Paint stocks in the red after Grasim doubles capex plan

Paint stocks traded lower on Wednesday morning after Grasim Industries Ltd announced to double its capital expenditure plan. Paint firms such as Asian Paints fell 3 percent, Indigo Paints 1.5 percent, Berger Paint 4 percent, and Shalimar Paints fell 0.4 percent. Grasim Industries, meanwhile,  rose 2.5 percent, as analysis viewed the capex plan meaningful. Paints stocks are under pressure due to a spurt in crude oil prices and fears of lower profit margins. Higher oil prices raise the input costs for paint companies, which use crude derivatives. Crude oil surged 50 percent so far this year in the face of global geopolitical crisis. Analysts expect Grasim's aggressive entry in the paints business may reduce the market share of these firms. Grasim has accelerated the execution of paints capacity of 1.33 billion litres, with commissioning of plants to start in phases starting fourth quarter of FY24. The project cost is revised up to Rs 10,000 crore by FY25 versus earlier indicated target capex of Rs 5,000 crore by FY24. In FY22, it set a paint capex of Rs 3,580 crore on acquisition of land parcels. "Grasim’s large capex plan in paints indicates its commitment towards becoming a serious player in this segment," said Motilal Oswal Securities in a note to investors. Grasim is building six greenfield paint plants across India - civil construction has started at two of its sites in Panipat and Ludhiana and is expected to start shortly at Chamarajanagar in Karnataka. The remaining three plants are at different stages of government approval process. It also has a strong focus on captive backend integration for the paints segment. From the fourth quarter of FY24, the company will look for a nationwide launch. "The 1.3-billion-litre capacity expansion outlook for Grasim is meaningful and compares to 1.7 billion litres capacity for Asian Paints (top player in paints segment) and much higher versus smaller peers like Berger (0.7 billion litres) and Kansai Nerolac (0.6 billion litres)," said Jefferies India in a note to investors.

"Finer details like capex constituents, strategy and pace of ramp-up are missing, which would drive uncertainty in near term," Jefferies said.

The Grasim management highlighted in a conference call that the industry growth has been higher than original expectations and the market structure is also changing and this prompted the company to accelerate its growth plans in the segment.

" Market dynamics of the decorative paints sector have changed with new capacities being announced backed by strong growth and outlook. Its  entry into this consumer-oriented business will further diversify its portfolio, provide scale and growth and will also offer a wide choice to Indian consumers as the Company plans to introduce the latest as well as a wide range of paint products," Grasim said in its earnings release.