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Birla Opus, despite being a new entrant, has already garnered a 2–3 per cent market share.
The paint sector is seeing heightened competition with the entry of deep-pocketed groups like Aditya Birla and JSW.
However, some brokerages see an opportunity in select stocks.
Nuvama Institutional Equities, for instance, is betting on Berger Paints and Indigo Paints.
The domestic brokerage is turning its attention to smaller players in the paint industry, signalling a shift in preference from industry giant Asian Paints to Berger and Indigo.
The brokerage sees brighter prospects for these emerging contenders in the second half of 2024-25 (FY25), citing several headwinds for Asian Paints that could limit its growth.
Analysts Abneesh Roy and Jainam Gosar of Nuvama point to Asian Paints’ higher exposure to big cities as a key factor.
They said urban centres have been grappling with challenges like soaring food inflation, escalating housing rentals, sluggish wage growth, and rising interest payments — factors that have weighed heavily on demand.
Moreover, Asian Paints faces the dual challenges of a high base effect and the pressures of being a pan-Indian player.
This broad reach makes Asian Paints more vulnerable to new competition, such as the recent entry of Birla Opus into metropolitan markets.
Interestingly, these challenges have not affected Berger and Indigo as much.
Their relatively smaller scale and regional focus, analysts believe, have shielded them from the immediate brunt of competition in larger urban centres.
This resilience has made them Nuvama’s top picks in the paint sector, with both stocks receiving a ‘buy’ rating.
According to Bloomberg data, while only a fourth of analysts are bullish on Asian Paints and Berger, brokerages see more upside (12.3 per cent) in the latter.
Decorative and industrial paint maker Kansai Nerolac, however, tops the return expectation list with a 14.7 per cent upside, followed by AkzoNobel India with a 13.8 per cent upside potential over the next year.
The Nuvama note also highlights a broader preference for Pidilite Industries over any paint company.
For Nuvama, the adhesives and construction chemical leader remains the top choice, standing out in an otherwise competitive landscape.
However, Bloomberg data suggests that while there are more bullish calls on Pidilite, the upside potential is just 5.5 per cent.
So, why are Berger and Indigo gaining ground on Asian Paints?
Urban slowdown hits big players harder
Big cities, long considered growth hubs for the paint sector, are now facing major economic headwinds, analysts at Nuvama said.
High food inflation, rising housing rentals, low wage growth, and steep interest payments have dented demand.
The trend isn’t limited to paints but is visible across industries, including fast-moving consumer goods (FMCG).
As Britannia highlighted in Q2FY25, metro consumers, despite contributing one-third of the urban FMCG market, were responsible for 2.4 times the slowdown compared to non-metro urban areas.
Asian Paints, with its stronghold in metro cities, has borne the brunt of this slowdown.
While Berger holds a 20.9 per cent market share nationwide, its metro presence is limited to just 10 per cent.
Similarly, Indigo remains a minor player in these regions.
This insulation has allowed both companies to avoid the full impact of urban economic challenges.
Additionally, Berger is steadily ramping up its urban footprint, while Indigo continues to grow from a smaller base.
Growth dynamics favour Berger, Indigo
According to analysts, Asian Paints’ dominance has also created a higher base effect, making incremental growth more challenging.
In the third quarter (Q3) of 2023-24, Asian Paints’ sales rose 7.4 per cent quarter-on-quarter (Q-o-Q), compared to Berger’s 4 per cent Q-o-Q growth.
However, as market conditions shift, analysts observed, the smaller players are catching up.
For Q3FY25, analysts expect Asian Paints to post just 1 per cent year-on-year (Y-o-Y) volume growth, with a 3 per cent decline in sales.
In contrast, Berger is projected to achieve 6 per cent volume growth and 5 per cent sales growth Y-o-Y.
Indigo, though still small, continues to report steady growth.
The impact of new competition
Being a pan-Indian player, analysts believe, Asian Paints is more exposed to emerging competition.
The entry of Birla Opus, for instance, has disrupted the market, particularly in metro cities where Asian Paints has a strong presence.
New players typically hurt the market leader more during their initial entry, while regional players like Berger and Indigo feel a smaller impact.
Moreover, Berger’s regional strength in East and Central India has further insulated it from the competitive pressures concentrated in urban areas.
Meanwhile, rural demand, which continues to recover across consumption categories, has favoured these smaller players with a stronger foothold outside metros.
Birla Opus, despite being a new entrant, has already garnered a 2–3 per cent market share.
The development has spurred heightened competition, benefiting smaller players who are agile enough to adapt to changing dynamics, analysts said.
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