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Birla Opus starts on a positive note; APNT takes steps to counter

We visited the markets of Ludhiana, Chandigarh, and Panchkula in Punjab recently to understand trends for paints and the acceptance of the Birla Opus brand. This is our first note in the series, and we subsequently will visit the western and southern markets for insights of a regional nature. Our channel checks show Birla Opus has been well received, as it has achieved a 7-10% dealer penetration in Punjab; there is positive feedback with respect to quality and service. Dealers chose to carry Birla Opus as it is part of the reputable Birla Group and better margin offered (refer to our note: Birla Opus offerings to remove pain from paint released on 4 April 2024). While it is too early to determine the impact of Birla Opus on the existing paint companies, we believe competition will intensify as the new entrant starts to advertise. Asian Paints (APNT IN) is likely to respond by bolstering dealer and painter incentives.

Demand environment remains subdued

Market demand for paints remains subdued due to the General Elections, fewer marriage days, and a structural drop in paintable areas in homes over the years. Dealers reported muted demand for paints during April-May, but there was strong demand for waterproofing products ahead of the Monsoon season, with expectations of improved paint demand in June post-elections. APNT's revenue growth for Q1FY25 is likely to be flat to low single-digit, primarily due to muted demand, increased competition, and a high margin base in Q1FY24 (24.2% standalone), leading to a likely EBITDA decline for Q1FY25.

Birla Opus market penetration rising in visited markets

Key takeaways from our visits include: 1) Birla Opus has achieved a market penetration of 7-10% in the visited areas, with all associated dealers equipped with Birla Opus tinting machines. Most dealers primarily sell Asian Paints (APNT) products, accounting for 60-80% of their sales. Birla Opus is actively expanding its sales team, and the Allwood brand has been well-received for its superior quality. At the dealer counters visited, Birla Opus represents 2-4% of sales, with its growth dragging KNPL and AKZO more than APNT sales. We believe work still needs to be done around creating a customer pull.

Our view: retain our negative stance on the sector

The rising share of Birla Opus at its dealer outlets would have a Domino effect on other paints dealers. ANPT has increased in-bill discount in a few markets to address competition from new entrants. We expect it to be rolled out in other markets as Birla Opus gains momentum. APNT could double incentives for painters & contractors and extend warranty on products. We believe while revenue risk for APNT is low in the near term, there is a possibility of margin risk; hence, we retain our negative stance on the sectors.

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