As Grasim gears up to launch Birla Opus, Jefferies turns bearish on Asian Paints

Jefferies retained its underperform rating on Asian Paints, with a target price of Rs 2,500 apiece.

Grasim Industries is all set to break the status quo in the paints industry with its Birla Opus range of products. Kumar Mangalam Birla will launch the business and inaugurate three facilities at Panipat, Ludhiana and Cheyyar.

The entry of Grasim Industries into the paints segment is expected to further intensify competition in the sector. In the first half of the current fiscal year, 49 percent of Grasim Industries capex outlay of Rs 4,900 crore was allocated to the paints business.

Grasim announced that it plans on targeting the larger cities first, following which, it will enter the lower-tier markets. The firm in on-boarding deals, finalising ads, signing leases on depots.

“Grasim is likely to be a bigger threat, in terms of a new entrant, than players who have announced entry into the paint sector earlier, given the group’s strong distribution reach in cement and putty, because of which Birla Opus, in our view, will be able to garner a strong distribution reaches in the shortest time,” InCred Equities said in a December 2023 report.

The consensus in the market is that Grasim will be faced with an uphill task. Smaller players will definitely feel an impact, but Asian Paints is likely to remain unscathed.

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International brokerage Jefferies noted that while Grasim is eyeing the second spot in the paints market, other companies such as JSW Paints and Astral are consistently spending around 15-20 percent on marketing to increase their market share and firm up their presence.

"While success is not guaranteed, the sheer magnitude of this investment by Grasim will likely push the new competitor to adopt an aggressive stance to ramp up," said Jefferies. The steps could be higher discounts, promotions for dealers or even painters, which would impact the industry's overall profitability.

At 9.45 am, shares of Asian Paints were trading almost 2 percent lower on the NSE at Rs 2,949.8 apiece. Over the past six months, shares have fallen more than 7 percent, as compared to a 14 percent rise in the frontline index Nifty 50.

Jefferies retained its 'underperform' rating on Asian Paints as the counter has a perplexing valuation of 55x one-year forward PE and has not risen much over the past two years. The target price of Rs 2,500 implied a 17 percent discount from the current market price.

According to Amnish Aggarwal of Prabhudas Lilladher, the paints sector has witnessed the entry of multiple players, including MNCs. While speaking to CNBC-TV18, Aggarwal said that Grasim has already allocated a significant investment towards this sector, with a capex of Rs 6000 crores by the end of the December quarter. This substantial investment has the potential to exploit distribution channels, such as Birla White and Ambuja, and gain a significant market share, as nearly 25-30% of the industry is still unorganised.

Although this move by Grasim may not force big market players out of business, it could put pressure on their profitability if they try to invest in distribution and advertising. Aggarwal believes this development is expected to bring interesting times ahead for the paints industry for the next 12-15 months, a situation that has not been witnessed in the past 20-40 years in the industry.

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