The entry of Grasim Industries to the oligopolistic paints market has triggered selloff in stocks of incumbent players. The combined market capitalisation of seven paints stocks has eroded as much as ₹25,000 crore, ever since the Aditya Birla owned company launched its brand–Birla Opus.
While the largest player, Asian Paints witnessed the biggest drop in market capitalisation, other companies like Kansai Nerolac Paints and Akzo Nobel India saw their market valuation fall by ₹1,285 crore and ₹919 crore, respectively, since February 2022. The market valuation of Asian Paints has come off ₹21,395 crore to ₹2.68 lakh crore. Shares of Shalimar Paints plummeted as much as 12.1% in four sessions, while Asian Paints, Akzo Nobel India and Sirca Paints lost 7-8%. The benchmark Nifty50 slid 1.2% during the same period.
| Company | Fall since Feb 22 |
| Shalimar Paints | -12.07% |
| Sirca Paints India | -7.77% |
| Asian Paints | -7.39% |
| Akzo Nobel India | -7.30% |
| Kansai Nerolac Paints | -5.16% |
| Indigo Paints | -3.28% |
| Berger Paints India | -1.30% |
Market participants are of the view that the aggressive expansion plans of Grasim Industries could negatively impact margins of existing players. JP Morgan opined that the accelerated national scale-up could drive pressure on operating margins of incumbents in FY25E, as they would likely step up their channel incentives and brand spends. This could happen even as on ground execution and consumer acceptance of the Birla Opus brand remains a key monitorable over the coming quarters. “Hence Asian Paints’ share price performance may stay subdued amidst earnings downside risk despite moderation in stock valuations,” JP Morgan wrote in an investor note.
The paint business of Aditya Birla group is aspired to be ₹10,000 crore and expected to be profitable in the third year of operations. Further, the management sounded more optimistic on delivering better margins compared to existing players, aided by a more efficient cost structure, scale benefits, reasonable realistions and premium mix.
According to JP Morgan, there has been aggressive network expansion from the incumbents over the past few quarters and the channel or brand investments could further accelerate for paints companies on account of Birla Opus’s dealer addition and advertising spends (Birla to match the leaders). “Even as benign raw material costs could provide some support to the gross margin, we expect the industry margins to moderate in-line with the guidance of the paints companies.” The brokerage is now guiding 18-20% margins for Asian Paints, against 22% clocked in 9MFY24. Similarly, the margin guidance for Berger Paints narrowed to 15-17%. In comparison, the margins for 9MFY24 stood at 17.4%.
Shares of Grasim Industries have surged 23% over the last six months, against 14% gains clocked by the benchmark Nifty50 during the same period.
