Why did Paint stocks fall today? Asian Paints Being The Biggest Loser

Why did Paint stocks fall today?
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Shares of all major paint companies were under pressure on Wednesday. Asian Paints was the biggest loser, the stock price fell 8%. Let us look at the reasons.

Paints stocks already under stress

  • The paint industry has grown at a good rate in the last decade. The Indian paints industry reported an 11% CAGR over FY2011-FY2019 and stood at Rs 545 billion. 
  • The industry is under stress for over two quarters now.
  • Paint companies have two input components - crude linked and non-crude linked. Crude-linked raw materials contribute nearly 30% of the total raw material cost for paint companies.
  • The crude oil prices have increased nearly 50% in the last two quarters.
  • The paint stocks are under pressure because of high input costs. The rising input cost (crude-linked) is impacting the margins.

Grasim in Paint Industry

  • Grasim had already announced entering the paint business last year. Earlier, it indicated a target CAPEX of Rs 5,000 crore by FY24.
  • Now the company has revised the project cost up to Rs 10,000 crore by FY25.
  • The strategy for entry into the high-end paints business is backed by the company's strong balance sheet which is expected to further strengthen after the sale of its fertilizer business.
  • The company has accelerated the execution of paint capacity of 1.33 billion litres, with the commissioning of plants to start in phases starting the fourth quarter of FY24. 
  • The company has acquired six land parcels and taken possession of five after completing the registration. 
  • So far, Grasim has spent Rs 579 crore in the paints business from the overall CAPEX of Rs 2,537 crore incurred in FY22.
  • Grasim’s large Capex plan in paints is an indication of its commitment to becoming a serious player in the paint industry.

Management's take - Why increase in CAPEX?

Market Dynamics of the decorative paints sector have changed with new capacities being announced backed by strong growth and outlook. Its entry into this consumer-oriented business will further diversify its portfolio, provide scale and growth, and will also offer a wide choice to Indian consumers as the Company plans to introduce the latest as well as a wide range of paint products.

Brokerage update

Jefferies India said in its report that the 1.3-billion-litre capacity expansion outlook for Grasim is meaningful and compares to the 1.7 billion litres capacity for Asian Paints and is much higher versus smaller peers like Berger and Kansai Nerolac. Finer details like Capex constituents, strategy, and pace of ramp-up are missing, which would drive uncertainty in the near term.

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