Wet paint alert: Can Grasim Industries surprise Berger Paints?

US-based Sherwin-Williams is the world’s largest paint company and had entered the Indian market with high hopes just five years ago, acquiring Nitco Paints, a maker of exterior speciality paint.

It did not take long for Sherwin-Williams to realize that the decorative paint segment, which accounts for 75% of India’s ₹70,000 crore paints industry, would be difficult to crack. The company tried to master the complex mesh of distribution—contractors, painters, the end consumers—but found it too daunting in the end. It sold its Indian decorative paints business to Berger Paints in 2013 for an undisclosed sum.

“We made some assumptions about the country’s readiness for the type of products that we manufacture. Those proved not to be correct,” the American company stated in a conference call in 2013.

Sherwin-Williams is one in a long line of companies that have failed to make it big in the Indian paint industry over the last two decades. The entry barriers are high with a strong bias towards established players. The industry is dominated by four companies that account for over 65% of the market. In the more lucrative decorative paints segment, Asian Paints commands over 55% share. That leaves very little room for the others. The second segment of the paints industry is industrial, where the automotive industry is a major buyer.

Nonetheless, the industry promises high growth and sustained double-digit profitability for those who can crack it. Despite the failures, there is never a dearth of new entrants. Steel behemoth JSW Group made its foray into paints in 2019. In 2022, building materials firm Astral entered the market by acquiring Gem Paints. A few months later, JK Cement did the same by acquiring a controlling stake in Acro Paints. Last month, Pidlite Industries of Fevicol fame also launched its range of decorative paints in select geographies. But the game changer could be the $60 billion Aditya Birla Group.

The conglomerate’s foray, with its flagship Grasim Industries, has set the cat among the pigeons. The company’s first products in the decorative segment are expected later this fiscal.

Unlike most, the group has a strong presence in the allied cements industry—Ultratech is the largest player in the category, and the white cement business gives it a toehold in the paints segment. The group also has deep pockets, a proven capability to build brands and know-how of the consumer and the market. For the first time, in decades, there are rumblings of an impending war in an industry known for its calm.

Grasim’s groundwork

New entrants such as Grasim have done the math. For nearly two decades, the decorative paints segment has grown at a CAGR of 14%. And volumes in this industry typically grow at 1.6-2x of the gross domestic product (GDP), which translates into a steady revenue growth of 12-15%, estimated Crisil Ratings, a rating agency.

“Growth opportunities are significant and post implementation of the goods and services tax (GST), the share of unorganized players is shrinking while large organized players are consolidating their position,” said Anuj Sethi, senior director, Crisil Ratings.

The scale of Grasim’s investment underlines the promise of this market. Initially, the company planned a ₹5,000 crore capex but quickly dialled up and doubled it realizing that bigger players have most to gain.

“When we announced our foray into paints, we said that we have a natural right to win—when I say ‘win’, I don’t mean against Asian Paints,” Kumar Mangalam Birla, chairman of the Aditya Birla Group, said at Davos earlier this year.

“I have great respect for that company. But what I am saying is that we have a great reason to be in the business. We have an overlap of a whole distribution network for cement and white cement. We have very ambitious plans…we have every reason to believe that we would be a very strong number two in the next five years,” he added.

To start with, Grasim will have six manufacturing plants—in Haryana, Punjab, Karnataka, Tamil Nadu, Maharashtra and West Bengal—and a total capacity of 1,332 million litres per annum (MLPA). This is about a third more than Berger, the No. 2 player in the market, and about 70% of leader Asian Paints’ current capacity.

“All the plant capex will be done for the paints (business) in the next financial year and by 2024-25,” said Pavan Jain, chief financial officer at Grasim, at an investor call last month.

The build-up to the launch has already begun. The company recently started beta testing its painting service ‘Sparkle’ in Mumbai, Pune and Bengaluru. For now, it is only catering to employees, friends and families of the extended Aditya Birla Group. This would give them a touch and feel of how the industry works.

“We have obviously studied all competition, including the market leader, and we have a clear view of what our key tasks are,” said Rakshit Hargave, CEO, Grasim Paints, at the investor call. “The work in terms of meeting the trade, meeting the dealers, collecting the data, is also going on track, in line with our proposed launch.”

Retail advantage?

Given the high entry barriers, the Group’s deep pockets will come in handy. For the first few years, the company would need to invest heavily in brand building while increasing its penetration at the distribution level.

“This business requires investment in a large distribution network besides aggressive sales-push and ad-spend, resulting in high selling expenses. New entrants who can use their distribution channels offering complementary products and those with the ability to continuously invest in driving sales are most likely to succeed,” said Sethi of Crisil Ratings. “Strong balance sheets are required given that the breakeven can take anywhere between three and five years.”

How much of an advantage will Grasim’s retail presence in the white cement business lend to its paint business? That’s an unknown.

