Omkar Kamat Sambary who runs a renovation company in Goa is used to buying paint from retailers. With long-standing relationships, he’s served quickly (usually on the same day) and at prices that make his business viable. But over the last year, competition among the companies he buys from has increased manifold. It’s almost as if time is running out for them. “Paint companies are rushing to instal tinting machines and gyroshakers," he says. These paint-making apparatus that are kept in dealer stores are the key to getting increased sales. While he’s not clear why there’s an urgency, he sees the old guard—Asian Paints, Berger Paints, Kansai Nerolac—moving aggressively to expand their footprint. They’ve got hot competition from the new crop—Indigo Paints and JSW Paints. “I myself have been offered a tinting machine and gyroshaker for free from Berger Paints, Indigo Paints and JSW Paints," Sambary adds, pointing to the fact that the industry hasn’t changed so rapidly in the 15 years he’s been in the business. Paint, for as long as analysts who track it can remember, has been at best a three-player industry in India. The top three—Asian Paints, Berger and Kansai Nerolac—account for about 80 percent of the business. They’ve grown steadily at rates that are 1.5 times GDP growth. Unlike other businesses like cement and steel, which are cyclical, the decorative paint business grew steadily in a decade where the industry saw a real estate down cycle. Demand from home renovations kept the business ticking. Over the last decade, the top two—Asian and Berger—have each seen sales expand by 12 percent a year, and profit at 12 and 17 percent respectively. Their market cap has moved up from a combined Rs43,000 crore to Rs432,000 crore or 25.9 percent a year.
These are decadal growth rates that match or beat even their famed consumer goods rivals like Hindustan Unilever and Marico, and have come about with no cash burn and efficient use of capital. Return on equity for the top two Indian paint companies is upwards of 20 percent. Over the last five years, Asian Paints—with a gross block of Rs5,000 crore—has generated Rs4,500 crore in free cash flow every year. The industry also comes with a Rs7,000 crore profit pool that’s worth fighting for. An analyst tracking the industry points out on condition of anonymity that, “It’s a wonder this (increased competition) didn’t happen earlier given that the business has a 20-30 year runway." The last time this happened was in telecom, which had a similar profit pool to fight for. That business has consolidated and become a two-horse race. Paints, he says, is likely to see many more efficient companies as the industry has taken notice of the performance of new entrants, Indigo Paints and JSW Paints. “Even if one gets 5 percent profit share, that’s still Rs350 crore," he explains. Over the past 24 months, while industry participants had been gradually watching the rise of newer rivals, it was Grasim’s announcement on May 24 that got everyone to sit up and take notice. In an earnings call, the company announced that it was doubling its proposed investment in the paints business to Rs10,000 crore. The company expects to launch in under two years by the fourth quarter of FY24 with a capacity 1,332 million litres per annum. The announcement set the cat among the pigeons with brokerage Jefferies dubbing it a ‘Jio moment in paints’. Rivals moved to rework their strategies, Asian and Berger Paints saw a combined 40,000 crore erosion in their market cap and observers scratched their heads as to why Grasim is adopting what seems like a capital-intensive route to get into the business? (The conventional wisdom is that the business has to be built gradually from the ground up.) While the answers will take time to become apparent, the last three years offer some clues on where the industry is headed. They also point to the different strategies companies are likely to adopt in getting a slice of the market.
Expanding footprint
Halfway through the last decade, market leader Asian Paints began exploring ways to increase revenue from outside the paints business. There was the launch of the kitchens business with Asian Paints Sleek, a home painting service, and range of products like polish.
At the same time, the company noticed that the waterproofing business was a significant whitespace the company hadn’t tapped. Here the market leader was Pidilite with its Dr Fixit product, which was mixed in cement during construction. Unlike paints, which is low on technology, this was a technologically advanced product that had a leading market share. Asian Paints also launched a waterproofing business with ‘damp proof’ products. While this gave the company inroads into cement dealerships, Asian was soon to launch a product, putty, that would take it head-to-head with the largest cement company Ultratech. This is the first most basic layer of paint applied on walls and Birla White’s putty is by far the market leader in this business. Ultratech doesn’t break out numbers for Birla White, but a company blog says the product had a growth rate of 14 percent compared to 11 percent for the industry. Over the last three years, dealers estimate that Asian Paints’ putty would have a 20 percent share of the organised market. Asian Paints did not respond to a request for comment. Unlike cement, which is sold through a distributor network, the paint industry in India operates on a direct-to-dealer distribution model. Asian Paints’ formidable distribution network means that dealers have to wait no more than four hours from the time they order the paint to getting it delivered in their stores. Some dealers are supplied with the paint directly, while others are supplied with the base. Once the shade is selected, the base is added to the tinting machine and then shaken in a gyroshaker to get the exact colour. It is a business that is low on investment and high on asset turns. The inroads made into cement dealers meant Asian Paints was able to persuade them to offer paint as well. All they had to do was keep shade cards to show customers and the product would be available in a few hours. It was a successful pitch and in the seven quarters since April 2020, their dealer network has risen by 61 percent to 145,000 dealers.
