Price hikes, easing input costs to boost paint firms’ margins
The moderation in crude prices removes a key margin headwind for Indian paint companies, say analysts
For the second time in a quarter, Indian paint companies increased prices by around 1.5-1.75% in December.
In the wake of persistent input cost inflation, paint makers have been raising prices to protect their margins. In October as well, paint prices were hiked by around 2-2.5%.
The last few quarters have been difficult for paint makers. Although demand growth in the decorative paints segment largely met analysts’ expectations, things weren’t as rosy as far as margins were concerned.
The sector has been facing a double whammy of surging global crude oil prices and a depreciating rupee. 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 weighed on their gross margins.
But now that the input cost environment has turned benign, investors can expect margins of paint companies to improve from here on. As the chart alongside shows, the price of titanium dioxide (TiO2), one of the key raw materials required to manufacture paints, has declined from its peak.
While it may take a short time to reflect in earnings performance, the benefits of price hikes and lower input costs would boost the margin recovery next year.
Analysts said that the moderation in crude prices removes a key margin headwind for Indian paint companies.
IIFL Institutional Equities Ltd has upgraded its FY19/20/21 EPS estimates for major companies. The EPS revision is highest for Kansai Nerolac (6/12/12%), followed by Berger Paints (0/5/5%) and Asian Paints (2/4/4%). “We expect full margin benefit in 4Q, as price increases are effective only for part of 3Q,” it said in a report. EPS stands for earnings per share.
Further, decorative demand is not expected to be materially impacted by the two rounds of price hikes. This is because the goods and services tax rate reduction from 28% to 18% on paints provides headroom to absorb such hikes, analysts said.
Meanwhile, investors will also be watching demand trends in the industrial and automotive paints segments, which have been languishing lately.
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