"Paints, a low-involvement category till recently, is suddenly a top draw for many large corporate houses, and has evolved well beyond wall paints to branded home solutions. As category leader Asian Paints and JSW battled it out, what’s making the sector so hot? Host Ratna Bhushan talks to A S Sundaresan, Joint MD & CEO at JSW Paints, and Manoj Menon, Head of Research & Consumer Analyst (Staples & Discretionary) at ICICI Securities.

Credits: Asian Paints, Nerolac, JSW Paints

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ICICI Securities Limited is a SEBI registered Research Analyst having registration no. INH000000990. It is confirmed that the Research Analyst or his relatives or I-Sec do not have actual/beneficial ownership of 1% or more securities of the subject company, at the end of 28/09/2022 or have no other financial interest and do not have any material conflict of interest. I-Sec or its associates might have received any compensation towards merchant banking/ broking services from the subject companies mentioned as clients in preceding 12 months."

This is an audio transcript of The Morning Brief podcast episode: Paint Wars: A New Coat of Competition

BG Sound 0:01
This is the morning brief from the economic times

BG Sound 0:10
asian paints har ghar kuch kehta hai

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kitni bhi dhool aaye ghar pe nah tikh paye

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Berger weather coat anti dust paint

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Zero matlab Nerolac hero

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ghar banane ka sapna tho sabka hai aur iss sapne ko apne hi rang mein sajane ke liye JSW hai nah? Aapka saathi

Ratna Bhushan 0:22
it's that time of the year when these taglines are on everyone's minds. It's the festive season and yes, we're talking about paints. Only this time around a lot is playing out behind that mera wala blue wall. It's a fresh coat of competition and industry veteran, but a relatively new entrants to the sector. Jsw is taking on category leader Asian paints in the Competition Commission. JSW is alleging that Asian Paints is flexing its muscle by arm twisting dealers, stalling incentives, and even delaying supplies. But many would argue it's a fair incumbent versus challenger market game, which plays out across all high competing categories. One thing is for sure, neither is giving up without a good fight. We get you the insider's take on the fight, as the paint plot thickens,

A S Sundaresan 1:31
where we said we do not agree is that Asian Paints has not abused its dominance, which is where we said like you know, we do not agree with that.

Ratna Bhushan 1:41
But is it a winner takes it all situation? Or is there room for more? Stay tuned for a ringside view from a market veteran?

Manoj Menon 1:48
I think there's already a problem of plenty from a competition point of view. I really don't think any of the incumbents are expecting hoping praying that any more are welcome.

Ratna Bhushan 1:58
We get you the people right in the midst of this red hot story. A S Sundaresan, Joint MD & Chief Executive at JSW Paints and Manoj Menon, Head of Research & Consumer Analyst at ICICI securities on what's making this category, so high stakes. It's Friday, September 30. I'm Ratna Bhushan from the economic times and youre listening to Paint Wars: A New Coat of Competition on the morning brief. Mr. Sundaresan, the paint sector has been making a lot of news of late. We've been following this story closely. And we decided to get all points of view on this podcast to begin with. Your company has alleged that Asian Paints uses its dominant position to block rivals by targeting dealers, some pretty strong allegations there. Can you give us the fine print on how this has played out?

Mr A S Sundaresan 2:54
I guess this is festive time. And it's the time of the year where paints come into spotlight. So that could also be one reason why you're hearing more about paints. Of course, the point which you brought about, of us having alleged of competitive action is also something which has attracted spotlight more because of the recent order, which the Competition Commission has posted. Now, this is not new. This is something which has been playing out for about three years now because we faced it when we launched in 2019. That is when as a new fledgling company, JSW paints. And more than that, you know, all those who decided to partner with us face the heat of action. That is what we took up in 2019 itself and complained to the Competition Commission that of course, we were the first to do it in the paint industry. And when we complained also, we noted that this has been happening before as well with other companies in the past, who had chosen not to complain for their own reasons. But we had complained and which is what the commission had taken into cognizance. And over the last three years, a lot has transpired. The CCA auditor has been out, which is probably what you have picked

Ratna Bhushan 4:11
a very interesting point you've raised Mr. Sundaresan, that, you know, this has been happening to other companies as well. So I want to ask you how high stakes is this face off? And you did mention that it is festive time and then there's peak wedding season, which is when you know everyone paints their homes. So How crucial is the timing on all this?

