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We model three scenarios for Grasim as (1) it succeeds and gains market share of20% by FY30 but hurts industry EBITDA margin by 150bps, (2) Moderate successfor Grasim with 10% market share by FY30 and industry EBITDA margin decline by
250bps and (3) Grasim fails to gain market share more than 5% by FY30 but indulges in price war and hurts industry EBITDA margin by 400bps. We note in all these scenarios; the existing players are likely to lose market share as well as report EBITDA CAGR in mid-single digits till FY30. The ‘commodity+’ segments such as putty, primer, distempers, entry level emulsions and enamels are likely to face maximum erosion in profitability. We also note the industry may spend significantly more in brand building efforts (ad-spend + trade spends) as well as R&D without any material improvement in RoI on additional investments. We advise investors to remain underweight in paints stocks. We downgrade Asian Paints, Kansai Nerolac and Indigo Paints to REDUCE (from HOLD), Berger rating stays at REDUCE. Akzo Nobel is the only paint stock in our coverage rated BUY.

* Grasim’s definition of success: Post announcement to enter paints in Jan’21, Grasim plans to rollout six manufacturing units, benefit from group’s distribution network of cement and relationships with real estate developers. It wants to be
second largest decorative paint company in India. While the timeline is not yet announced, we believe it would like to reach 20% market share by FY30 to be no. 2 decorative paint company.

* The likely scenarios: With Grasim ready to launch paints by Q4FY24, we model three likely scenarios as (1) Grasim successfully gains 20% market share and industry EBITDA margin declines 150bps by FY30, (2) Grasim is moderately
successful and gains 10% market share and industry EBITDA margin declines 250bps and (3) Grasim fails to gain market share higher than 5% and goes for price war and industry EBITDA margin declines 400bps.

* Existing paint companies to be negatively impacted in all scenarios: While Grasim’s entry may boost industry growth in near term but it is likely to revert to 10% in medium-long run. Grasim market share gains will likely impact the industry
profitability due to intensive competitive pressures will result in mid-single digit EBITDA CAGR for paint companies till FY30 in all the three scenarios.

* Segments which may bear the brunt: We model the ‘commodity+’ segments such as putty, primer, distempers, basic enamels and economy emulsions to see heightened competitive pressures. However, we believe the pace of the
premiumisation is likely to accelerate.

* Reactive actions by existing players: While the industry reaction will be dependent on aggression by Grasim, we model (1) ad-spend to increase without any material improvement in RoI on additional investments, (2) the trade margins are likely to
increase, (3) the focus on distribution expansion will be higher and (4) the product differentiation will also increase.

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