Paints Spraying Colours of Gloom Due to Rising Crude

The rising prices of the crude on the back of the current economic turmoil caused by the demonetization, had a double effect on the paint firms. If the liquidity crunch is affecting the volumes, higher costs might affect margins, if companies decide to absorb the cost so as to not disturb demand.

The increase in prices of crude oil has been seen to be sustainable so far. This stared when the oil-producing countries agreed to the cuts in production. This has also seen an increase in the petroleum based solvents that paint firms use in their production. If the rising crude prices see derivatives like plastics becoming expensive, it can result in higher packaging costs. Lastly, freight costs may also see an increase once fuel prices rise in the market.

Another key raw material, titanium dioxide (TiO2), has seen prices rise both month on month as well as year on year basis. Firms import their requirement and could see production costs increase as contracts get renewed at a higher rate. If lower costs helped firms improve profitability in the past (even if demand was not as strong), they now face a situation where rising costs may dig a bite into margins.

Let’s say that the average oil prices increases by a further 10 per cent, then the estimated FY18 EPS for consumer firms such as Asian Paints and Berger Paints could be lower by 8 per cent, other things remaining same, said an expert. EPS stands for earnings per share.

According to another, the timing makes it worse. Demonetization and lack of cash have affected decorative paints demand, a segment that is discretionary by nature and cash plays a major role.

According to a recent report, the managements of major paint companies such as Asian Paints as well as Berger Paints said offtake is down, with Berger stating that demand is down to 40 to 45 per cent of its original level. The report further added that the situation has seen a minor improvement as dealers have begun moving to digital payments.

That may paint a sober sight even as there is uncertainty on whether oil prices can go up further. Though demonetization is not a structural issue and the situation is slowly settling down to normal, it has jolted the demand in the market, and it is difficult to judge how soon consumption will recover to normal levels. Thus, paint stocks could remain under pressure till signs of a recovery come in sight.

On the market front, Berger Paints share price, which is a top 500 stock recommended by Dynamic levels, closed 1.45 per cent higher at Rs 202.65.

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