Paint manufacturers are preparing to raise prices; The right time to add stocks to your portfolio?

Is it a good time to play the recovery theme now? As major paint manufacturers confirm another round of price hikes to dampen rising input costs, some say the worst could be behind for the industry.

Positive about the price hikes, most analysts believe that passing higher costs on to the end consumer should help paint companies offset recent inflation at least for now. But few are bullish on the sector as a whole amid alarming valuations.

Asian paintings and Berger paintings confirmed price increases starting November 12. Nomura said Asian Paints’ latest price hike was bigger than its cumulative increases over the past six months.

The price increases come at a time when the industry faces headwinds from a surge in key commodities, primarily crude oil and its derivatives.

Crude oil has jumped 62.8% year-to-date, benefiting from rising demand amid limited supply.

Here’s how the benchmark crude oil has moved over the past year:

Paint manufacturers have lost their appeal on Dalal Street in the recent past.

Store To recover (%) PE (LTM)
A month Three months Six months One year
Asian paintings -6.7 3.4 18.6 39.3 92.3
Berger paintings -9.3 -12.3 3.8 17.7 94
Nerolac from Kansai -14.1 -12.1 -4.3 6.5 53.7
Indigo paints -6.6 -6.8 2.3
Akzo Nobel -7 -6.8 -5.6 6 31.5
Shalimar paintings -2.5 -17.6 2.1 26.5 -8.5

The Indian equity benchmark Nifty50 has risen 27.7% in 2021 so far.

Dalal Street was disappointed with the Asian Paints second quarter show as its quarterly revenues exceeded expectations, but profits were well below estimates. The company’s net profit as well as EBITDA performance fell short of expectations as the cost of materials consumed jumped 72.7%.

“In the second quarter, the gross margin of market leader Asian Paints declined 966 basis points to 34.7% as the company refrained from aggressive price increases in order not to spoil the current trend of demand in the market. A similar trend was observed at Kansai Nerolac. also paints, ”Geojit financial services analyst Antu Eapen Thomas told

Kansai Nerolac posted a 45.3% drop in net profit to Rs 92 crore for the July-September period, even though revenues rose 17.1% to Rs 1,619.6 crore. Other paint manufacturers have yet to release their quarterly figures.

He expects demand to remain robust due to:

  • resumption of housing and construction activity
  • shorter repaint cycle
  • holiday season
  • urbanization
  • Any volatility in crude prices will increase pressure on paint company margins, Thomas said. “Due to the unprecedented trend in raw material prices, the cost of inputs as a percentage of turnover has increased to 65% from 50 to 55%,” he said. The analyst believes the valuation of Asian Paints is high, but expects it to moderate due to pressure on margins.

    Will price hikes help investors forget about missed profits?

    Experts see a huge opportunity in paints in the country, with the industry expected to record double-digit growth in the future. Demand conditions for decorative paints remain robust in all segments, driven by a recovery in the economy, still grappling with the fallout from the pandemic.

    Market veteran Deven Choksey believes the consumer is willing to spend, keeping the demand scenario intact. “This should benefit big companies like Asian Paints, where they have a very strong franchise for retail customers,” he told CNBC-TV18.

    Material inflation remains a concern and it remains to be seen whether the company will pass 100% of the higher costs on over the next few quarters, said Choksey, who finds the Asian Paints valuation reasonable.

    How to play painting theme now

    Varun Singh, FMCG and retail analyst at IDBI Capital, is bullish on both Asian Paints and Space Berger. He believes that the benefit of price movements should be visible from the fourth quarter of FY12.

    Thomas remains positive on Asian Paints, citing its strong balance sheet, pricing power and expanding its network.

    Price increases are inevitable for paint and varnish manufacturers as rising costs weigh on their margins.

    The price increases are enough to keep up with inflation until the second quarter of fiscal 22, Singh said.

    For example, Asian Paints increased its prices seven percent in the first half of FY22, well below materials inflation of around 21 percent, according to Thomas.

    “We expect the current high single-digit price hikes to help ease inflationary pressure on input costs and fuel stock prices. However, the current valuation is not very attractive, which may encourage investors to remain cautious in the short term, “he said

    (Edited by : Abhishek Jha)

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    Margarita B. Bittner

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