The most though provoking questions are more often than not qualitative, there is limited utility in slicing and dicing numbers beyond a point.
The overall trend I see is that category expansion is happening across the board in stories that operate in the building materials sector. Other examples being -
Cera Sanitary venturing into faucets, tiles in addition to growing the core business
Kajaria ceramics venturing into sanitaryware, bathware and now plywood
HSIL venturing into PVC Pipes
Each of the sub categories within building materials has a large unorganized market, smaller regional players who lack the scale and the brand recall will cede market share to larger players over the next 5-10 years. COVID-19 has accelerated this shift by starving the smaller players of access to capital and by improving the cash flows of the organized players.
In the same vein Asian Paints venturing into waterproofing is a logical move. They already have strong distribution network in hardware stores and this presents a catchment area that can be accessed by sweating existing relationships. Construction chemicals is a large market in India, waterproofing by cursory estimates appears to be a sub USD 1 Bn category as of date but it meets the criteria of Asian Paints - brand strength, distribution network and influencer relationships can lead to a dominant market share. The waterproofing segment also offers a replacement market with a 4-5 year refresh rate, this is right up Asian Paint’s template.
Over a period of time one can expect to see 4-5 strong players with presence across multiple categories in the building materials space. The market sent the valuation of Cera and Kajaria higher the moment the management displayed the willingness and the ability to scale across multiple categories while keeping risk under control. When manufacturing is relatively easy and business success depends more on brand and distribution, sweating existing market reach to tap into new categories is easy.
HSIL did 200 Cr revenue in PVC Pipes within 2 years of launching
JSW Paints crossed 200 Cr within 2 years of launch
Cera captured respectable market share in faucets where Jaquar was the undisputed leader
Kajaria now does 250 Cr per year in sanitaryware + faucets
The niches that we are used to seeing in this segment may disappear over time. As the market started getting more organized, Kajaria (best tiles player) has to now compete with Cera (most efficient sanitaryware player). Competing against Johnson Tiles was easier for Kajaria, similarly competing against HSIL was easier for Cera. Now they go head to head against one another.
The good players in each of these categories will get bigger and keep growing but as they challenge the leaders in other categories the moats may get challenged, testing a few theories that we have been taking for granted all these years. In the process, the pedestalization of some of the businesses by investors will get tested if not shaken. I would spend more time tracking emerging supply and industry structure than obsess over growth rates, ROCE and ROE which are the culmination of business dynamics, never the source of a competitive advantage.
Corporate India is getting hungry, it is not just investors who read case studies about how Amazon has disrupted so many categories in the US.