Asian Paints shares: Asian Paints Ltd shares have extended their decline, dropping over 16% in the year 2023 thus far. The stock received a downgrade from CLSA, indicating potential further downside, particularly following Grasim Industries’ entry into the paint business.
The overseas brokerage firm CLSA, based in Hong Kong, has downgraded the stock to ‘sell’. They emphasize that increasing competition could potentially affect the near-term growth and margins of the paint maker. Grasim Industries recently entered the paint business with its ‘Birla Opus’ brand, further intensifying the competitive landscape. As a result, CLSA has reduced its target price from Rs 3,214 to Rs 2,425.
On Monday, the stock of Asian Paints experienced a significant decline of over 4.5%, dropping to Rs 2850. This resulted in the company’s total market capitalization falling below the 2.75 lakh crore mark. Notably, the stock had closed at Rs 2,984.80 on the preceding Friday and has depreciated by 16% since the beginning of 2024, compared to its levels around Rs 3,400.
According to market analysts, downgrades in ratings were justified given the intensifying competition within the sector. The top paint company in India, Asian Paints, is seeing cautious outlooks from major brokerages due to growing competition, according to Mahesh M. Ojha, Research at Hensex Securities.
“The writing had been there on the walls for a while. Nobody refused to accept the truth that Grasim Industries would upend the market, even though everyone knew it would. We think the paint business will face significant challenges over the next few years. In particular, we expect Asian paint manufacturers to lose some market share, which might negatively impact both their sales and profitability,” he stated.
Grasim Industries, with its core focus on textiles and chemicals, is now diversifying into the paint sector. According to a Reuters report, market analysts believe that this expansion could propel Grasim Industries to become the second-largest paint manufacturer in India by capacity, trailing only behind the industry leader, Asian Paints.
Over the past 2-3 years, the Indian paint industry has experienced a lackluster performance. According to Sonam Srivastava, Founder and Fund Manager at Wright Research, this trend can be attributed to various factors. These include the slowdown in the real estate sector, escalating raw material expenses, heightened competition within the industry, and regulatory shifts affecting demand dynamics.
Sonam Srivastava, Founder and Fund Manager at Wright Research, pointed out that the emergence of Grasim Industries’ Birla Opus, along with its ambitious expansion strategies, poses a significant challenge to existing industry players. She warned that heightened competition might spark market share disputes, exert pressure on earnings, and trigger price conflicts. However, she emphasized that the ultimate impact would hinge on various factors such as Birla Opus’s performance, financial stability, growth prospects, product range, and pricing strategies.
Grasim Industries Ltd introduced its paints business last week, unveiling the ‘Birla Opus’ brand. The company anticipates this venture to yield gross revenues of Rs 10,000 crore ($1.21 billion) within the next three years, aiming to achieve break-even during this period. To support this initiative, the Aditya Birla Group company conducted two fundraising rounds in calendar year 2023.
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Motilal Oswal commented on Grasim, emphasizing the company’s commitment to enhancing customer satisfaction and product quality. They highlighted initiatives such as offering improved incentives to contractors and ensuring faster product delivery, aiming for a turnaround time of within four hours of placing orders at most locations.
“We are maintaining our earnings per share (EPS) estimates for FY 24-26. We reaffirm our ‘buy’ recommendation with a target price of Rs 2,670. Our valuation approach includes applying a 40% discount to the holding in subsidiary companies, valuing the standalone business at 7 times EV/Ebitda, and assessing the paint business at 1 times investments. At present, we are not altering our assumptions for the paint business; we prefer to wait and observe the scalability of its operations.”
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