Paint Companies Hit New Highs
The ongoing rally in paint stocks shows that key companies have beaten the covid blues, and how. Shares of leaders in the decorative paints segment, Asian Paints Ltd and Berger Paints India Ltd, touched fresh 52-week highs in opening trade on December 29. Last week, the stock of industrial paints leader Kansai Nerolac Ltd had scaled a new peak.
Analysts expect the worst in terms of covid-led demand impact to be behind the sector. Volume recovery is expected to gather pace in the December quarter with a further reopening of the economy. Paint makers are increasing their focus on economy paints, emulsions, putty and adjacent products in waterproofing and adhesives segments. As seen in the past few quarters, revival in volumes would continue to be led by low-cost products amid demand in smaller cities and towns, analysts added.
The price of key raw material, titanium dioxide (TiO2), has increased by around 23% so far in the December quarter, showed Bloomberg data. Compared to a year-ago, TiO2 prices are flat, but analysts caution of upward pressure, going ahead.
Crude derivatives are estimated to form around 60% of the cost of goods sold for paint companies. TiO2 pigment forms around 25% of the total content of paint. Analysts at Ambit Capital India Pvt. Ltd said movement in these two components drives a band of 400-500 basis points (bps) margin movement. One basis point is one-hundredth of a percentage point. Profit after tax is impacted by around 2% on the back of a 1% change in crude price, said analysts at JM Financial Institutional Securities Ltd.
Paint companies usually pass on the burden of increased costs to customers. Analysts said the quantum of price hikes will depend on the pace of volume growth.