All's not well for paint companies: Partial price hikes won't be enough

Paint stocks were down 2-3 per cent each on worries that higher raw material costs and partial price increases will weigh on their margins. The rupee hit a new low against the dollar at 73 and crude oil prices were at a four-year high of $85.35 a barrel.

The pressure points for paint companies is crude derivatives and higher prices of titanium dioxide (TiO2). Most Indian paint companies import TiO2, which accounts for 25 per cent of raw material costs. “High inflationary pressure would take a toll on the companies’ profitability in the near term. However, many companies have taken a 3-4 per cent price hike from October and could take another price hike in December. This should help partially offset the input cost pressure,” said Vishal Gutka, AVP at Philip Capital.

In fact, after a recent 10 per cent slash in goods and services tax (GST) to 18 per cent, companies have deferred price hikes in the wake of the anti-profiteering rule. Thus, it won’t be a surprise if paint companies deliver lower profitability in the September 2018 quarter. Asian Paints, for instance, is likely to witness 180-basis point contraction in gross profit margin and 100 basis point in earnings before interest, tax, depreciation and amortization margin.

With the crude oil prices moving up and rupee falling further, the key worry is the ability of paint companies to pass on the costs without impacting volumes and market share. It would also be interesting to see whether the companies pare their other operating expenses. In FY18, too, paint majors had reported 100-190 basis point contraction in their gross profit margin. Cost efficiency, in terms of lower operating expenses such as advertising spends and other expenses, helps limit the adverse impact on operating profit margin. 

Meanwhile, pick-up in overall consumer demand, expansion efforts undertaken by the companies and the lower GST should help garner higher volumes.