Asian Paints' grip on waterproofing segment gets tighter. Should Pidilite investors be worried?

By Harsha Jethmalani
Pidilite's expensive valuations could weaken its bond with investors. The stock trades at a one-year forward price-to-earnings ratio of around 80 times.

Asian Paints Ltd, leader in the decorative paints segment, is making its mark in the waterproofing segment. According to analysts at Credit Suisse, the waterproofing market in India is led by Pidilite Industries Ltd, estimated to have around 50% market share. However, paint companies have made significant inroads into this market, said the foreign brokerage house in a report.

"In our estimate, Asian Paints has around 25% share in the water proofing market now and has been gaining share consistently. Initially Asian Paints played mainly in remedial water proofing, as in this segment the painter is the main applicator and thus Asian Paints had a stronger right to win. However in the past couple of years, Asian Paints is also pushing strongly in the new construction water proofing segment," said the Credit Suisse report.

Credit Suisse said it maintains an outperform rating on the Asian Paints stock, reacting to which shares of the company surged to a new all-time high on the National Stock Exchange.

It added that Pidilite's revenues from construction chemicals, of which waterproofing is the largest segment, has seen a slowdown in growth since FY18, which coincides with Asian Paints' increased aggression in this segment.

So, should investors in Fevicol-maker Pidilite lose sleep over it?

In the post June quarter earnings conference call, the company's management had said that the waterproofing penetration is still at 40%, there is large headroom for growth and company will not be losing share to new players.

The management added that waterproofing remains fastest growing segment for the company and comprises three segments  - organised real estate, individual housing, repair and renovation. Most paint companies operate in repair segment and in the new constructions paint companies are not major competition in waterproofing, the management added.

Analysts at Edelweiss Securities Ltd feel that the company’s dominant position, vast reach with around 4million outlets and strong connect with middlemen as well as consumers act as strong entry barriers.

"Domestic demand was boosted by Goods and Services Tax implementation, and management continues to be confident of growing top line led by rebalancing of the trade channel, deepening penetration and product innovation. Good long-term performance of acquisitions and sustainability of healthy growth in core business outweigh the risks from Asian Paints in the waterproofing and adhesives space," said the domestic brokerage house in a report. "Besides, as the adhesives space is already dotted with many MNCs and regional players, Asian Paints’ entry is not likely to materially alter the competitive scenario for Pidilite, in our view," it added.

That said, some other analysts are of the view that Pidilite's expensive valuations could weaken its bond with investors. The stock trades at a one-year forward price-to-earnings ratio of around 80 times.


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