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The chip shortage has affected industries ranging from automobiles to consumer electronics. Now, the supply crunch has claimed an unlikely victim: the Indian paint industry.

The chip shortage, analysts cautioned, could impact the supply of tinting machines and the expansion plans of paint companies. These machines help shops create different shades of paints within the store, in line with the requirement of customers. Dealers who use tinting machines do not have to hold large amounts of shades in stock. As such, if the chip shortage becomes long-drawn, it could impact paint companies in terms of expansion through new dealerships.

A potential risk
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A potential risk

“We expect delays in (the supply of) tinting machines to remain for a few quarters for most paint companies. We expect less impact on top two companies, Asian Paints Ltd and Berger Paints Ltd, as they already have a high tinting machine penetration compared to smaller peers," analysts at Edelweiss Securities Ltd said in a report on 22 September.

The broker sees a higher impact on Indigo Paints Ltd, which had the highest rate of tinting machine addition over the past few years, given its smaller base and aggressive plans. On average, the annual rate of tinting machine addition for Indigo Paints since FY18 is around 51%, compared with 15-20% of Asian Paints and Berger Paints, the Edelweiss report said.

New entrants in the paint industry will also have to face this challenge upfront. “Apart from the existing paint makers, it (the chip shortage) could also delay expansion plans of new entrants such as Grasim Industries Ltd, who are making a foray into this sector," said an analyst with a domestic brokerage house requesting anonymity.

“That said, a bigger trigger for the sector and stock prices remains the movement in input costs and quantum of price hikes," the analyst said.

Investors would reckon that the recent rise in prices of titanium dioxide and other crude-based monomers could lead to margin erosion if not adequately passed on.

Meanwhile, shares of paint companies have seen a steep rally in the past year on demand improvement in the key decorative paint segment.

However, despite the demand revival, the expensive valuations of paint stocks are hardly justified, analysts said.

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