How input costs make paint companies shine

There could be two reasons for investors to be upset. One, input costs such as petroleum coke (petcoke) and coal derived from crude have risen sharply for cement companies, creating near-term margin headwinds. Other cement stocks also fell heavily on Monday. Second, some analysts say that JK’s foray into the paints space could raise capital allocation concerns.

JK will invest to up 600 crores spread over the first five years. India’s low-penetration paint sector is attractive to many. In early 2021, Grasim Industries Limited announced an investment of 5,000 crore in this business. It aims to become the number two paint manufacturer in the country by profit. In 2019, JSW Paints launched its paint products with a capital expenditure plan of Rs. 600 crores.

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So, should the incumbents be put to sleep due to increased competition?

Don’t expect much to change for the major paint companies. “We do not see any meaningful impact on the top two paint makers Asian Paints Limited and Berger Paints India Limited with new companies entering this space. Avneesh Roy, Executive Director, Institutional Equities, Edelweiss Securities Ltd. said, “We have seen international companies like Sherwin Williams exit the Indian paint sector after struggling to find their feet given the strong hold and brand value of existing companies. have seen.” Even several other players such as Nippon, Jotun, Kansai and Exo have found it challenging to move past the top two players. Small and regional paint manufacturers may be affected by increased competition,” Roy said.

As such, making a mark for a new company is a lengthy task. Decorative paints sales report expected from JSW Paints 450 crore- 500 crore, which is 0.8-1% market share in FY22, in the third year of product launch, said analysts at Kotak Institutional Equities.

That said, the bigger concern in the near future is rising costs. Paint companies use crude-based monomers as the major input. With Brent crude oil prices still hovering above $120 a barrel, the prices of these ingredients are expected to rise further.

Also, since most of these chemicals are imported, a weaker rupee could put pressure on margins. The region was battling cost inflation even before the Russia-Ukraine crisis began. In the last one year, the prices of decorative paints have been increased by about 20 per cent.

“If oil prices persist for a longer period of time, it could prompt them to hike prices by another 5% in the next two months,” Roy said.

This may lead to some reduction in demand. Recent price hikes may compress margins in the March quarter, but given the impact of the gap, investors should be prepared for margin compression in the following quarters.

Meanwhile, shares of Asian Paints, Berger and Kansai Nerolac Paints Ltd trade at 58, 54 and 33 times their estimated earnings for FY13, shows Bloomberg data.

“After the recent correction in the stock market, the valuation multiplier of paint stocks has cooled down to reasonable levels. Despite the high exposure to water-based paint, approximately 35–40% of items used by major paint players are linked to crude oil, making gross margins vulnerable to oil shocks. Varun Singh, analyst, IDBI Capital Markets & Securities Ltd, said the delay in protecting gross margins, coupled with price hikes, is a major threat to the valuation of paint stocks.