The Indian paint industry is headed for a fascinating battle. The undisputed market leader, Asian Paints, is finally getting worthy challengers, who will seek to grab a share of the market cap owned by it. We think it won’t be just any battle, it will be a war on the scale of the Coke-Pepsi fight in the sugared water space, or the Colgate-HUL fight in the synthetic toothpaste space, or the earlier HUL-P&G fight in the shampoo space that we have seen in the earlier decades.
Let’s see what’s at stake (see graphic).
Asian Paints is a behemoth in the Indian paint industry, commanding a market cap of over USD 34B, and around three quarters of the total market cap of the listed paint companies. The Buffett-Graham school of investors love it and B-Schools have case studies on it. Over the years, as it grew in strength and it became the second most valuable paint company in the world – next only to The Sherwin-Williams Company – we wondered when will the attack come? When will this market attract new entrants eager to grab some of the bounty of offer?
In the last couple of years, the challenge has begun to emerge. Four worthy challengers have emerged – JSW, Grasim, Pidilite and Astral. All of these companies have built businesses and brands that are household names in India, consumers trust them, and they have deep pockets.
What can this mean for Asian Paints? The table shows one hypothesis. If you look at the share of cumulative 5-year cash flow from operations within the paint sector (the first five companies in the graphic), Asian Paints has a two-thirds share. While its share of market cap is a tad more than this, in general, the share of sector market cap is close to the share of 5 year CFO.
Now consider what happens if the new entrants are thrown in the mix. Lets assume the new entrants devote 25% of their 5 year CFO to the paint business over the next 5-6 years. Now Asian Paint’s share of total CFO reduces to just over 30%.
What does this mean? If the new entrants mount a serious challenge, as they likely will, Asian Paints’ share of total pain market cap could come down sharply. It may not fall to as low as 31%, but you can try your own math. For ex, try this
- Asian Paints’ share of total paint market cap comes down to 50%
- Total paint market cap grows at 10% CAGR from today’s number
What do you get? We get an extended period of market underperformance. Hope Asian Paints can prove us wrong.