Paint stocks correct on fear of increased competition...
Existing paint companies will have to sacrifice profitability in order to maintain market share after Grasim Industries announced mega capex in its paint division.
Grasim industries has announced a capex of Rs 10,000 crore to commission a total paint manufacturing capacity of 1.3 MTPA by FY24. The announced capacity is ~65% of existing capacity of market leader Asian Paints. Grasim Industries is the industry leader in the specialty chemical and cement business in India. The company’s foray into the paint business is an extension of its expertise in manufacturing specialty chemicals. For retail distribution, Grasim plans to leverage its existing ~30,000+ cement dealers spread across 6000 Indian towns in metros, tier-1 and rural India. While the company refrained from sharing any near term market share target, the initial objective is to become one of the leading players in the paint industry.
We believe Grasim can become a meaningful player in the paint industry over the long term. The company's large investment plan for its paint division and back up of established dealer networks supports growth potential. However, before giving a thumbs up, we would like to wait and watch Grasim’s future strategy on product differentiation and strengthening of supply chain network. In the past decade, despite entry of global giants such as Sherwin Williams, Jotun and Nippon, the key domestic players market share remains undisturbed. Going forward, we build in a normalised EBITDA margin (i.e. pre-Covid level) for paint companies considering growing competitive intensity and input cost pressure.
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