Domestic paint makers, which had expected earnings to stabilise after a period of intense competition, now face fresh headwinds as a rise in raw material costs threatens to weigh on profitability.
The ongoing conflict in West Asia has pushed up crude oil prices. Derivatives of crude are widely used as raw materials in paint production and account for about a third of total input costs for paint makers.
“Retaining profitability guidance becomes more challenging if crude oil remains elevated,” said Poonam Upadhyay, director at Crisil Ratings. “While the impact will be with a lag, higher raw-material costs would gradually start feeding into the cost structure,” she said.
Fuelled by supply concerns, crude prices rose to nearly $120 a barrel earlier this week before easing to about $90 a barrel. In the October-December quarter, crude averaged about $60 a barrel.
Solvents, binders, resin and titanium dioxide are crude-linked derivatives used in paint production. “Within the raw-material basket, crude-linked items account for over 60% of raw material cost,” Upadhyay said.
Market leader Asian Paints has guided for margins in the 18-20% range, while Berger Paints India expects margins of 15-17%. Kansai Nerolac India sees margins at 13-14% in the short term, with a target of about 15% over the longer term.
“Companies usually maintain about two months of inventory, so they will see an impact in the next quarter,” said Arun Agarwal of Kotak Securities. “In the past, every 1$ increase in crude prices has impacted EBITDA margins by 25 basis points if companies don’t increase prices,” he said. Given the current competitive market, raising prices will be difficult, so one can expect a dent in margins in the next quarter, he said.
“Given the current geopolitical situation, the whole crude impact can come in very fast,” Amit Syngle, chief executive officer of Asian Paints, had said in a call post the announcement of the company’s quarterly earnings in January.
