IGI Logo

Ambitious targets for the paint business

Aims for revenue of INR100b and turning profitable in three years

* Grasim Industries (GRASIM) on 22nd Feb’24 inaugurated its paint plants at three locations - Panipat (Haryana), Cheyyar (Tamil Nadu), and Ludhiana (Punjab). Construction at other three plants at Chamarajanagar (Karnataka), Mahad (Maharashtra) and Kharagpur (West Bengal) is in full swing and they will be commissioned in phases in FY25.

* GRASIM has the Paint business under the brand name, “Birla Opus”.

* The company announced its foray into the paint business on 22nd Jan’21 with an initial capital outlay of INR50b. Later in May’22, the management indicated that the capital investments in this business would be INR100b (cumulative capex stood at INR59.96b as of Dec’23) with an aggregate installed capacity of 1.33m kl. This capacity will be further increased by 0.5m kl in the second phase at a much lower cost.

* The company aims to achieve a turnover of INR100b in the next three years and would become profitable at that time. The sales and distribution network is in place to support the launch of Birla Opus and the company plans to cover all towns with a population of over 100k by Jul’24 and 6,000 towns by FY25-end. GRASIM will focus on customer satisfaction, product quality, better incentives to contractors, and faster delivery of products (within four hours of placing orders at most of the locations).

* We largely retain our EPS estimates for FY24-26. Reiterate BUY with a TP of INR2,670 as we value its: 1) holding in subsidiary companies by assigning a discount of 40%; 2) standalone business at 7x EV/EBITDA, and 3) paint business at 1x of investments. We do not change our assumptions for the paint business as of now and would wait for the scalability of operations. We believe that the value of the company’s paint business is not captured in its CMP (Exhibit 12).

Key takeaways from management interaction

* The per capita consumption of paints in India is 3kg vs. the global average of 10kg and 25kg in developed countries. India ranks at the bottom 10% of paint consumption globally; hence, there is a huge potential for growth. The paint business is a strategic extension to the company’s presence in the housing construction segments. GRASIM is adding 40% of industry’s installed capacities.

* The company has launched factories, operations, products, and services in one go on a large scale, which is unprecedented in this business. The company’s paint capacity in its first year of operations will be greater than the combined capacity of the second, third and fourth largest players. All the plants are equipped with state-of-the-art technologies, which will help to achieve zero defects, zero liquid discharge, and unprecedented speed of operations. It has one R&D center with 120 people in Taloja, Mumbai.

* GRASIM highlighted its 5D strategy: Design, Develop, Disrupt, Distribute, and Delight customers by offering differentiated products.

* Design – Birla Opus will offer the widest range in the industry, with 145+ products and 1,200+ SKUs across categories. Its product portfolio is on par with or, in some segments, ahead of the market leader. It will offer 2,300+ tintable color options. Over 300+ painters spanning 11 cities put the company product to test against leading incumbents in each category and over 95% of painters and contractors ranked Birla Opus as #1.

* Develop – GRASIM commissioned greenfield projects within 20 months of receiving regulatory approvals (Cheyyar plant became fully operational in 16 months). All six facilities are best-in-class with full automation, interconnected systems, and automated storage and warehousing. Backward integration will enable it to produce core ingredients in-house, including immersions for waterbased paints and resin for both solvent-based and wood-finished paints.

* Distribution – In mid-Mar’24, Birla Opus will be launched in Punjab, Haryana, and Tamil Nadu. By Jul’24, it will be available in all markets with a population of over 100k, and in the next eight months it will also be available in towns with a population of just 50k. The company has established the 2nd largest network of painters even before the launch, with over 300k painters and contractors registered in just six months. It has already enrolled 5,000 dealers and the targets to reach to 50,000 dealers by Mar’25. GRASIM will provide free tinting machines, which will be digitally linked to the control hub and will be 40% smaller in size compared to existing machines. About 95% of its current dealers will install tinting machines of the company. The focus will also be on improving working capital for dealers. Warehousing network is being bolstered (150+ depots integrated with the latest warehousing systems). GRASIM will also offer preferred financing through financial services arm Aditya Birla Capital.

* Disrupt – It is committed to redefining the paradigm for institutional contractors and painters, who are the backbone of this industry. It has enrolled 300k+ painters and contractors before the launch. It will launch a painter partnership program, ‘Udaan’, to show case work and attract new business and a loyalty program with instant redemption. It will also offer unmatched rewards for all products. Moreover, learning centers are being established as hubs for training painters and educating network partners.

* Delight – It is taking a series of industry-first steps: 1) Company-owned Birla Opus paint studios in 11 major cities and Birla Opus paint galleries across 300 towns; 2) The track-and-trace system (QR based) will enable end-to-end traceability from production to application. Also there will be laser printing on the boxes, which will make them tamper-proof; 3) A consumer assurance program for customer satisfaction. It will offer an additional one-year warranty on most water-based products and first-time product warranty on enamels and woodbased products; 4) Digital experience with AI enhanced tools will help paint selection; 5) Paint craft services; and 6) Value offer: Extra 10% quantity on most water-based paint products during the promotion period.

* Break-up of capacities: 1,080m liters water-based paints; 120m liters distemper; 106m liters solvent-based paints; 14mn liters wood-based paints and 12mn liters of colorants. ? Product ranges: Luxury brand- One; Premium range- Calista; Economic rangeStyle; B2B products- Prime; Allwood for wood product range; and Alldry for water proofing range.

Valuation and view

* The VSF segment’s margin is expected to remain stable, and caustic soda prices appear to be bottoming out. GRASIM will benefit from the capacity expansion of Epoxy, where margins are better than caustic soda. This would help the company improve margins of the chemical segment. The management has successfully completed the rights issue of INR40b with an oversubscription of nearly 2x.

* We largely retain our EPS estimates for FY24-26. Reiterate BUY with a TP of INR2,670 as we value its: 1) holding in subsidiary companies by assigning a discount of 40%; 2) standalone business at 7x EV/EBITDA, and 3) paint business at 1x of investments.

For More Motilal Oswal Securities Ltd Disclaimer http://www.motilaloswal.com/MOSLdisclaimer/disclaimer.html SEBI Registration number is INH000000412