Paint stocks plunge on Grasim industries' capex boost

Mumbai: Shares of domestic paint companies slumped on Wednesday following Grasim Industries' announcement to double the spending on its entry into the paints business. The Aditya Birla Group's foray into the industry is expected to disturb the 'oligopolistic structure' of the local business, said analysts with brokerage Jefferies terming it as a 'Jio Moment' for the Indian paint industry.

Asian Paints tumbled 8% to ₹2,839, Berger Paints declined 6.83% to ₹568.50, Shalimar Paints fell 3.8% to ₹131.55 and Akzo Nobel India dropped 2.98% to ₹1,724.

"While success is not guaranteed as there is no clarity on its plan on branding and distribution, given significant capex, Grasim may go for an aggressive strategy (pricing or otherwise) and disturb the market structure which may have a greater impact on smaller players but Asian Paints may also be at risk," said Jefferies' analyst Vivek Maheshwari in a client note.

"This is reminiscent of Jio's foray into the telecom industry, with significant capacity additions, which ultimately resulted in lower industry tariffs."

Grasim said on Tuesday said it has doubled the capital expenditure for its entry into the paints business to ₹10,000 crore and could start production from March quarter of FY24. Grasim shares fell 2% to ₹1,375.

JP Morgan said the announcement could result in an "overhang" on listed paint players

"We do see more risk to smaller paint companies compared to Asian Paints which has been gaining market share despite being the largest player," said the brokerage's analyst Latika Chopra in a client note. The brokerage has a price target of ₹3,400 on Asian Paints, about 20% above Wednesday's closing price.

Asian Paints has a market share of over 50% in the decorative paints segment, according to various estimates. The stock has been among the favourites of investors in the past decade because of its market share, pricing power and strong sales network. There are concerns in a section of the market that the entry of another deep-pocketed group into the segment could eat into the premium in share valuations Asian Paints enjoyed for almost a decade. Analysts said its valuations-measured by Price to Earnings (PE) ratio - of 60-65 times bakes in its strong track record.