loader2
NRI

Open Free Trading Account Online with ICICIDIRECT

Incur '0' Brokerage upto ₹500

BLOG

Paint companies under stress amid burgeoning crude prices

ICICIdirect Research 04 Mar 2022 DISCLAIMER

Buzzing:

Sharp rise in crude prices may de-rail the margin recovery of paint companies.

Context

The paint companies have successfully passed on ~20% price hike in 9MFY22 to offset higher raw material prices. That resulted in a sequential recovery in gross margins for paint companies. However, the recent surge in crude prices (up 26% in the last one month) has raised concerns over a margin recovery for paint companies in the near term. Crude linked raw materials contribute ~30% of the total raw material cost for paint companies. However, non-crude linked raw materials contribute a significant chunk (~70%) of the total raw material basket. If crude prices sustain at elevated levels, the companies may have to take further price hike in the range of 5-6% to offset higher raw material costs.

Our perspective

We believe the margin recovery will continue in Q4FY22 considering the usage of low cost raw material inventories and support of price hikes already taken during 9MFY22. If crude oil prices sustain above US$95-100, the companies will have to take further price hike of ~5-6% in Q1FY23 to maintain their gross margins. On the demand side, the company may witness lower volume offtakes in Q4FY22 due to pre price hike inventory build-up in Q3FY22 by channel partners. We believe, in the near term consumers may either downtrade or delay the repainting cycle due to higher paint cost. However, a revival in the real estate sector, especially residential segment, will help drive demand recovery for paint companies in FY23E. We build in price led revenue growth of 18-20% FY23E factoring in 20% price hikes and a margin expansion of 130-300 bps. We believe the recent correction in stock price provides a good entry opportunity in Asian Paints, which is the market leader in the segment.

Download App

Download Our App

Play Store App Store
market app