Explained: Rs 10,000 crore Foray By Grasim Industries Into Paints Business And What It Means To Asian Paints-Berger-Nerolac Tripoly

The paints sector has become the centre of attention after Grasim Industries announced that it would double the expected capital expenditure over the next three years.

Initially, Grasim had announced a cumulative capital expenditure of around Rs 5,000 crores, to be spent until the financial year 2024 (FY24). But in the last quarter of FY22, it announced that it was planning to cumulatively spend Rs 10,000 crores till FY25 for the paints business. Unlike another new entrant JSW Paints, which entered the industrial paints business, Grasim plans to enter the consumer-oriented decorative paints business.

Why Enter the Paints Business?

Decorative paint manufacturers have done quite well for themselves over the past decade, buoyed by low commodity prices, low inflation, heavy brand-building and consistent growth. As a result, the stocks of decorative paint companies have created significant value for shareholders. Over the last decade, these companies have generated a consistent return on capital employed, margins, and positive cash flows.

So far, the industry has majorly been concentrated in the hands of the top three players – Asian Paints, Berger, and Kansai Nerolac. The excellent economics is certainly one of the reasons that have motivated Grasim to enter the business, with one of its investor presentations highlighting high Return on capital employed (ROCE) as a positive factor in the paints business. But apart from a high ROCE, the business offers an opportunity to diversify into another business, where it can grow and scale.

In fact, the Grasim management has found the sector so attractive that the new number for expansion into the paints sector has been pegged at Rs 10,000 crores. Initially, the company had cited a figure of around Rs 5,000 crores. Nevertheless, the company has clarified that the Rs 10,000 crore figure includes non-Capex expenditure, pre-operative expenses etc. as well.

Though the figures are not exactly comparable, and the time frame for the capital expenditure has been extended to about one year, the pace of capital expenditure has certainly increased. It is quite likely inflation has pushed the number upwards as well. The company has attributed the acceleration of capital expenditure to market dynamics that have become more attractive.

“Since the announcement of our entry into the paints business, the market dynamics of the decorative paint sector has become more attractive. We have accordingly decided to accelerate our capacity commissioning, and accordingly updated our plan with the project cost of ₹10,000 crores by FY25,” the company’s CFO said during a conference call with investors.

How does Grasim Plan to Dominate the Paints Sector?

Grasim is aiming for the number two position in the paints sector. Given that the decorative paints business is aimed at retail customers, it is necessary for Grasim to have a production and distribution scale, along with brand awareness among its target customers.

From the end user’s perspective, the paint to be used is usually recommended by the painter. It might be difficult to convince the average painter to recommend Grasim’s paint over the number one or number two players. In addition, building a trustworthy brand would take significant time, given that most of the other decorative paint players have been around for a very long time. Hence, it appears that Grasim plans to establish itself as the number two player first before focusing on the number one spot.

In order to reach its target, Grasim plans to use Birla White’s distribution presence to build its’ paint brand. Birla White offers products on the undercoat site, which is complementary to the new paints business of Grasim.

Ultratech-owned Birla White is a leader in the cement and putty business, and putty is usually applied for texture or smoothness before the application of paint. The cement and putty business already has a strong distribution network spread across more than 6000 towns. The number one player in the decorative paints category has already managed to find a synergy between cement and putty dealers and has convinced them to sell its paint as well. Grasim is expecting to follow a similar route as well, given that companies supply to dealers directly.

On the manufacturing side, the company plans to start commissioning facilities by the last quarter of FY24 and ultimately plans to commission a capacity of 1,332 MLPA. The capacity is clearly quite significant, given that the top player in the decorative paints business has a capacity of 1,700 MLPA. The number two and number three player would trail Grasim’s expected capacity. Clearly, Grasim would add significantly to the supply side of the paints sector.

What Does Grasim’s Entry Mean for Other Players?

Increased competition is seldom good news for companies, especially in an inflationary scenario where companies are unable to pass on their costs to customers. Paint manufacturers have already seen a decline in margins as raw material prices continue to rise. At the same time, the effects of an increased supply by a player with deep pockets could potentially be bad news.

Nevertheless, the odds in the sector have always been stacked against new entrants. In the past, heavyweights such as Sherwin Williams, Jotun and Nippon have tried to enter the Indian market without avail.

Brand name, connections with painters, the ability to attract dealers, and several other factors play a major role in the sector. Hence, Grasim’s strategy of directly starting with a significant scale is quite unorthodox. The usual strategy has been to grow slowly, one step at a time, rather than scaling up rapidly within a very small time frame. As a result, despite its heavy investment in manufacturing capacity, Grasim’s paint business has its fair share of sceptics as well. Even then, the fact that customers are down-trading or looking for quality options at lower price points could possibly help new players familiarise the market with their new products.