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JSW Paints - An ambitious fish in a big pond

Disclaimer: This is an informative post and not a recommendation to buy/sell/hold any security/instrument.

Asian Paints is the darling of Dalal Street, adored by investors for its consistent compounding through the years. One small hiccup the firm has faced in recent days though is the CCI probe initiated by JSW Paints on grounds of anti-competitive behaviour. In today's post, we step aside from that issue and look at the paints market, where JSW stands today and how the firm could leverage its unique edge.

The Indian Paint Market:

The Indian paint market is a largely oligopolistic market with Asian Paints, Berger, Kensai Nerola and AkzoNobel occupying ~65% of the market. Paints are broadly classified into two broad areas decorative paints and industrial paints, with Asian and Berger dominating in decorative, and Nerolac having a strong presence in industrial paints. The inherent economies of scale and moats around distribution and brand make the entry of a new entrant difficult. At least until now.

The entry of JSW

JSW entered the paints market in 2019 with a 600cr investment. With that, they started a 25,000kl industrial paint plant and a 100,000kl domestic paint plant, with a plan to ramp up production in the decorative segment to 200,000kl. The benefit that JSW has though, other than the access to capital that would keep a lot of player out, to begin with, is that they have captive demand on the industrial side. The firm's steel unit manufactures coil coated steel which would have requirements in excess of the firm's industrial capacity. The segment is also growing steadily giving the paints business a good opportunity to dominate an important segment and grow from there.

The edge in the hyper-competitive space

The paint market in India is extremely competitive and as the recent issues with dealers in the south showed, firms go to great lengths to protect their territory. JSW, however, seems uniquely poised to breach most moats that the incumbents have. The firm has enough capital to infuse to grow capacity, they have a brand that is significantly well known - although developing the paint brand will still take some effort, and they have chosen their markets well - the housing market in the south where it has established its decorative paints plant that caters to a zone that has been central to the affordable housing scheme, and whose growing millennial populace would be attracted to its all paints at one price scheme, and its industrial segment where it has a unique 'right-to-win' driven by the parent's expertise in steel.

The firm plans to grow slowly in the initial few years, which is a wise choice - you wouldn't want to take the behemoths head-on in a multi-geography battle before you understand the tricks of the trade well enough, especially in a diverse country like India. But the firm definitely has a lot of the signs that could make it a formidable player a few years down the line.

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