Grasim’s Paint Venture May Not Threaten Asian Paints’ Dominance, but Industry Dynamics Set to Shift with Increased Competition.
Grasim Industries has made its much-anticipated debut in the paints sector with the unveiling of its Birla Opus product line. This move is poised to reshape the competitive landscape within the industry as the heat of rivalry intensifies.
With the launch of Birla Opus, Grasim sets its sights on securing the second spot in the decorative paints market, currently dominated by its competitor, Asian Paints.
The company has set an ambitious target of achieving a gross revenue of Rs 10,000 crore within three years of full-scale operations. To support this goal, Grasim has made an initial investment of Rs 10,000 crore and established three production facilities in Panipat, Ludhiana, and Cheyyar, Tamil Nadu.
Grasim’s aggressive expansion strategy to carve a niche in the paint sector has earned praise from industry analysts while simultaneously weakening Asian Paints’ grip on the market.
Amid concerns of heightened competition sparked by Grasim’s entry, several brokerage firms have issued cautious evaluations for Asian Paints. This sentiment led to a decline in Asian Paints’ stock price on February 26, with shares trading 4 percent lower at Rs 2,867.60 on the NSE at 09:36 am. Conversely, shares of Grasim Industries experienced a slight uptick, reaching Rs 2,201.
In anticipation of heightened competition within the sector, brokerage firm CLSA has downgraded Asian Paints to a ‘sell’ rating and reduced its price target for the stock by nearly 25 percent to Rs 2,425. Additionally, CLSA has trimmed its earnings estimates for Asian Paints for FY25/26 by 8-10 percent.
While CLSA remains optimistic about Asian Paints potentially emerging as a leader in the paint industry post the industry shake-up, it also suggests that victory is not guaranteed. The brokerage firm anticipates a possible de-rating for Asian Paints, with its stock price expected to align closer to its 15-year average multiple.
Similarly, Goldman Sachs shares concerns regarding Asian Paints and has adjusted its price target for the stock downward by almost 14 percent to Rs 2,850, while maintaining a ‘neutral’ stance. Goldman Sachs has not only revised its target multiple for the stock from 58x to 52x but also lowered its earnings-per-share estimates for FY25/26 by 5.2 percent and 10.9 percent, respectively.
Goldman Sachs further highlights that Grasim’s entry strategy into the paints sector appears more comprehensive than initially assumed, focusing on product superiority and aggressive marketing expenditure.
Citi expresses confidence in Grasim’s potential to secure the second position in the paints sector, citing its plans for nationwide expansion by the end of FY25, additional capacity enhancement, and a robust dealer engagement strategy as key drivers. With a ‘buy’ recommendation, Citi sets a price target of Rs 2,650 for Grasim.
Although Grasim’s entry isn’t anticipated to displace established market leaders, it is expected to intensify competition, leading to pricing pressures, challenges in maintaining profitability, distribution, and advertising efforts, as per the consensus view.
Contrarily, Macquarie doesn’t foresee a significant increase in discounting levels in the industry, considering Grasim’s revenue objectives for the next three years. The brokerage maintains its preference for Asian Paints over smaller competitors and reaffirms its ‘outperform’ rating on the stock, setting a price target of Rs 4,000.
However, Jefferies presents a different perspective, suggesting that Asian Paints could face competition not only from Grasim but also from smaller players like JSW Paints and Astral. These smaller competitors are actively investing in marketing efforts, allocating approximately 15-20 percent of their revenue to bolster market share and solidify their presence.
Jefferies has upheld its ‘underperform’ rating on Asian Paints, pointing to the stock’s perplexing valuation at 55x one-year forward PE and its constrained growth over the last two years. With a target price of Rs 2,500, Jefferies indicates a 17 percent markdown from the current market price.
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