Advertising and sales promotion
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Potential strong competitor in the long run.
Disc: not invested in any paint companies at this time
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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.
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Indeed. Last 10 months of COVID has changed the way corporates are looking at themselves and also at business. If a paints company can transform to a sanitizer company, an FMCG can become a BPO for coordinating with retailers etc, a skeptical competitor can become a pure enabler - many ecommerce companies/aggregators, privacy/security skepticism turn to a rush for Digital/Cloud, many factories turned to healthcare related manufacturing …and examples go on… if such companies can do what they have done in last 10 months - they have realized they can do anything and need not wait to do that but can do that now. I think we would see many more such large forays in times to come from leaders. They have understood how nimble they can be despite their size and now know exactly where to get that extra growth from and how.
Big would become Bigger, Large would get Larger. This is not exactly a bad news for the smart Small as probably they would be left alone in the battle of the Bigs and would silently keep growing at envious pace.
Idea is to stick to an ethical, smart management with proven execution capabilities and limited liabilities - Small, Big, Large - All now know where & how to get that extra growth.
Thoughts Welcome!
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This is big news. The Rs5000cr capex is sizable compared to the existing gross block of large incumbents. The catch here is that building a brand and distribution moats in the paints business always had more to it than just providing copious amounts of capital (initially). So its naive to assume that they will make much out of this foray in 5 years time.
What this does tell you as that outsiders view the paints industry as earning above normal profits and thus extremely attractive to attempt to enter. Perhaps, margins currently are so good, that are encouraging new entrants to come in. The question here is to ask if the long term margin trajectory for the large incumbents is sustainable. At some point, the large incumbents might have to let go off some margins to deter new entrants.
This ofcourse takes the sheen off smaller players like Indigo. Large groups which enter paints with such large capex plans might ultimately fail but not before they run amok with the pricing discipline to make initial market share gains. This will hurt the smaller players and brands much more than large incumbents.
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Agree. And would just add to the discussion here with a marketing viewpoint as well.
How is a decision on a new product launch taken?
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Market size : Asian paints would possibly anticipate a much larger market in Pidilite adjacencies, with a rare brand of similar strength
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Synergy in distribution : Products that can be sold into the the same dealer network/serviced by a similar task force. The Indigo paints product range is a better bet, but pidilite products could be across a vast distribution universe tapping a part of which could still be more viable? Or maybe not, that’s a business/data call.
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The advantages of a wider basket : Counters seasonality to a certain extent. Gives a different medium of initiating first purchase to the consumer and then to enable cross selling into other bouquet of products.
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Profitability : Obviously, potential profit pool from higher margin products is more lucrative
Overall, the opportunities are large and I think the Asian paints strategy is fantastic. And I would not be surprised at all to see them enter newer Indigo paints areas in the course of time as well.
Paint sector might become a commodity space in few years down the line as this space is getting crowded day by day. How the incumbents respond to the new entrants is a thing to watch.
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This price if sustains implies market capitalization of 10,000 Crores, slightly greater than 4th biggest player AlzoNobel.
Market Cap now almost at 15k Crores with the stock 20% limit up after listing at 75% premium over issue price.
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Well, it may be far fetched to call Indigo Paints listing as GameStop like phenomenon, the price action of Indigo Paints after listing today (20% UC) may be due to the short covering if anything to go by the twitter account @gk2524 is true. This in a way resembles GameStop saga as most analysts were of the view that the Indigo IPO is extremely over-valued and they might have created short positions accordingly but the share price has gone the other way!
Thanks!
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Sequoia posted this on their website after the successful listing of Indigo Paints. They were the first external investor of Indigo Paints.
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Given the size of the company, it is very hard to believe now Market cap of Indigo is higher than Akzo Nobel.
Discl: Not invested.
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White Oak Capital Management Consultants LLP acquires 24,18,982 shares through open market transactions yesterday which is equivalent to 5.09% of the company’s issued shares, as disclosed to the stock exchanges.
Thanks!
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The price action for IPOs at this point in time is something that we should not even try to explain. It is driven by pure liquidity. The fundamentals of this company is definitely solid but clearly the multiples assume a clear runway of growth - and predicting the long term runway for a company with limited history is more likely to be wrong than right.
Disclosure: Invested in IPO but exited fully.
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Indigo Paints brokers and analyst meet
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Indigo paints Q4 Results:
Investor presentation:
Q4 had revenue growth but decline in EPS/profit. Yet to go through investor presentation to understand results well.
Disc: No investments, tracking
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A bit disappointed with the results for the kind of valuations it commands now.
The only positive factor is, co has become debt free as of 31st Mar.
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Company has become debt free from IPO money.
Few notes from Concall
a. Kerala’s share in Revenue was 50% in 2016 not it has come to 30%
b. Kerala did not grew as expected and because of this the numbers look tepid
c. There is no clear answer why Kerala did not grew. Mr. Hemant Jalan pointed that it may happen that few states will not perform at some time and it is applicable to all paint players
d. Dependence on Kerala will not be there as revenue share increases from other states
e. Dealer count increased from 11200 to 13200 addition of 2000 in FY21
f. Tinting machines increased from 4300 to 5500 addition of 1200 in FY21
g. Focus on differentiated products will be there and strategy will remain in place to gather market share using differentiated paints
h. Cost of raw material is lowest for Indigo as there plants are based closed to the raw material manufacturing areas
i. Advertising spend will remain high considering requirement of more brand awareness but share of the Ad spend compared to revenue will come down as revenues increase kicking in operating leverage
Q4FY21 Conference call link
Disc: Not invested…Tracking closely
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