Crude oil prices, currently below $80 per barrel, impact around 40% of the raw material costs for paint companies as the cost of binders – a key input material – is linked to the prices of crude oil.
Crude oil prices are seen remaining weak in the near term amid concerns of demand weakening globally. With prices of another key raw material – titanium dioxide – also having seen a sharp correction from its peak levels, profitability is seen improving in the current quarter, but to a limited extent.
This reflected in the shares of major paint companies, which ended 1-4% higher on Friday, even as the benchmarks Nifty 50 and Sensex ended marginally in the red.
“Historically we have seen that paint companies do not see a drastically different margin profile, because when raw material prices correct, they pass on most of it to the customers,” said George Thomas, fund manager for equities at Quantum Mutual Fund, who sees profitability improving by around 100 basis points.
Asian Paints, has in fact, cut product prices by 1% earlier this week, with other players following suit.
The minor price revision, notwithstanding, paint makers are expected to see volume growth in mid-teens through the rest of the year, which is likely to keep earnings stable in FY24.Share prices, though, are unlikely to see a meaningful upsides. “Given the valuations for some of the players, there isn’t too much room for an upside, especially when you have a new player entering the market, which has a history of creating brands,” Thomas said. Grasim will launch its paints operations under the ‘Birla Opus’ brand in the March quarter.
“While the launch of Grasim’s paint business will happen in Q4, it is more likely to impact smaller and local players,” said Abneesh Roy of Nuvama Institutional Equities, who remains positive on market leader Asian Paints. Given the company’s ability to withstand competition, an over 50% market share and being the decision maker for pricing in the local market, he has a ‘buy’ rating on the stock for a target price of 3,650.
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