Pigment of hope: Paint companies find some respite as costs ease
Summary
Prices of crude-based derivatives have eased. This is good news for the margin outlook of paint and adhesive companies.
Looming concerns of a global recession have weighed on crude oil prices. Brent crude prices have dropped by 13% so far this year. So, prices of crude-based derivatives have eased. This is good news for the margin outlook of paint and adhesive companies. Prices of titanium dioxide and vinyl acetate monomer—key input chemicals for these companies—have moderated lately.
But this time around, other factors could partially offset the benefits of easing input costs. “The benefit that paint companies would derive from moderating prices of crude-derivatives would largely be offset by higher selling expenses due to aggressive sales push and increase in advertising spend by companies to counter competition from new entrants," Poonam Upadhyay, director, Crisil Ratings, said.
In the March quarter earnings call, the management of Asian Paints Ltd, a leader in decorative paints, said it is looking to spend on advertisements to propel demand. Similarly, close competitor, Berger Paints (India) Ltd said its ad spends as a percentage of sales are ahead of pre-covid levels with the company seeing saw marginal increase in TV ad spends and substantial growth in digital spends.
“We are factoring 150 basis points improvement in gross margin in FY24 aided by easing input costs, which will come gradually, mostly in the second half," Jay Gandhi, analyst at HDFC Securities Ltd said. That said, it remains to be seen if some of this is passed-on to customers by reducing prices.“That would depend on how aggressive Grasim gets with its pricing strategy. Historically, price cuts in paints have been rare and this time, if it happens, it would mark the culmination of two fac-tors: easing costs and Grasim’s product pricing," he added.
Grasim Industries Ltd and JK Cement Ltd have allocated capital expenditure for their entry into the paints sector. With the launch of Haisha paints, Fevicol-maker Pidilite Industries Ltd has also entered the decorative paint category. “Notably, Pidilite is not looking at a full-fledged paints foray; paints business is more for ‘range completion’. Grasim, meanwhile, has a presence in white cement and putty; in paints, it will have to start from scratch and convert wholesale distribution to direct while building brand recall. We believe Grasim is likely to be much more aggressive in paints than Pidilite," a Nuvama Research report said. In this backdrop, protecting market share would be crucial. For that companies are expected to step up advertisement spends for brand building in a run-up to the upcoming festival season. Plus, dealer discounts or schemes are likely to be introduced.
Interestingly, to expand their product offerings, paint companies are also entering adjacent categories such as waterproofing. Notably, the paint industry is said to have high entry barriers, so the fight for market share is feared to translate into an increased pricing pressure. Thus, hurting profitability of incumbents.
That is not all. “The average rupee-dollar exchange rate is likely to remain high at ₹82-83 per dollar even in FY24 impacting the cost of imported materials. Domestic paint companies import almost a third of their overall raw material requirements," Crisil’s Upadhyay said.
Meanwhile, demand for decorative paints is expected to be reasonable in FY24, but potential risk from an El Niño event on rural demand remains. FY24 growth is expected to be largely volume-led.
But shares of paint companies have been resilient. In the past one year, stocks of Asian Paints, Berger Paints and Kansai Nerolac Paints Ltd have gained 23%, 16% and 21%, respectively. Valuations of paint stocks are not by any means cheap, according to Gandhi.
