Crude oil prices are declining and the Rupee is stabilising against the dollar, but paint companies are are set to increase prices by 1.5 per cent from December-- the fourth time in a row they will be doing so.
Asian Paints was able to maintain its profit at a little over one per cent, but high input costs led Berger Paints, Kansai Nerolac, and others to report fall in profits in the second quarter.
An industry source said the price increase had been under consideration towards the end of the second quarter. “Despite previous price hikes, input costs have been on the rise as is evident from the second quarter results of any paints firm. We feel that a price hike needs to be made to make up for the rising input costs,” said the source.
Asian Paints, Berger Paints and others have already communicated about the impending hike to its dealers.
However, industry officials suggested that if crude prices stabilises and the Rupee strengthens a decrease in prices might be considered.
“We never know if crude will again shoot up all of a sudden or how the Rupee will fare in the coming few months. If we see stabilised crude prices, then we will definitely think over to pass on the benefits to customers,” said the source.
On the other hand, the hike from Berger Paints may be lower than what it was previously considering.
“Pressures have increased on account of higher inputs costs and thus increasing the prices was a definitive option. But let’s see to what extent can it go up now that crude prices are on a downward trend,” said Abhijit Roy, managing director and CEO at Berger Paints, as he refused to narrow down on the percentage increase.
Crude and its derivatives account for 25-40 per cent for any paint company’s cost of raw materials and currency volatility puts at risk around 30-40 per cent of the total cost of production.
For companies like Asian Paints, whose decorative paints portfolio is considered strongest among the peers, crude prices can affect 25-30 per cent of production costs. For Berger Paints, which has a substantial exposure to industrial paints, the dependency is higher. For Nerolac, which is the strongest in automotive paints, higher crude prices can hurt margins.
On the other hand, a weak Rupee and a strong dollar have been putting pressure on the import bill of paint firms. Titanium dioxide, monomers, certain pigments and additives – raw material for paints – have to be imported.
For any paint firm, the dependency on imports to manufacture paints stands at 30-40 per cent of the total production cost.
“A fast depreciating Rupee has been haemorrhaging input costs for quite sometime now”, Roy said.
For Asian Paints, the largest company in this sector, cost of material consumed – an indicator of cost of production sans labour – rose by 33.27 per cent at Rs. 21.83 billion during the quarter ended September 30, 2018 while for Berger Paints, the same rose by 47.74 per cent to touch Rs. 8.20 billion. Kansai Nerolac registered a 25.38 per cent increase in cost of material consumed at Rs. 8.20 billion while the same for Akzo Nobel India, went up by 16.35 per cent at Rs. 3.70 billion.
Last month only, paint companies had hiked prices by 2-2.5 per cent while in March and May this year, prices were hiked by 1.5 and 2 per cent respectively.
Abneesh Roy, research analyst at Edelweiss Securities, said that after the GST rollout, paint prices had corrected by around 10 per cent and that gives paint firms headroom to increase prices to pre-GST levels.