Listed paint companies should cruise through the December quarter (Q3FY24) with decent volume growth aided by the festive and wedding season. The test for paint supplies would be in Q4, however, when competition issues flare up. Grasim Industries is slated to launch its paint under the Birla Opus brand next quarter.
The paint sector has high entry barriers. But recently, companies with strong financial muscle, such as Grasim and Pidilite Industries, have entered the sector, which has seen an oligopolistic structure for many years now with a handful of companies dominating the market. Some of the new entrants also have a distribution channel, a key factor for penetration and success in this business.
In response, current listed paint makers have increased pressure on capital expenditure. Recent management comments indicate that capacity addition plans are progressing well. For example, of the Rs 3,400 crore outlined for brownfield expansions in the medium term, Asian Paints has already spent close to Rs 1,500 crore, management said in its Q2 earnings call. The decorative paints major plans to invest around Rs 8,750 crore over the next three years to boost capacity, back-end integration and acquisitions.
Berger Paints India, Kansai Nerolac Paints and Akzo Nobel India are also focusing on capital and increasing production capabilities. Grasim is also getting ready with three of its six paint plants to be operational in Q4, management said in its Q2 earnings call. Grasim has committed Rs10,000 crore of capital to its paint business.
“Incumbent paint companies are gearing up to protect their turf with big capitals. Our analysis shows that existing (top five companies) and new entrants are likely to get a total revenue of around Rs 12,000 crore in fiscals 2023 and 2024 against around Rs 7,000 crore made in the four treasuries till 2022,” said Anuj Sethi, senior director, Crisil Ratings.
Not only capital, also brand building is important to capture the attention of customers. Interestingly, Fevicol maker Pidilite, which enjoys strong brand recall value, has launched an interior paint called Haisha. “Ad spend to boost brand recognition is expected to remain elevated at 9-10% of revenue going forward. This metric has already risen in the current fiscal and is expected to rise in the next as well,” added Sethi.
Further, to capitalize on existing brand equity, paint companies have entered adjacent product categories of waterproofing/home decor through the same distribution network.