Analysts’ Take On What Grasim’s Foray Into Paints Means For Incumbents

Analysts expect Grasim Industries Ltd.’s foray into the paints business to increase competition for incumbents and possibly lead to their de-rating.

The Aditya Birla Group flagship textile maker has lined up a Rs 5,000-crore capital expenditure for the paints business for three years, it told the bourses on Friday. Entry into the paints sector, Grasim said, will add size, scale and diversity to its existing business portfolio.

“The company endeavors to invest in businesses that have the potential to be a leader in the addressable markets, have the ability to achieve scale and generate consistent and attractive returns in the long term,” Kumar Mangalam Birla, chairman of Aditya Birla Group, was quoted as saying in the exchange filing.

Shares of Grasim ended 6.5% higher on Monday at Rs 1,069.05 apiece — the highest in more than two years. That compares with a 4-5% drop in Asian Paints Ltd., Berger Paints Ltd., Kansai Nerolac Paints Ltd. and AkzoNobel that currently dominate India’s paints segment. Indigo Paints Ltd. has just concluded an initial public offering and will soon list on the bourses.

“Grasim’s entry may provide impetus to volume growth over the medium to long term but it’s also likely to impact margin and profitability of the incumbents,” Emkay’s Ashit Desai said in a note.

Of the 12 analysts tracking Grasim, six each recommend a ‘buy’ and ‘hold’. The stock has crossed its Bloomberg consensus 12-month price target of Rs 1,015 apiece on Monday.

Reaction Of Incumbent Paint Stocks:

• Shares of Asian Paints ended 3.2% lower at Rs 2,513.95
• Shares of Berger Paints ended 3.2% lower at Rs 748.45
• Shares of Kansai Nerolac declined 6% to end at Rs 612.6
• Shares of AkzoNobel closed 3.2% lower at Rs 2,401.5

Here’s what analysts have to say...

Morgan Stanley

• Maintains ‘equalweight’ rating with a price target of Rs 966 apiece.
• Considers move a positive development as it will help improve value within the standalone business and address capital allocation concerns.
• Cash flow profile will become less cyclical once paints business stabilises.
• Opportunity to build higher share of value from the standalone business.

Emkay

• Upgrades to ‘buy’ from ‘hold’; raises price target to Rs 1,225 apiece from Rs 1,105.
• Grasim is likely to pose a serious competition to incumbents in the paints business in the long run.
• Success in paints will ensure stable cash flows to the standalone entity.
• Channel checks indicate viscose staple fibre prices are up 20% versus Q3 average.
• Post recent run-up in share prices, Asian Paints, Berger Paints are richly valued and may see some correction in the near term.
• Retains ‘sell’ rating on Berger and Pidilite, along with ‘hold’ on Asian Paints.
• Cuts Asian Paints’ March 2022 target by 9% to Rs 2,460 apiece.

Dolat Capital

• Grasim has the potential to make it big in the paints business.
• Industry can accommodate new players.
• Portfolio diversification would help maintain growth.
• Expects partial dent on market share of existing companies.
• As investment is very high, some market share may shift from existing players to Grasim.
• Does not expect any financial impact till FY23.
• Expects some de-rating for existing stocks as they are already trading at very rich valuations.

ICICI Securities

• Maintains ‘add’ rating; raises price target to Rs 1,140 apiece from Rs 875.
• Entry into paints business is a strategic choice.
• Likely to be debt free by FY22 and hence intends to leverage strong balance sheet.
• Likely improvement in core business and better clarity on capital allocation, holding company discount may narrow.
• Core business viscose staple fibre and chemical expansion plans remain intact.
• Ascribe low probability for a price war as pricing is not the most critical differentiating factor.
• The event may lead to de-rating of all paint stocks, particularly the No. 2 to No. 5 players like Berger, Kansai and Akzo Nobel.