Paints shares lose sheen post Birla Opus launch; Asian Paints at 10-mth low

CLSA downgrades Asian Paints to 'sell'

Shares of paint companies faced pressure, falling up to 5 per cent on the BSE in Monday’s intraday trade amid concerns that Grasim Industries’ entry into the paint sector will intensify the competition. Asian Paints reached a 10-month low of Rs 2,850, slipping nearly 5 per cent after brokerage firm CLSA downgraded the stock following the Birla Opus launch. The paint maker’s stock traded at its lowest level since April 28, 2023.

Asian Paints eventually settled 4 per cent lower at Rs 2,868.4 on the BSE. The stock has corrected 20 per cent from its 52-week high of Rs 3,566.9 on July 24, 2023, having hit a 52-week low of Rs 2,705.9 on April 3, 2023. Berger Paints, Indigo Paints, Kansai Nerolac, Shalimar Paints, and Sirca Paints India were down from 1 per cent to 2 per cent. The S&P BSE Sensex was down 0.5 per cent at 72,790. 

Grasim Industries, the flagship firm of Aditya Birla Group, announced its entry into the decorative paint business in India on Thursday with the launch of the new brand Birla Opus.

Kumar Mangalam Birla, the group’s chairman, said that the company aims for revenue of Rs 10,000 crore in three years of full-scale operations. The company believes that over the medium term, it can achieve equal or better earnings before interest, tax, depreciation, and amortisation (Ebitda) margin than the industry leader.

Birla Opus will have over 145 products and 1,200 stock-keeping units across water-based paints, enamel paints, wood finishes, waterproofing, and wallpapers. The company has launched factories, operations, products, and services on a large scale, an unprecedented move in this business.

The company’s paint capacity in its first year of operations will exceed the combined capacity of the second-, third-, and fourth-largest players.

CLSA downgraded Asian Paints to ‘sell’ from ‘underperform’ and reduced the target price to Rs 2,425 from Rs 3,215 earlier. In its note, the global brokerage said that the competitive intensity in the paint sector is likely to increase considerably with the entry of Birla Opus.

However, analysts at Macquarie expressed a preference for Asian Paints over smaller players like Berger Paints, which they believe would be relatively more affected by new entrants.

Grasim has indicated a focus on brand creation using white spaces, especially in painter relationships/product innovations. This, coupled with its targets for Rs 10,000 crore net sales after three years of full launch and positive Ebitda, makes analysts believe that industry discounting pressures will not rise as sharply as earlier envisaged.

Grasim’s medium-term expectation of reaching an industry leader or higher Ebitda margin further supports this, analysts said in the report.

While the premium segment is seeing slower growth, positive traction is observed in the luxury segment. In the coming quarters, Asian Paints is expected to benefit from rural recovery, strong growth in industrial businesses, and continued traction in project business.

With the entry of a large player in the paints industry in the fourth quarter of 2023-24 estimates, competitive intensity is likely to increase, according to an analyst at KRChoksey Shares and Securities in the third quarter results update.

Asian Paints possesses all the ingredients to outperform its peers in the long run. Some of these include: improving demand, especially in rural areas; falling raw material prices and efficient sourcing; and the recent announcement to expand production presence and backward integration of key raw materials. These steps are in the right direction to achieve the next level of growth and secure its market share in the long term, said analysts at Axis Securities in the results update.

However, the brokerage firm believes the stock is likely to see sideways movement owing to increased competition from new entrants (JSW and Grasim), which will keep profitability in check in the near term.