Paint companies to hike prices in December again, year-to-date hike nearing 20%

Abhishek Law Kolkata | Updated on November 25, 2021

Asian Paints and Berger have signalled a hike of around 4-6 per cent

An increase in raw material cost, supply disruptions, rise in freight and transport cost hit gross and EBITDA margins of companies

Paint companies are hiking prices for the second time in successive months as they continue to fight rising raw materials and energy costs, and protect margins.

Asian Paints and Berger — the two large players accounting for more than 50 per cent of the market together — have signalled a hike of around 4-6 per cent effective December 5.

In November, both these companies had announced one of the steepest price hike of around 8-10 per cent.

On a year-to-date basis, the price hike in decorative paints is now at a record 19–20 per cent across five rounds; making it one of the sharpest in recent times.

Also read Paint maker Akzo Nobel India mulls another round of price hike

With the two market leaders announcing price hikes, other players like Akzo Nobel India and Indigo Paints are expected to follow suit.

To decide on quantum

Both Akzo Nobel India and Indigo Paints confirmed to BusinessLine that price rise is in the offing, although they are yet to decide on the exact quantum.

“We will hike prices in December in line with the market leaders. But, the increase will not be as steep as theirs. On a weighted average it will be one or two percentage point lower than the leaders,” Hemant Jalan, CMD, Indigo Paints, said adding: “A call on the quantum is expected to be taken in the next two to three days.”

Interestingly, Akzo Nobel India, the makers of ‘Dulux’ paints, initiated a near 18 per cent price hike that played out primarily across Q2 (September-end) and into Q3 (Oct – Nov) of this fiscal. The company took the lead in price hike, unlike in the past when market leaders signalled the increase and others followed.

Also read JSW Paints’ monthly sales cross ₹100 crore in October

Its MD Rajiv Rajgopal had, in an earlier interaction with BusinessLine, said, “When market leaders hike price, you get an indication that there is scope of absorption at the end-user level. We are working out the quantum.”

According to market analysts, price hikes should have been announced earlier; but one of the leaders delayed it. In Q2FY22, when India was coming out of the second-wave of Covid infection and subsequent lockdowns, the leader, generally known to take an aggressive stance on price increase, in a bid to gain share and not hamper pre-festival volumes, took a hit on margins. Price hike was moderated.

There was also an anticipation that raw material costs would start tapering as global supply chain disruptions moderated. But the results were not as expected and the price of most paint company stocks took a beating too.

Margin pressure

A quarter-on-quarter increase in raw material cost — first the crude-derivative driven ones, and then non-crude ones — continuing supply disruptions and an increase in freight and transport cost hit gross and EBITDA margins of paint companies.

Amit Syngle, Managing Director and CEO, Asian Paints, signalled “aggressive price hikes” after the company’s Q2 earnings call.

“Inflation is at unprecedented levels. We haven’t seen this kind of an inflation in material prices at least in the last 40 years,” he had said.

For Asian Paints, the consolidated gross margin (indicative of raw material pressures) declined in Q2 FY22 by 970 bps y-o-y and EBITDA margin declined over 1,000 bps to 12.7 per cent (lowest in past 14 years).

On the other hand, Berger Paints India saw its Q2FY22 gross margins decline 450 bps to around 36 per cent; while operating margins dropped to 15.6 per cent, a 333 bps fall y-o-y.

Akzo Nobel India saw its gross margins come down to 40.2 per cent (from 48.7 per cent) while EBIT per cent saw a drop to 10.1 per cent (from 14 per cent in the year ago period).

Kansai Nerolac saw a 937 bps fall and Indigo Paints witnessed a 690 bps EBITDA margin compression during the period.

“Berger’s Q2FY22 EBITDA margin decline was lower than peers due to price hikes higher than market leader, market share gains in economy paints and operating leverage and likely reduction in ad-spend,” analysts at ICICI Securities Ltd said in a report.

‘Hikes inevitable’

According to Abhijeet Roy, MD and CEO, Berger Paints, the December-price hikes are “inevitable”. However, whether the hikes will have an impact on volume growth is something that has to be looked at on a long-term basis.

“In our analysis, there should not be much of an impact. Paint cost is 40 -45 per cent of the actual project cost in case of an individual. So an 18 per cent hike, or lets round it off to 20 per cent, would mean an 8 per cent increase in effect at the end-user level. So a project cost of ₹30,000 would be up by say ₹2,000 – 3,000. A volume impact in such cases is unlikely,” he added.

For Q2FY22, almost all paint companies saw double-digit volume growth.

Some early signs of stability in crude prices are visible and supply chain disruptions are witnessing some recoveries. The current hikes should cover raw material cost and other inflationary pressures.

Analysts & industry observers believe the current hikes would help restore margins to “previous levels”.

Asian Paints management indicated that the target is to keep operating margins at 18-20 per cent levels; while Berger said operating margins are likely to be at “18 per cent level in Q4FY22 onwards”. Akzo Nobel management said, it remains “committed to double-digit margins”.

Published on November 25, 2021

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