In our last article, we discussed why the future of NIFTY in the short term does not look good and why the market is going downhill. But despite the market conditions, there are certain stocks that are performing well and there are some others that seem fishy in the current situation. In this article, I will try to explain what is wrong with this sector and why am I trying to avoid these stocks.
To start with, I am not just talking about one specific company. There is an entire sector that looks quite grim. Historically, this sector has stocks that have been constant multipliers and have provided handsome gains but currently, I am trying to avoid these. And I will try to explain my rationale behind this in very simple terms.
Which sector is it?
The sector is talking about is the paint sector. From 2020 till now, the sector has performed really well and among all the paint stocks, Asian Paints in particular has outperformed the rest. The main reason behind this growth can be attributed to the fact that they have to build a very robust distribution network and an amazing tie-up with the local vendors. So, when these vendors used to place orders for the new inventory, Asian Paint was able to deliver it way too quickly over other paint manufacturers.
Here are a few reasons why the future of the sector looks weak in the short term.
1. The Segment Getting Diluted
In recent times, some big players have also entered this sector viz. Grasim, JSW, Astral Polytechnic, and even JK Cements and this might not be a piece of good news for the investors. This has led to fighting between the manufacturers to steal away the customers of Asian Paints. And there is this general rule of the market that whenever competition increases, it is great for customers because the manufacturers will try to price their products lower than their competitors to woo new customers. This will lead to manufacturers providing heavy discounts and offers and when this happens, the profit margins of the manufacturers will start going down. And historically, low-profit margins are bad for both the business and its investors.
2. Too Much Expenditure
Aditya Birla group's Grasim Paint has announced to spend over 10,000 crore INR by 2025 in the industry. JSW group has raised 100 million USD from funding groups and they themselves have allocated around 750 crores into their paint business. JK Cements have announced an investment of 600 crores into their paint business.
This influx of money is scary. The main reason behind the influx of this huge capital is the fact that they want to stand toe to toe against the product catalog of already established paint makers like Asian Paints and Nerolac. And do keep in mind that Aditya Birla group, JSW group, and JK Cements already have an established distribution network. Moreover, they also manufacture a range of other housing products and building materials. This makes it lucrative for the builders to purchase all the building materials from steel, cement, pipes, and paint as well from the same manufacturer instead of looking for different ones for each product.
3. Rising Crude Oil Prices
If you have any idea about paints, you must know that petrochemical products are an essential component in any paint. With already the price war starting where manufacturers trying to provide their products at the cheapest price possible, the increased cost of petroleum is going to put them under massive stress.
Remember what happened when Jio entered the telecom sector with a huge capital influx from Reliance, they quickly established their telecom network pan India and spoiled the customers with low prices and this did not work out well for previous telecom players like Vodafone-Idea, Aircel, and others. Vodafone-Idea whose stock price was around ₹110 in 2015 is now trading in the range of ₹5-15 while many have already stopped their business.
This is just an informative article from my personal point of view and not a piece of investment advice. Personally, I will be staying away from this sector for some time for the reasons mentioned above and also because the established paint businesses are also trading at a high P/E ratio thus making them susceptible to market falls.
I personally use "Groww" for my stock and mutual fund investments and so far I do not have any complaints against them. This is not sponsored. However, if you are planning to open an account using Groww, you can use my referral link, through it both of us can get ₹100 deposited in our account when you activate your account on Groww. It is a win-win situation. Click here to open an account on Groww. With this, we have made it to the end of yet another article. I hope you have acquired something new. Consider giving it a like and sharing it among your friends and family. It will motivate me to keep writing new articles for you. To get notified whenever I publish new articles, sign up to the NerdyTree by hitting the "log in" button at the top of the page. Let me know your thoughts on the paint sector in the comments below.