A S Sundaresan 4:34
You know, there is certain activity in the market linked to this, but this particular issue is not so much linked to a season like Diwali or something so that it's not so much as as much of a timing issue. It's more about how the market is free for people in the trade to choose who they want to deal with and who they want to partner with. It's more fundamental issue like that. At what is being raised by us, which is what we have complained about, it is not got so much to do with the seasonality.

Ratna Bhushan 5:08
On that note, I want to ask you JSW paints has made its stand clear, your company does not agree with the CCIs orders that Asian paint did not abuse its dominant position. You said in recent interviews that you will take and I quote, appropriate steps, what are the steps,

A S Sundaresan 5:26
we had appealed against a whole set of things. One, of course, is to say that Asian Paints indeed is a dominant player, and the CCI confirmed that it is a dominant player. you know there were points that the big dealers have enough countervailing buying power to counter the dominant player like Asian paints, but the CCI ruled that that's not the case the dealers are at the mercy of Asian Paints. So it's not these are all things which we had complained about which the CCI concurred with our observations. So, where we said we do not agree is that Asian Paints has not abused its dominance, which is where we say like you know, we do not agree with that view of the Commission as per law, there are steps available to go and take this further in terms of appealing in terms of other forums available in the law, currently, we are studying the order in detail, we are consulting with our legal advisors as to what the next steps will be. So, I do not have exactly what the next steps will be right now. But you know, that is under study and we will take whatever is possible in the law to get remedy for this particular part, which has not gone as per what we complained about

Ratna Bhushan 6:46
significant point here Mr Sundersan the company is exploring the legal route also. So is NCLAT Also an option because I was reading somewhere that you know, this is being speculated

A S Sundaresan 6:58
that is a option. And I think in recent times, that's what has been articulated, saying that when there are orders to be appealed against NCLAT Is a body, to which one can go further appeal, that's an option.

Ratna Bhushan 7:13
No I just want to take you to the macro picture. You know, you said at the beginning that you've been in the sector for about three years, how do you plan to break into a market that is so intensely competitive

A S Sundaresan 7:25
for any new business for any new startup that is always the biggest challenge. It's also the biggest opportunity, we believe, yes, paint market is mature and competitive. In the last three years, we have made a lot of efforts, right from committing ourselves to creating new paint company of the future, in terms of looking at what we can bring in terms of freshness to what a paint company can do in the space. There are a whole lot of things which we are doing very different. Maybe that's one of the things which has caught the attention of competition as well to single us out.

A S Sundaresan 7:28
Okay, I must ask you this question. Now it picked my interest, you said we're doing things different. Can you just give our listeners some insight into what you're doing differently?

A S Sundaresan 8:08
It's a very long list. We're the first company for instance, we are offering an entire range of water based products for every surface at home, we have offered them with best in terms of globally available technology in terms of them being very environmentally friendly, friendly. And we are bringing in a lot of transparency into you know what paints are and how they can be bought in a very compact range very easy to understand range for the consumer to go about making an knowledgeable decision. You said earlier that it's a low involvement category, we believe the low involvement is because it's so difficult for the consumer to understand. So we've tried to do a lot of simplification there we call our range as a simple swift sure range and then India is a very colorful country and color is one of the things which consumers very keenly look at. We are the only company which thought of giving all colors at the same price something which is very, very important in something which is very close to consumers. These are some of things which I would tend to believe that they are pathbreaking. And from our experience over the last three years, the consumers and our stakeholders in the market, the trade partners, everybody really sees these as you know absolute fresh bread being blown into the industry.

Ratna Bhushan 9:37
I just want to take you back to the CCI issue for a moment. Industry watchers say that these are business practices which are commonplace across industries, where you know, Challenger brands do face pushback, this happens frequently. So where do you see this going forward? And where do you see a resolution because like you said, this issue is is not new. For three years it's been happening and the latest CCI order is also in favor of the other company.

A S Sundaresan 10:07
We believe that in a market like India, which is not just developing it is very fastly moving, there has to be free and fair environment for businesses to thrive. And for consumers to get choice. I think companies can try in their own ways and means to be competitive, but if that competition is going to affect the freedom of choice for consumers and for trade, I think then that is not okay. And that I don't think is it will be acceptable for most companies, including the established companies. I mean, that's that's what we're fighting for.