“The white cement business has a very different kind of distribution. So, while in theory it can be leveraged for the paint business, how much can be practically done is to be seen,” said Jay Gandhi, an institutional analyst at HDFC Securities, a brokerage.

The market is littered with multi-branded retail outlets that stock paints from different companies and it is the oversized influence of the local contractor or painter that is crucial. To break this cycle, companies like Sherwin-Williams and Norwegian firm Jotun had tried setting up standalone retail shops. Those haven’t worked.

Another unique aspect of the business is the ‘tinting machine’ distributors have. This machine is used to mix colours to get a certain shade and, in most places, the machine has been supplied by Asian Paints. In fiscal 2020, Asian Paints had 46,000 dealers with tinting machines, more than double of Berger’s 20,000. It ensures loyalty and control over distributors.

Capex battles

Given that the business is so dependent on distribution, dealer support, and a strong brand, none of the incumbents are push overs. Deep pockets would ensure Grasim will stay the course but a disruption—or an overnight change—in the pecking order is unlikely.

“It is not capex alone that drives growth because distribution network plays such a big role and it takes time to develop it,” said Mamta Muklania, associate director at CareEdge Ratings, another rating agency. “You need a connect with the dealer, contractor or painter. Then, also the customer. So, overnight, it is not possible to change anything. But gradually, with increasing presence and acceptance of the product, the share will go up,” she added.

The competition is aware of Grasim’s strengths but stresses it won’t be easy.

“We know there will be a battle (for No. 2). But we are confident of our own growth,” Abhijit Roy of Berger Paints said. “If someone has to catch up in five years, they need to grow at three or four times our pace. It’s a humongous growth rate and not very likely. It is not impossible, but not very logical.”

Incumbents, meanwhile, are adding capacities, too. In the post pandemic era, demand for paints shot through the roof—fiscals 2022 and 2023 saw 33% and 18% growth, respectively.

In October last year, Asian Paints announced a ₹6,750 crore investment plan to expand capacity by at least 30% to 2,436 MLPA in the next three years. Then, in January this year, it announced a brand-new plant in Madhya Pradesh at an additional investment of ₹2,000 crore. With this, Asian Paints would be nearly double the capacity of Grasim at 2,636 MLPA.

Berger, which has a shade less than a 1,000 MLPA capacity today (it recently started its biggest factory near Lucknow in Uttar Pradesh), plans to achieve at least 1,500 MLPA capacity over four-five years. This will help the company stay just ahead of Grasim on capacity (1,332 MLPA).

The big question: with so much capacity expected from the top two players, what sort of utilization will Grasim be able to achieve in the medium term?

“In three years, they can make a sale of about ₹1,000-1,500 crore, which would be a miniscule percentage of the total capacity they are putting up,” said Amit Syngle, MD & CEO, Asian Paints, during an analyst call in January. “For us, it is a very calculated move because today, we are operating at about 70-75% of our capacity and, going forward, we are clear we will be able to utilize all these capacities… with respect to others, we do not know how they justify the capacity additions.”

Shots fired but Grasim is in no mood to back down.

“There is sufficient gap in the market for a strong national player, which can persistently supply materials as well as make sure its presence is not only in urban but in rural markets. So, we are very optimistic of our results,” countered Himanshu Kapania, business head of paints business at Grasim during an earnings call. “We believe that the market is ripe enough for a second player and large enough to be able to accommodate the capacity that we are building. Our theme is a profitable #2 player, and we will make every attempt to meet all the objectives and missions that we have started to build our business on,” he added.

Price war ahead?

There is yet another question awaiting answers. Will Grasim’s entry fuel price wars?

A report by ICICI Securities, in March, stated that quick gains by Grasim would help the industry’s profitability while a protracted battle would bleed everybody. In other words, if Grasim makes quick inroads into the market, it wouldn’t undercut the competition too much. The report added that a 20% market share by 2029-30 would mean a 150-basis points contraction in profitability for the industry. On the other hand, if Grasim captures only 5% of the market, then margins could be down by as much as 400 basis points.

Fortunately, the decline in crude prices—a key raw material—has improved margins and companies have the head room to reduce prices if needed.

“Some margin contraction is expected, because once a new player enters, even existing players may want to increase their ad spend and further improve their distribution network,” said Gandhi of HDFC Securities. “Also, if demand does not play out as expected, then there might be price actions as companies would look to maintain market share.”

Roy of Berger Paints does not anticipate a price war but admits the growth trajectory for all the players could be hit as the market accommodates another large player.

“Our reading is it (growth) can come down by 3-4% if we do nothing. But we are not going to sit idle,” he said, promising a feisty fight.

“We have our own weapons, too. We can expand our distribution and penetration in the market. Last year, we added 8,000 dealers. This year, we plan to add 10,000. And we will have new products and avenues for growth like waterproofing and construction chemicals,” he added.

But then, a surprise can await him, yet again.

Updated: 14 Jun 2023, 12:53 AM IST