In bear grip! This Nifty50 stock is unlikely to regain lost colour

NEW DELHI: The already-beaten down paints sector faced fresh headwinds after Grasim announced double the spending on its entry in the business. Termed as a 'Jio Moment' for the Indian paint industry by Jefferies, Dalal Street analysts believe the Aditya Birla Group's foray into the industry is expected to disturb the 'oligopolistic structure' of local businesses.

It is expected that Grasim may go for an aggressive strategy (pricing or otherwise). This, Jefferies said, would disturb the market structure which may have a greater impact on smaller players but Asian Paints may also be at risk.

Grasim said it has doubled the capital expenditure for its entry into the paints business to Rs 10,000 crore and could start production from the March quarter of FY24.

A day after the announcement (May 25), industry leader Asian Paints cracked 8 per cent. Since then, the stock has recouped some losses but is down 20 per cent from the 52-week high of Rs 3,588 touched in January. When a stock falls 20 per cent or more from recent highs, it is said to be in bear grip.

"With new players entering the market, the high margins which the existing paint players enjoy will come under pressure and they will lose some market share. They might hold on to their overall volume but they might not be able to grow for the next two-three years. That creates an issue, especially for a stock, which trades at a high premium," said independent market analyst Sandip Sabharwal.

Asian Paints has a market share of over 50 per cent in the decorative paints segment. The stock has always enjoyed premium valuations given its market leadership, pricing power and strong sales network. Even after the recent slide, analysts see little room for upside.

"When a big player like Grasim comes out with this kind of a large capex announcement, they will definitely cause some sort of short term disruption, though it is not so easy for them because Asian Paints has a brand presence and distribution which will take them some time to match," Neeraj Dewan, Director, Quantum Securities told ET NOW.

Asian Paints' valuation, though, is not really cheap, he said, adding that it is not in the value zone. "I would be a little wary of investing into paints or something like Asian Paints right now."

Besides rising competition, growing crude oil prices, and thus crude derivates, have also hit paint stocks. Crude derivatives form 30-40 per cent of raw material costs for large paint companies like Asian Paints. Currently, the oil prices are trading upwards of $120 barrel and any rise in input costs will further eat away margins.

During the quarter, Asian Paints margins declined to 19.4 per cent, compared with 21.0 per cent in the year-ago quarter.

To counter the rising inflationary pressure, the company has taken aggressive price hikes. This, the management said, has impacted the demand in smaller cities to some extent. Some downgrading on products happened in T1, T2 and metro cities as well. Overall, the demand conditions have been very healthy, it claimed.

Brokerage Elara Capital has pared Asian Paints FY24E earnings estimate by 9 per cent but retained FY23 estimates to factor in intensifying competition in the category. It also downgraded the stock to 'Sell' from 'Accumulate' with a pared target of Rs 2,420 from Rs 3,400 earlier, based on revised PE of 50x from 64x.

"Many the companies in the paint segment will not be able to increase prices or might choose not to increase prices as much as they want because of the input cost pressures as they try and maintain their market share. If the stocks from the sector were cheap, we could have argued that concerns have been factored in. But most of these companies like Asian Paints are trading at a 90 price earning ratio. At 90 PE, there is a substantial risk of a downgrade in the valuation," Sabharwal said.

He believes investors might get better entry opportunities but given the valuations and earnings growth outlook, they should stay away from the sector for now. He does not see any returns being made from these stocks at least for the next couple of years.

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)