Paint makers brace for raw material inflation, supply chain disruptions as pressure builds on margins

Northbound crude prices and global supply-chain disruptions have made Indian paint companies – which have witnessed good volume growth in recent times – brace for inflationary pressure on raw materials, logistical issues, pressure on gross and EBITDA margins.

This has also led to apprehensions of another round of price hike in decorative and industrial paints necessitated by the need to protect margins that, some say, will continue to be under pressure for at least two more quarters.

Industry experts say an average 7-8 per cent hike has already been taken across decorative paints in six months of FY22 – mostly passing on the bulk of cost increase which has been in 10-12 per cent range YTD. Company-specific hikes are higher, some being upwards of 10 per cent in premium categories.

Price hikes

In the industrial paints segment, price hikes have been taken and negotiations are on for another set of hike, expected immediately after the festive season. According to a market sources, there have been nearly five rounds of hikes, though officially the number is three – ranging between 1 and 2 per cent on existing selling price in India.

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Akzo Nobel NV, the Dutch-major, during its international earnings call, has said it is anticipating a 20 per cent price increase in commodity prices (globally). In fact, the paint maker in its earnings call has raised concerns over availability of ingredients – including a particular tint used to make shades of the colour blue.

It further anticipates spiralling costs and material shortages to last into the next calendar year. The Indian arm, Akzo Nobel India – whose shares are traded publicly and the fourth largest paint maker here – is in its silent period. Global paint-major Sherwin-Williams lowered its third quarter and 2021 sales and earnings expectations, amid escalating raw material availability challenges and inflationary headwinds.

Material shortages

A senior executive with an Indian paint major said, there is trouble sourcing items like tinplate used to make metal cans; which can cause delay in deliveries. Shipments too are delayed, due to non availability of containers and vessels, leading to postponing of production schedules. Europe and the USA markets recently saw shortage of resins – a prime ingredient in paint. The situation though was averted in India.

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“Its not titaniumdioxide price only now. You look at the other items – tinplate is up, shipping charges are through the roof, and so on. Not all are oil price driven. We are now struggling at the supply chain side,” he said adding that, “this is the worst commodity inflation for the industry in recent times”.

Indian paint companies are stocked up to cater demand well into Q3, but the following quarter (January onwards) will be as he calls “testing times”, specially on the margin front. Volume growth though isn’t the immediate concern for paint companies.

“Asian Paints, which declared results today has seen its gross margin (Consolidated) compress by 966 bps y-o-y and EBITDA margin (Consolidated) dip 1,090 bps y-o-y. It’s one of their multi-quarter low margins,” Abneesh Roy, ED, Edelweiss Securities told BusinessLine .

But he expects volume growth to continue in Q3, banking on festive demand. The stock market reacted negatively to Asian Paints’, the largest paint-maker in India, with the scrip down at nearly 5 per cent to ₹3,015, at NSE, post announcement of results.

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