Ratna Bhushan 10:48
All right, compelling statements there, Mr. Sundaresan finally, I want to ask you this festive season comes after two years of the pandemic where there is a lot of pent up demand which is kicking in. So what is your macro expectation for the paint sector in terms of growth,

A S Sundaresan 11:04
so far as the festive season is concerned the last couple of years also, the markets opened out around the festive season. What I meant was like things like lockdown limiting kinds of factors were not there during the season, but this is probably the first year where right from the beginning of the fiscal year everything has been normal. We believe stability should help the season be good though this time the Diwali is a bit early. When the Diwali is a bit early. There is a certain bit of you know distribution of the demand. Some people do it before Diwali some people do it just after Diwali. But we expect the season to be good. There should be more positivity around that. And that's what we are seeing with various festivities which are now taking place across the country. We saw how the Ganpati season went in. In the West we will soon see how the Dashera and other festivities open up so we believe that you know the mood is going to be very positive, festive season should be good and everybody is clearly hoping and looking forward to a very robust season. Rains also have been a bit extended but I think they are clearing up which should also augur well for the season to be good.

Ratna Bhushan 12:20
Coincidentally, Mr. Sundaresan was with Asian paints for a good 20 years, and now is in a faceoff with the very same company. We reached out to Asian paints, but they declined to comment. My colleague Neha Chaliyawala, wrote in a report in the economic times that the CCI has given a clean treat to Asian paints, which leads the decorative paints business clearing it of allegations related to anti competitive trade practices. Now that you've heard from the companies, let's get a ringside view from the markets. I have with me Manoj Menon, Head of Research at ICICI securities, Manoj has been extensively tracking the consumer goods sector for well over a decade. He's also rated as India's leading consumer analyst in the institutional investor Asia money survey over the last 10 years. Manoj, How are the competitive dynamics of the paint sector playing out it's not just JSW versus Asian paints, right, but a lot more at stake.

Manoj Menon 13:22
Look, Paints as in discretionary consumption segment is going through an interesting juncture or a phase at this point, Historically, it's been assumed that paints is a high entry barrier business or for a multiple set of reasons. Point number one being not the last mile access to the consumer which is true the retail trade which is still in a desegregated fashion in India. Point number two, the power of brands point number three, the necessity for having significant influence for the brands with the influencers, which is essentially the painters and contractors etc. Having said that, if you actually take a step back and look at the last five, seven years, you've actually seen that there has been attempts made by Nippon paints, there has been successful attempts by Indigo paints. And after that there is a JSW and many more in the pipeline, including some of the names you mentioned, which is grasim astral has got aspirations, right. So I think it's an industry pays an opportunity for a lot of aspirants to say that okay, while it is assumed to be a high entry barrier, but I think it is not as high as it is perceived to be. So that's point number one. Point number two, what we have seen over a long period of time is that given that the penetration and consumption levels of paints is low in India, which is not very dissimilar to many other discretionary consumption, the opportunity exists there as well. But this is one industry where you actually had only a bunch of players which is Asian paints, Berger, Kansai Nerolac, Akzonobel maybe the top four players actually have gone for the bulk of the market share 80 to 90%. So to that extent, there has been an opportunity which has been proven by an indigo paints for example, as a case study which would have in my opinion, give them excitement for many new entrants to come

Ratna Bhushan 15:03
But Tell me a lot of these large players seem to be extending the cement category into paints, a lot of large corporate houses seem to be following this route. So is this a sustainable model? And are companies trying to leverage using the same distribution channels?

