Cement manufacturer JK Cement Ltd on Saturday announced its entry into the paints business via a wholly-owned subsidiary. The company is looking to invest ₹600 crore over the first five years and aims to clock revenues of ₹850 crore during the same period.
On Monday, shares of the company fell nearly 6% to hit a 52-week low of ₹2,478.05 on the National Stock Exchange in opening deals. While India’s paint industry is estimated to be only 50% penetrated, given the high entry barriers and cut-throat competition, making a mark could be easier said than done for a new entrant.
Apart from these, it also raises capital allocation concerns for the company.
Analysts at ICICI Securities Ltd note that there is a probability of minor Ebitda loss in the initial years in the paints business, hence there could be an overall RoCE-dilutive impact. Ebitda is short for earnings before interest, tax, depreciation and amortization. RoCE stands for return on capital employed.
“In FY14, JKCE had invested around ₹800 crore in white cement business outside India in Fujairah, UAE, and that business is still incurring loss at net level with the company making cumulative impairment provision of around ₹320 crore for FY20-FY21,” said the ICICI report on 7 March.
What’s more, analysts at Motilal Oswal Financial Services are of view that the company may be required to pump in more funds to compete with existing and new entrants such as Grasim Industries, which has committed to invest ₹5,000 crore in its paints business.
“Investments of JK Cement will be at a much lower scale versus Grasim and we believe that its presence will be limited to north/central regions. Entry in this segment at such a lower scale does not make much business sense at a time when competition is likely to intensify,” the domestic brokerage house said in a report on 7 March. Investors would reckon that Grasim aims to become the number two paint company in terms of profit.