Grasim’s paint foray turns brokerages bearish on Asian Paints as competition heats up; stock falls 4%

While Grasim’s paint foray is unlikely to take away Asian Paints’ top spot in the sector, it will definitely fuel competition and change dynamics within the industry.

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Grasim Industries staged its much-awaited entry into the paints sector with the launch of the company’s Birla Opus range of products. Its foray into the paint industry is expected to shift dynamics within the sector as competition heats up.

Through the launch of Birla Opus, Grasim aims to secure the second position in the decorative paints market, which is currently dominated by rival Asian Paints.

The company aims to reach a gross revenue of Rs 10,000 crore within three years of commencing full-scale operations. Grasim has already invested Rs 10,000 crore upfront and commissioned three plants in Panipat, Ludhiana, and Cheyyar in Tamil Nadu.

While Grasim’s intensive business strategy to make a spot in the paint industry has garnered appreciation from analysts, it has also weakened the stronghold for Asian Paints.

Several brokerages has issued a cautious outlook for the paints major amid concerns of increased competition which triggered a fall in the stock on February 26. At 09.36 am, shares of Asian Paints were trading 4 percent lower at Rs 2,867.60 on the NSE while those of Grasim Industries were slightly up at Rs 2,201.

Anticipating a significant spike in competitive intensity within the sector, brokerage firm CLSA downgraded Asian Paints to a ‘sell’ and also slashed its price target for the stock by nearly 25 percent to Rs 2,425. The brokerage house also cuts its FY25/26 earnings estimates for Asian Paints by 8-10 percent.

While the firm remains optimistic about Asian Paints emerging as a leader in the paint industry post the shake-up, it also feels that it is not the guaranteed winner. CLSA also sees a likely de-rating for Asian Paints, with its stock price expected to move closer to its 15-year average multiple.

Goldman Sachs shares a similar concern for Asian Paints as the firm also cut its price target for the stock by nearly 14 percent to Rs 2,850 while retaining a ‘neutral’ call. The firm not only lowered its target multiple for the stock to 52x from the earlier 58x but also cut its FY25/26 earnings-per-stock estimates by 5.2 percent and 10.9 percent, respectively.

Goldman Sachs also believes that Grasim’s strategy for its entry into paints was more comprehensive than assumed and based on product superiority and aggressive marketing spend.

Also Read | Grasim Industries targets second spot in decorative paints market with Birla Opus

Brokerage firm Citi is also feeling confident about Grasim’s ability to achieve its desired vision of becoming the number two player in the paints sector. Grasim’s plans to be pan-India by the end of FY25, another round of capacity addition and a clear dealer pull plan in place are some positives driving Citi’s optimism for the company. Citi has a ‘buy’ call on Grasim with a price target of Rs 2,650.

While the overall consensus doesn’t see Grasim’s entry dethroning big players in the business, it could still flare up competition and put pressure on pricing, profitability, distribution, and advertising.

Macquarie doesn’t anticipate a sharp spike in discounting levels in the industry either, taking into account Grasim’s revenue target for the next three years. The brokerage still prefers Asian Paints over smaller players and maintained its ‘outperform’ call on the stock with a price target of Rs 4,000.

However, Jefferies has a contrasting view as the firm expects Asian Paints to also feel some competition from smaller players like JSW Paints and Astral which are consistently spending around 15-20 percent on marketing to increase market share and firm up their presence.

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

Jefferies has maintained its ‘underperform’ rating on Asian Paints, citing the stock’s puzzling valuation of 55x one-year forward PE and its limited growth over the past two years. The target price of Rs 2,500 suggests a 17 percent discount from the current market price.

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