rs 1004. The brokerage has ‘Add’ rating on the stock with a target price of Rs 1,140.
Meanwhile, analysts at Jefferies believe more than Grasim, its subsidiary Ultratech is a better bet.
“While some investors may be displeased over UltraTech not foraying into paint by itself, we actually see this as positive as success is not guaranteed in paint. So, while Grasim needs to take that risk and invest a hefty investment, UltraTech has the upside on distribution fees if the business scales up well, which will take time, while there is no downside if the journey is fraught with challenges,” it said.