Paint stock rally: Sharp surge in input costs seen as a dampener
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Paint companies’ shares have seen a sharp rally in recent times. And why not, the demand outlook for this sector seems to be bright courtesy a normal monsoon, anticipated pick-up in construction activities and the impact of the pay hike for government employees in the second half of fiscal year 2017.
On a year-to-date basis, shares of key paint makers like Asian Paints Ltd, Berger Paints India Ltd, Kansai Nerolac Paints Ltd and Shalimar Paints Ltd have given more than 50% returns.
These companies posted robust June quarter earnings and anticipation of good results in the September-ended quarter, which is just around the corner, has been fuelling optimism among market participants.
Also, this time due to the early festive season, brokerage firms like Edelweiss Securities Ltd expect volumes for paint manufacturers to remain strong in high single digits and see a positive impact on the demand side as dealer inventory increases. The brokerage firm expects Asian Paints and Berger Paints to report volume growth of nearly 9% and 10%, respectively, on a year-on-year basis in the second quarter of FY17.
Continuing the positive tone, brokerage firm UBS Securities India Pvt. Ltd said spending intentions in this year’s festive season, as suggested by the UBS Evidence Lab survey, are higher than that in 2015.
The survey foresees an acceleration in paint volume outlook with a higher frequency of painting and more people intending to paint within 12 months.
On the flip side, there might be an adverse impact due to heavy rainfall in many parts of India especially for exterior paints, cautioned Edelweiss Securities.
Apart from that, rising input costs could also play spoilsport going ahead. Though margins of paint companies are expected to continue to expand in the second quarter of FY17, the pace could be slower since prices of some key raw materials like crude oil, titanium dioxide and other monomers have bottomed out. On a year-on-year basis, titanium dioxide prices rose 1.5% in September to Rs210/kg, pointed out a recent Motilal Oswal Securities Ltd earnings preview report for the second quarter of FY17.
Global crude oil prices too have recently resumed their northward journey with Brent crude price breaching the $50 a barrel mark. If the upmove in crude oil prices continues, it could dampen the bullish sentiment, say some analysts.
Meanwhile, it has to be seen if demand in both urban and rural areas meets the high expectations, translating into better volume growth and whether paint companies pass on prices to consumers. Investors would do well to keep an eye on these developments.