Brokerages remain cautious on Asian Paints despite recent rally in stock

Shares of Asian Paints rose to a two-month high, but brokerages remain cautious amid regulatory scrutiny and growing competition in the premium segment

Shares of the largest Indian paint company, Asian Paints, hit a two-month high of ₹2,464, up 2 per cent on the BSE in Thursday’s intra-day trade amid heavy volumes. The stock price of the paint company has bounced back nearly 5 per cent from Wednesday’s low, shrugging-off the probe by the Competition Commission of India (CCI).

 

The stock, which has outperformed the Nifty50 over the past month, delivering 7.8 per cent returns compared to 3.5 per cent for the benchmark, ended the day a tad higher. 

 

The CCI has ordered its director general (DG) to investigate allegations of misuse of market dominance by market leader Asian Paints in the domestic market.

 

This investigation follows a complaint raised by Grasim Industries, a new entrant into the paint market through Birla Opus Paints, accusing Asian Paints of putting restrictive clauses with its distributors discouraging them from selling products of Birla Paints. CCI has prima facie found that Asian Paints has violated India’s anti-trust laws and has ordered a thorough investigation against the complaint. 

 

On its part, Asian Paints in an exchange filing said the company is currently reviewing the order and will take appropriate legal recourse. The company said it remained committed to fully cooperate with the CCI during the course of the investigation.

 

If the final report suggests that Asian Paints has violated the market practices, they will get penalised and it will have a bad impact on the brand, believes ICICI Securities.

 

CCI will complete the probe in 90 days and submit the report.

 

Asian Paints has a leadership position with 50 per cent plus market share while Birla Opus has gained 7 per cent market share within a short span of two years.

 

Though the final verdict is awaited, CCI preliminary findings indicate wrong doings by Asian Paints, which will not go well with the street, the brokerage firm said in a note.

 

While JM Financial Institutional Securities likes Asian Paints’ brand equity & supply chain strengths, the brokerage points out that over the past two years these moats have been challenged and is visible from the underperformance on sales growth vs peers/industry. 

 

While initial signs of normalisation of competitive activity (likely stabilisation in sales run-rate of Birla Opus) & JSW Paints’ intent to scale up in a sustainable manner are positive, it is too early to call out stabilisation in industry structure.

 

Premium segment, which is a stronghold of Asian Paints, could see increased activity from new players (Birla Opus, increased focus on Dulux by JSW Paints-Akzo) as well as existing incumbents (Berger Paints) who are strengthening their position in urban markets.

 

Hence, while valuations are below long term averages for Asian paints, the industry construct and earnings profile/visibility have also changed. The brokerage firm maintains its cautious view on the sector and would await more concrete signs on revenue recovery before changing its stance on Asian Paints.

 

Despite consolidation, Kotak Securities, too, believes that there would be no let up in the competition for market share.

 

Analysts led by Jaykumar Doshi said, “Even as JSW Paints is a rational competitor, we expect a rise in competitive intensity especially in the premium segment where Asian Paints holds a dominant 65-70 per cent share. This would be driven by Dulux’s strong brand equity, under-penetration (latent potential) and JSW Group’s execution prowess.”

 

The brokerage has retained its cautious view on the decorative paints sector.