Paints: Price hikes to provide partial relief to eroding margins
After raising prices by around 1.5% in March, Asian Paints recently announced yet another price hike of nearly 2% effective May and peers are expected to follow suit
Paint companies are tackling persistent input cost pressure with price increases. After raising prices by around 1.5% in March, Asian Paints Ltd recently announced yet another price hike of nearly 2% effective May and peers are expected to follow suit.
Paint makers have effected a slew of price increases in the past few quarters mainly to protect margin erosion on the back of rising raw material expenses. In 2017, all paint firms announced aggregate price hikes of approximately 5.5% across segments.
Though the price of titanium dioxide (TiO2), a key input material, is currently down by around 12% from its peak, it remains elevated (see Chart 1). Most Indian paint companies import TiO2.
Similarly, prices of crude oil have also inched up on a sequential and year-on-year basis. Many of the inputs used in the manufacture of paints include monomers and crude oil derivatives, and account for about 30-35% of the total raw material cost of the sector.
The price increases are expected to partially offset the impact of inflated raw materials on margins.
According to ICICI Securities Ltd, gross margins of paint makers are expected to fall by 75-100 basis points year-on-year in the March quarter, but the margin contraction will be lower than the 150-300 basis points seen in the first nine months of fiscal year 2018 (FY18). A basis point is 0.01% (see Chart 2).
As the full impact of price hikes is realized, along with the planned hike from May, the brokerage house has factored in a 20-50 basis points expansion in its FY19 gross margin estimates.
As far as demand is concerned, year-end schemes and incentives provided to the dealers along with a favourable base will aid volume growth in decorative and industrial segments in the March quarter. That said, paint demand is yet to see a meaningful pickup.
“Our survey of ~30 paint dealers pointed to a modest demand environment for decorative paints. While channel has recovered from goods and services tax (GST) impact and has restocked to pre-GST levels, substantial pick-up in consumer sentiment and spending remains elusive. Further, RERA implementation and sand shortage in several states continues to hurt demand from institutional buyers,” IIFL Institutional Equities said in a report dated 9 April. RERA stands for the Real Estate (Regulation and Development) Act.
Meanwhile, shares of key paint manufacturers are trading at an expensive one-year forward price-to-earnings multiple of more than 40 times and considering the aforementioned issues, these valuations need to correct.
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