Nirmal Bang Securities highlights that the business update given by Grasim Industries is a long term positive for the company. Grasim Industries is looking to be the second largest player in the high growing paint industry. The commitment of Rs 5000 cr capex in next 3 year indicates Grasim Aggressiveness to capture the market. The company has a long history of successfully incubating newer businesses.
Reasons for entering paint segment:
Grasim Industries has strong balance sheet which would get further improved with the sale of fertilizers business.VSF is established market leader and almost on completion of major capex cycle hence it is logical to add a high growth and high ROCE business.
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Paints would help in reducing the seasonality and volatility in the business which is present due to price movements in VSF and chemicals. Also, Grasim Industries is looking that due to addition of this high growth business in standalone business, the discount due to “holding company” would reduce
Focus on Rs 40,000 cr decorative paint segment where unorganised have one-fourth market share. Decorative segment has grown at a CAGR of 11% in the last 5 yrs and is likely to grow faster in the coming years.
Grasim Industries is looking to become the second player in the industry though there is considerable time to reach there. Grasim Industries has a significant similar distribution network through “Birla White” and strong brand equity which would expedite the process of conversion from unorganised to organised. White cement is mainly used as Putty and is being sold at hardware stores which are migrated as Paint outlets.
Grasim Industries now would get in discussion with Ultratech to engage the above channel. Grasim Industries will target Pan India market with multi-locational plants and looking to invest Rs 5000 cr capex over next 3 years in initial Phase which would be funded through debt and internal accruals. The project is likely to be value accretive for shareholders as the company is looking for 20%+ IRRs.
Grasim Industries is done with the planning phase and currently entering the execution phase.Grasim is history of incubating businesses. The skills required for selling cement and paints are different hence the new business is planned under Grasim and not under Ultratech.