Manoj Menon 15:20
The answer is actually yes or no, it's very interesting that India is possibly the only market in the world where actually consumer analysts actually look at paints, whether it go by the MSCI, the Morgan Stanley for industry, classification, etc. Paints is largely considered as a building material product everywhere in the world, actually, India is only where as I said, it is considered as a consumption category. The context is globally, many of the companies sell multiple things and not just paint. So if you come to India, specifically, it's important to appreciate that while there is a channel which sells paints, but they also sell, for example, something called putty which is nothing but white cement plus, you know something which essentially is an integral element which has to be used as an undercoat before you actually apply a paint. Now, over the years, the cement companies, you know, has been dominant in let's say, a putty product. But at the same time, the paint companies saw that there is an assortment selling opportunity, which essentially means that if a consumer is buying paints, he anyway needs some party, he also needs a primer, he needs in fact, a brush. So from a paint company point of view, it is actually an opportunity to ensure that can I increase the basket size from the consumer? So if you ask me, it is an absolutely correct thing from many of the paint companies point of view to actually extend or stretch the brand, you know, from paints to multiple other segments. So I wouldn't really take this as a paint versus cement company sort of an opportunity where yes, a paint company attempting to sell multiple other things is very much feasible. And it is very much demonstrated, and why limit only two putty. For example, some of the paint companies have diversified into waterproofing, which used to be perceived as a problem solution product to now creating a completely new segment to say that, you know, when you do a repainting, or when you do a painting, why did you actually use a waterproofing also, similarly, if there is a company, which is dominant in the putty segment it is not that difficult for them to attempt to actually extend the brand into paints. Also, I'm not saying that the opportunity is there for every company to extend the brand from category X to category Y. But having said that, you know, there is an opportunity for some of the players who may have the brand equity to do that. And I do believe that grasim definitely falls into that particular case study. Now, it's all about execution.

Ratna Bhushan 17:31
Okay, you talked about creating new categories, creating new consumption opportunities. So in that sense, there's a clear transition happening from what was a low involvement category into one that's turning into brand play, right? So Manoj, tell me companies aren't just selling paints anymore, like you said, but turning into holistic solution providers, how do you see the space evolving further?

Manoj Menon 17:56
So two points there, let's say out of 100 units of paints, which are sold in India 50% is where the consumer chooses which brand he requires another 50% is influencer or painter driven now this number could be 60 - 40 or 55 - 45. But broadly, what industry experts believe is that it's 50 - 50. So it is incorrect to say that it's an unbranded segment. Yes, it is less branded than many other consumption categories. Now, if you look at influencer driven, let's say revenue generation for paints, it is important to appreciate that it is actually an opportunity for many of the newer entrants influencing could be monitoring, which is higher incentives. Influencing could be actually educating the influencer, saying that my product is different. Or it could well be a case of lower prices also right there are multiple ways to influence the influencer. As long as the companies are able to do all of these or some of these, there's no reason to believe that there should not see significant success. Now coming to the other side of it, where in a typical consumer paint purchase cycle, he or she typically walks into the paint store and say, Look, I need an XYZ brand. Typically, in a paint outlet, the paint dealer will be keeping at least two, if not more number of brands, depending on the incentivization provided by the paint companies to the dealer, the dealer typically kind of converts the choice of the consumer from, let's say, brand A to brand B, that's exactly the market share game, provided you have the ability to do this incentivization because there is a cost to it. Point number two, the willingness, it's always about the ability versus willingness

Ratna Bhushan 19:27
Manoj, like you said, the market game hinges a lot on incentivization. And the crucial role dealers and distributors play right. at this point, I'd like to draw your attention to the Asian Paints issue. They've been allegations that they sort of flexing their muscle in the market. I even read a headline recently which said, is Asian paints a bully? What's your take? What are you picking up from the market?

Manoj Menon 19:51
Look, I think it's like this. In any industry, you know, or either in most industries, there will be a market leader. In some industries. There will be A dominant market leader now that dominance may come from multiple sources, it could be a product differentiation, process differentiation, or it could be a regulatory requirement. For example, take the case of liquor industry, right? I mean, so it's a very difficult industry to enter. And it's even more difficult industry to ramp up because there are challenges in terms of route to market and access etc, right. So the dominance may come from multiple sources of advantage. Now, Asian Paints has been a market leader for 30 years, so they have earned the leadership through right strategies and execution over a long period of time. So that's point number one. Point number two, any market leader typically will exercise some part of the leadership to further lead leadership, which essentially mean to say that if you have 50% market share, of course, you want to increase your share from 50 to 51, and 51 to 52, right? It's all about incremental outperformance even for the market leader. So that's how I see this thing, and to call somebody a bully, etc. At least I don't have any evidence to kind of, you know, subscribe to those sort of statements.

