JK Cement's foray into paints sentimentally negative in near-term: Analysts

That said, if JK Cement is able to achieve its guidance, it could potentially add nearly 5 per cent to its market-cap over the medium term, expects Emkay Global

5 min read Last Updated : Mar 07 2022 | 4:15 PM IST

Amid soaring oil prices and likely intensifying competition in the paint business going ahead, analysts are skeptical about the timing of JK Cement’s foray into the segment.

While some say the entry in this segment at such a lower scale does not make much business sense at the current juncture, others say it won’t be easy for the company to establish itself in the decorative paints segment.

This is because consumers trust in existing brands, and an infrequent purchase cycle makes it difficult for new entrants to gain share in mid-to-premium emulsions that command the bulk of the profit pool.

"Entry into paints may raise capital allocation concerns given the many entry barriers, heightened competition and probability of minor EBITDA loss in the initial years. Hence, JK Cement may see an overall return on capital employed (RoCE)-dilutive impact," said a report by ICICI Securities.

Last week, the company's board approved entry into the paint business through a wholly owned subsidiary. The arm would undertake manufacturing, selling, trading, importing and exporting, and otherwise dealing in all types of paints and allied products and services at an initial capital outlay of Rs 600 crore spread over five years.

The investment is mainly to set up plants at various locations and also likely to include branding and other related expenses. Moreover, the management is targeting commissioning of the plant in the next two years.

Analysts at Emkay Global, however, believe the target looks aggressive given that land acquisition and various regulatory clearances are still pending.

Those at Motilal Oswal Financial Services opine JK Cement's investments in the segment is at a much lower scale than Grasim, which forayed into the business in January 2021 with a capex of Rs 5,000 crore.

Both, Grasim and JK Cement, are manufacturers of White Cement and Wall Putty in India, whose distribution channels overlap with the Paints distribution channel.

"Grasim has already received Environmental Clearance for its factories in Punjab and Haryana and we believe that these will be operational in the next 18 months. Further, hardware stores may face challenges for allocating space for tinting machines to another new entrant in such a short time," pointed out MOFSL.

"The company is aiming to produce various products and targets revenues of Rs 850 crore in the next five years. We believe that the establishment of a management team, the creation of stronger brand equity and investment in tinting machines remain key challenges," concurred Emkay Global.

Analysts believe JK Cement can set up a plant of 0.12-0.15m kl, assuming 15 per cent of the amount committed for working capital and capex/liter of Rs 40.

The company's focus will likely remain on the North and Central markets for the paint business.

That said, analysts say the segment may bear fruit for the company in the medium-term as the company plans to leverage the strong JK White cement / putty brand, over 50,000 distribution network of white cement / putty dealers (large portion of which also sells paints), and longstanding relationship with real estate developers.

"Unlike peers, JK Cement has been able to utilise its white cement / putty EBITDA to fund its grey cement expansion and gain market share. Besides, the company’s white cement/putty business generates a relatively steady-state EBITDA, which provides stability to overall EBITDA despite sharp volatility in the grey cement business. Similarly, the proposed paint business too may provide stability to the company’s overall income in the medium-term," noted ICICI Securities.

Generally, for listed paint companies, every 1 per cent revenue market share amounts to equity valuation of Rs 4,000-5,000 crore. Therefore, in an optimistic scenario, if JK Cement is able to achieve its guidance, it could potentially add nearly 5 per cent to its market-cap over the medium term, expects Emkay Global.

Paint industry's size is worth Rs 60,000 crore with revenue market share of top-3 players currently at 70 per cent.

Phillip Capital added that though it may act as a sentiment dampener for time-being due to valuation multiples, the management is expected to deliver a robust strategy for this business which should help the company make its presence felt here in the longer-term.

On Monday, the shares of JK Cement slipped 12.3 per cent and hit a fresh 52-week low of Rs 2,313 in the intra-day trade. They ended 11 per cent lower at Rs 2,341 per share as against a 2.7 per cent fall in the Sensex index. Analysts have ratings ranging from 'neutral' to 'buy' with a maximum target price of Rs 3,935.