Paint Makers Say Demand Remains Strong But Crude Is A Concern

Paint makers expect demand to increase in the ongoing financial year despite higher crude prices.

The paint industry uses crude oil derivatives such as monomers and titanium dioxide as raw materials, which account for more than 50 percent of a company’s total expense. Oil has rallied to levels last seen in 2014, close to $80 a barrel, as supply disruptions from Iran to Venezuela continued to fracture the global market.

Asian Paints Ltd., the country’s largest paint maker, in its annual report said the demand outlook is positive for the industry but concerns about raw material costs remain if crude oil prices continue to soar. “Raw material prices in the paint industry have moved up over the last three quarters, leading to a series of price hikes in the sector,” it said. “Any potential adverse market conditions can further affect the industry.”

Berger Paints in its annual report said demand picked up in the second half of the previous financial year as the impact of demonetisation settled down and the industry adjusted to a new indirect tax regime. A near normal monsoon for the third consecutive year, higher minimum support prices for crops and the central government’s push towards rural infrastructure are expected to boost rural consumption. The cut in goods and services tax rate on paints from 28 percent to 18 percent is likely to improve demand, it said.

But costlier raw materials is likely to put pressure on the gross margins, which represents the percent of total sales revenue that a paint maker retains after incurring the direct costs associated with producing the goods and services it sells.

This, coupled with a weak Indian rupee, can result in gross margins moderating by 110-200 basis points for paint makers, according to Avi Mehta, research analyst at IIFL.

The rupee is the worst-performing Asian currency, depreciating more than 12 percent year-to-date against the U.S. dollar.

Companies such as AkzoNobel N.V. and Kansai Nerolac Paints Ltd. are likely to be more affected due to a higher share of industrial paints business, wherein price hikes require contract renegotiation and typically happens with a lag.

Yet, AkzoNobel and Kansai Nerolac Paints agreed that the government’s move to hike minimum support prices, health care plans and a normal monsoon boosted the rural economy. This will increase the income of rural consumers.

But a higher crude, according to Kansai Nerolac Paints’ statement, is putting pressure on raw material prices, which will impact the bottom line. Inflation, it said, is expected to be higher.