- The stocks of
Asian Paints andBerger Paints plunged nearly 3% on Monday. - The grey market premium for unlisted Indigo Paints also crashed.
- The paints industry has high entry barriers, and new entrants have had minimal success over the years.
- However, analysts fear that the entry of one of the country’s biggest billionaires into the space is likely to alter the game.
This was bad news for Asian Paints, Berger, and Kansai Nerolac, who control over 60% of the country’s $7.5 billion
It was worse for those who invested in the initial public offering (IPO) from Indigo Paints, because a challenge from someone like Birla was not a risk they had factored in. Though the grey market was still quoting a premium of ₹790-800 for a piece of Indigo, it was down ₹80 compared to Friday’s premium. It is fair to assume that the listing on February 2 won’t be as hot they expected.
Birla, a giant in the cement and aluminium industry, has decided to spend ₹5,000 crore over the next three years via his flagship firm Grasim to rattle the incumbent market leaders. That’s more than what Berger and Nerolac have planned for, combined!
The owner of the multinational commodities giant has been increasingly optimistic about the recovery in the Indian economy, particularly in the construction space. “In India too, the initial prognosis and narrative of experts proved to be excessively pessimistic. The economists, I am told, are now searching for alphabets that will adequately describe this trend of cautious optimism,” said Birla in a Linkedin post.
Even before that, in a conversation with Business Insider in October 2020, Birla said, “There was a big question around what would happen to infrastructure spending. If I just see aluminium and cement businesses, they’ve both come back to pre-COVID levels very quickly.”
The entry of any new, and serious, player is good for the consumer but bad for the competitors. According to Emkay, “Grasim’s entry may provide impetus to volume growth over the medium-to-long term, but it is also likely to impact margins and profitability of incumbents.” Particularly, in the industrial segment— e.g selling paints for use by car makers— the margin is likely to get squeezed and it will hurt the incumbent players.
The paints industry has high entry barriers, and new entrants have had very limited success over the years. And large players such as Sherwin Williams, Jotun, and Nippon have failed to gain more than 2% market share in the Indian paint industry.
And Birla is not entirely new to the construction space. Ultratech’s Birla Putty, already sells through 54,000 outlets (2nd largest distribution), and three out of four among these outlets also sell paints. The network is already in place, and it is waiting for the product.
Birla has been at the receiving end of the disruption in telecom. Rival billionaire Mukesh Ambani’s Reliance Jio entered with a bang, started a price war that nearly pushed Birla’s Vodafone Idea to the brink of a collapse. Those invested in Asian Paints or Berger Paints or Kansai Nerolac hope he won’t start a similar price war in their space.
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