In yet another attempt to tackle relentless input cost pressures and curb margin erosion, paint companies have raised prices.
According to a recent dealer channel check by domestic brokerage house ICICI Securities Ltd, paint makers have increased prices by 2-2.5%, effective 1 October. However, the quantum of price hike may not be enough to offset the inflationary impact of raw material costs.
On a year-on-year basis, the price of key input titanium dioxide recorded a 6% increase in the second quarter of this fiscal year. Prices of other monomers have also inched higher, say analysts.
Nearly 55% of raw materials used by paint companies are crude oil derivatives and account for 30-35% of the total raw material cost of the sector. So, a rise in global crude oil prices hurts. Also, since most of these chemicals are imported, the rupee depreciation will make their gross margin picture look worse.
It should be noted that in the wake of elevated costs, paint companies announced average price hikes of 1.5% in March and 2% in May. But in July, despite cost pressures and given the anti-profiteering clause, companies cut prices by 10% to pass on the benefit of the reduced GST (goods and services tax) rate on paints.
So, while volume growth may be healthy in the September quarter earnings, margins are sure to take a hit. Analysts estimate a 50-200 basis point impact on gross margins of key paint makers. A basis point is one-hundredth of a percentage point.
In short, a double whammy of rising crude oil prices and the depreciating rupee is a key concern for investors in paint stocks. Unless steep price hikes are taken, putting the gloss back on their profitability will be challenging.
However, in spite of this, shares of key paint companies continue to trade at a rich one-year forward price-to-earnings multiples of more than 40 times.
In its latest report on Asian Paints Ltd, Bank of America Merrill Lynch said that pan-India checks indicated swelling optimism about future growth, and it expects a healthy second half for the company led by a solid festive season. Premium valuations are likely to sustain on robust and visible growth ahead, it added.
Further, after the 2-3% price increase Asian Paints announced in October, another 4-5% hike is likely in December if crude oil prices remain elevated, added the report.