JK Cements diversifies into the paints segment

It is not often that a diversification into paints is a negative factor for a stock. However, we do live in abnormal times. Paint companies are under pressure due to the sharp cost inflation and the competitive pricing situation in the paints industry. An industry that has been long dominated by a handful of large paint companies, this is perhaps the toughest time they have faced and not a great time for a cement company to get into paints. 

The cement company in reference here is JK Cements, part of the JK Singhania group. The stock slipped by nearly 9% after the company announced that it planned to invest Rs.600 crore to foray into the paints business.

The stock has touched a 52-week low and is seen as a drag on profits at a time when the cement sector itself is seeing an operating profit hit due to sharply higher power costs and freight and transportation costs.

The company, JK Cements, has announced that its board had approved an investment of Rs.600 crore into the paint venture. This amount will be infused into the paints business over a period of 5 years, so it is not an immediate commitment.

The paints business will be carried by a wholly-owned 100% subsidiary that will floated for the principal purpose of entering into the manufacture, marketing and exports of paints.

As per the mandate, the paints subsidiary of JK Cements would venture into manufacturing, selling, trading, importing and exporting all types of paints. It will also build a strong franchise in allied products and services.

One logic for this investment is that paints and cement both pertain to the OEM demand for housing and hence there are obvious synergies. However, the market is not buying this argument at this point of time.

Apart from the OEM synergy approach, the company has more reasons for this foray. Firstly, the magnitude of investment is not too large to have a meaningful impact on the balance sheet or in revenues in the immediate future.

Hence short term repercussions are going to be limited. Secondly, this move will help JK Cement to diversify its product portfolio and expand its revenue stream in the long run and also better leverage its distribution network.

The markets appears to be far from impressed. The stock of JK Cement has lost 28% in the last one month on earnings downgrades and rising energy costs. JK Cement has also been hit by higher coal and petcoke prices, crude prices hikes, higher ocean freight rates etc. all these parameter have a negative impact on cement companies. Also, the spike in diesel costs is expected sooner rather than later and that has also been a major overhang. 

But the bigger concern that investors have about the paints foray is its ability to handle the well-entrenched players like Asian Paints and Berger which have intimidating distribution networks.

Grasim has also committed Rs.6,000 crore to its paints foray so the competition is coming from the big daddies of cement. Under these circumstances, the million dollar question is how JK Cements plans to add value to shareholders amidst this macro chaos.