Grasim’s core business is strong, but success in paints is essential for stocks

Grasim Industries Ltd is venturing into the paint business and has pledged to invest Rs 10,000 Crore for this purpose. The company aims to become number two in paints over a period of time and aims to leverage its white cement distribution network.

Analysts have warned that the paints industry is highly competitive and past experience shows that gaining market share from each other has been a herculean task even for existing companies. In this context, scaling can be a challenge for Grasim.

According to national brokerage Edelweiss Securities Ltd, Grasim’s core business of VSFs and chemicals is firmly entrenched. “Its balance sheet remains strong (net cash of Rs96 crore in Q1FY23) and is also expected to remain firm despite capital spending,” Edelweiss said in an August 29 report.

The report further adds that despite VSF’s recent capacity expansion of around 36%, it is already operating at over 90% utilization. “In Chemicals, caustic soda capacity is on track to increase to >1.5 mtpa in FY24 (1.15 mtpa in FY22) while chlorine consumption in VAP is steadily increasing (32% in the first quarter of FY23 vs. 28% year-on-year),” he said. Mtpa is the abbreviation for million tons per year.

That said, investors in this stock would closely watch its foray into new segments. “While we appreciate Grasim’s efforts to continue to grow, the success of these capital-intensive and highly competitive new ventures is critical to further steer the stock,” the Edelweiss report added.

In this calendar year so far, Grasim Industries stock has gained about 1.5%. This is slightly better than the negative 0.5% returns of the Nifty500 sector index.

Meanwhile, the company is also exposed to the cement sector through its subsidiary UltraTech Cement Ltd. With the entry of the Adani Group, analysts warn that competition is also likely to intensify in this sector.

Adani Group’s aggressive growth plans could hamper the industry’s already weak pricing power. Note that input cost inflation has kept cement inventories on a low base in recent quarters. Even if petroleum coke and coal prices decline, significant improvement in the industry’s operating margin is only likely after Q3FY23.

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