Assessing the rationale and consequences of new entrants in the paints business

The paints market in India has been witnessing a foray of building materials companies over the past couple of years.

• In May 2022, Grasim Industries announced that it is increasing its investments in the paints business from INR 50 billion to INR 100 billion and will commence operations with a capacity of 1,332 million liters by the end of the financial year 2024.
• JSW Paints plans to double its revenue from the paints business in the financial year 2023 to around INR 20 billion, and expand its production and distribution network. The company is targeting a turnover of INR 60 billion by the financial year 2026 and eyeing to be in the top three positions in the market.
• PVC pipes manufacturer Astral Poly took a 51% stake in Bengaluru-based Gem Paints for around INR 1.9 billion in May 2022.
• Online business-to-business platform Infra.Market acquired a 24% stake in Gurugram-based Shalimar Paints for around INR 2.7 billion in April 2022.
• JK Cement acquired a 60% stake in Rajasthan-based Acro Paints for around INR 1.5 billion in December 2022.

But why so many companies are making an incursion into the paints market simultaneously? The answer lies in the business ecosystem.

• First, there are several tailwinds. The industry trends are favorable on account of the infrastructure investments planned by the government and the housing revival in the real estate sector which are key drivers to propel the demand for paints.
• Secondly, the paints market is itself quite enormous and is consistently growing. The total market is estimated to be around INR 700 billion and has witnessed an annualized growth of 12% over the past five years. The organized players constitute almost 70% of the market. The decorative segment, consisting of various categories such as exterior wall paints, interior wall paints, wood finishes, and enamels, forms around 75% of the organized space while the rest is industrial.
• Third, the paints business enjoys healthy unit economics with high inventory turns and relatively lower capital expenditure, thereby commanding attractive valuations.
• Fourth, the industry is occupied by a handful of organized players including Asian Paints, Berger, Kansai Nerolac, and AkzoNobel. The four companies have around 65% of the overall paint market in India. Given the foreseeable growth in the industry, there may be some room to accommodate new entrants.
• Fifth, the new entrants are majorly established business materials giants. They already have their distribution network set up across the country. They are cognizant of the fact that they can leverage this network to diversify their product portfolio for incremental revenue. They seek to capitalize on the synergies inherent in the paints business.
• Lastly, the building materials companies seem to be creating an entirely exclusive business ecosystem for the customers where they can provide different types of products on the same platform, paints being of them. Grasim and JSW Group are working on developing an online business-to-business platform for directly selling a comprehensive portfolio of building materials including cement, and paints, among others to the customers. This will enable them to create a hybrid, online as well as offline, distribution cum sales network.

The entry of new players will cause a significant shift in the market dynamics. The entry of new players will surely intensify the competition in the market and will eat into the share of the incumbents. The new entrants seem to be targeting (product diversification) those micro-markets where they already have a strong foothold in their existing businesses and may gradually expand to other geographies later.

• One of the new entrants, Grasim, is looking to exploit the segment aggressively. Grasim seems to be targeting the second spot in the market. The capital expenditure of INR 10 billion announced by the firm exceeds the gross fixed assets of Asian Paints by around INR 3 billion. The company plans to set up 6 production sites. It has already issued the engineering contracts for all 6 sites while civil work has commenced at Panipat and Ludhiana. The targeted annual capacity of around 1.3 billion liters is second only to Asian Paints’ capacity of more than 1.7 billion liters, while that of Kansai Nerolac Paints is around 0.6 billion liters.

In response, the industry incumbents such as Asian Paints, Berger Paints, and Kansai Nerolac have announced significant investments to the tune of INR 2 to 10 billion to boost production capacity.

A strong distribution network is key to establishing a sustained competitive advantage in this industry. While the industry incumbents are strengthening their existing distribution network, the new entrants are likely to exploit the synergies in their current business. For instance, Grasim can utilize the 55,000-strong distributor network of its subsidiary, UltraTech, owned by Birla White whose products provide synergies with the paints business as white putty is usually applied before painting.

• JSW Paints has also established a significant presence with 3,500 dealers and shopkeepers over the past three years. They started the paint business with ‘Any Color One Price’, a unique selling proposition that caught the eye of many.

Given the competitive intensity of the industry, even if a company can manage even 1.5% market share, it may be able to achieve about INR 1 billion profit out of the INR 70 billion profit pool available in the industry. However, this may not be an easy feat to achieve if the competition intensifies further.

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