Ratna Bhushan 20:59
Okay. The point is that these are typical market practices, right? When there's a strong incumbent, they typically try to block a new challenger brand. So it's nothing new, right? I mean, this happens across different categories, whether it's cement, or whether it's, you know, soaps or detergents or even offerings.

Manoj Menon 21:18
Absolutely correct. That's exactly the way it is. Look, you know, to give you an example, from fast moving consumer goods, or consumer staples, for example, if brand A knows that brand B is going to launch a new variant, or brand C is going to enter the market, it is very normal for brand A to actually give a higher incentive to ensure that the trade buys, let's say more of my product, which is brand A, just to ensure that, you know, there is enough shelf space, let's say when brand B or brand C comes to the market, just as a normal practice, trying to protect your turf is normal, which any leader will do. In fact, I went one step ahead, to actually say that it's not just protection, which is in some way defensive, there are market leaders who are aggressive and Asian Paints happens to be one

Ratna Bhushan 22:01
Manoj, what is your current call on different paint stocks.

Manoj Menon 22:05
So we have a neutral to negative stance on paints over the last almost a year. Now, this is a downgrade we're done exactly a year back actually in October of 2021. Now for multiple reasons, competitive intensity being one of them. So just to start with competitive you know, likely intensity increases etc. So going by what we know in the last five, seven years, the new players which is JSW, which is Indigo, paints, etc, or even a Nippon has actually demonstrated that collectively, they have about 5% sort of market share in decorative paints, which in my opinion is underappreciated by the market today market talks about grasim, but it's important appreciate that a bunch of existing players is already taken away market shares from the current set of paint players in that context, you have a grasim wanting to come in with significant capacity announcements, which some estimates suggest that it is half of what Asian Paints has got today or even higher. And then you also have an astral which has got a very good distribution on the ground wanting to ramp up their presence in paints through an inorganic route by acquiring gem paints. So the context here is its a good industry in the real long term, which is five to 10 years, but we do believe that there is a significant redrawing of the landscape. Let me explain that part. So if you look at the current landscape, you know, Asian paints and decoratives would be around let's say 60% market share. Now, there is a likelihood that you actually have another player which is grasim, which comes from a large industrial group actually likely to be a worthy competitor, there is no going back because the stakes are very high for any new entrant including grasim and astral you know, which is also as I said, you know, entered this segment, it's a very credible player you know people talk more about grasim but astral is also very credible player so when I consider all this industry which is growing well, the likelihood of Industry Growth acceleration is low to accommodate new players, which means there will be redrawing of market rates, which essentially means we are neutral to negative in on Asian Paints. AkzoNobel is the only stock within the paint coverage. We actually have a marginal positive view with an add rating. That's essentially because we do believe it's a turnaround story, but we are fully cognizant that the headwind for industry, multiples akzo is also exposed to but at the same time, it trades so cheap that we do believe that there is a likely relative outperformance opportunity in an akzo or a kansai nerolac which has got a higher industry auto

Ratna Bhushan 24:27
that gives me a lot to think about Manoj, my final question to you is, while we can expect a lot of free drawing of market share among existing players, are there any new ones planning to enter the market?

Manoj Menon 24:40
Im not aware of that? Look, I think my conversations with all paint companies and we at ICICI securities cover all five listed large paint companies. Look I think there's already a problem of plenty from a competition point of view. I really don't think you know any of the incumbents are expecting hoping praying you know that Any more are welcome.

Ratna Bhushan 25:01
Welcome may not be the buzzword in the paint sector, and it's definitely not healthy competition. The final word on the Asian Paints versus JSW, matter seems to be some time away with the possibility of more judicial tangles. But despite increasing layers of competition, the gray band suggests that more big boys are waiting to join this messy paint party. I'm Ratna Bhushan, and you've been listening to paint wars a new coat of competition on the morning brief.

Ratna Bhushan 25:34
This episode was produced by Vinay Joshi, sound design, Rajas Naik, executive producers Anupriya Bahadur and Arijit Barman. Do listen, like and share this episode. The morning brief is now streaming on Amazon music and ghana.com Apart from Spotify, Apple and Google podcasts, and of course, ET's very own audio platform Et play. The morning brief is every Tuesday, Thursday and Friday. Thank you for listening and have a nice day ahead. All external sound clips used in this episode belong to the respective owners. All credits and disclaimers in the description.

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