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Price hikes taken by paint companies to offset high raw material costs

Buzzing:

Price hikes of ~17% YTD by paint companies will help negate the significant pressure of higher raw material costs on gross margins.

 Context:

In Q2FY22, while paint companies reported strong volume growth (25-34%), we were negatively surprised by the steep fall in gross margins of companies to ~35%. A sharp rise in raw material prices (~21%) and delay in taking price hikes (by only 6-7% YTD) had dented gross margins by 450-1000 bps YoY in Q2FY22. The management clarified that the price hikes have been deliberately delayed to avoid festive demand disruption. While improved product formulations and negotiations with suppliers provided some relief, absence of required price hikes dragged profitability. To safeguard future margins, paint companies have taken aggressive price hikes of ~9-10% post Diwali and another round of price hike (of ~3-4%) is on the cards by December. The cumulative price hike will pull up the gross margins of paint companies back again to their pre-Covid levels by Q4FY22.

 Our perspective:

We believe, structural growth drivers for paint companies such as 1) strong repainting demand, 2) revival in real estate demand, 3) market share gains from unorganised players, 4) diversification on new products such as waterproofing and construction chemicals are intact. While we do see a very limited impact of price hikes on volume offtakes in the near future, the long term demand outlook remains intact. We believe paint companies would continue to grow at a CAGR of 19-20% in FY21-24E while improved operating leverage will help in a recovery in EBITDA margins from their Q2FY22 level.