Paint companies under stress amid burgeoning crude prices
Sharp rise in crude prices may de-rail the margin recovery of paint companies.
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.
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.
Disclaimer – I ICICI Securities Ltd. ( I-Sec). Registered office of I-Sec is at ICICI Securities Ltd. - ICICI Venture House, Appasaheb Marathe Marg, Prabhadevi, Mumbai - 400 025, India, Tel No : 022 - 6807 7100. I-Sec is acting as a distributor to solicit bond related products. All disputes with respect to the distribution activity, would not have access to Exchange investor redressal forum or Arbitration mechanism. The contents herein above shall not be considered as an invitation or persuasion to trade or invest. I-Sec and affiliates accept no liabilities for any loss or damage of any kind arising out of any actions taken in reliance thereon. Investments in securities market are subject to market risks, read all the related documents carefully before investing. The contents herein mentioned are solely for informational and educational purpose.