Paint makers hold back on price hikes amidst volatility

Despite the fluctuation in crude prices because of geo-political tensions, Indian paint-makers are holding back on price hike, at least for another quarter till March 31-end.

Paint companies say recent price hikes are yet to have full effect and this apart a three-month-long stock position – which include 30-45 days of finished stock; and another 45-60 days of raw material – should be enough to see through short-term price fluctuations.

Brent is trading at over $100 per barrel.

Indian paint majors have already taken a 22 per cent price hike so far in the nine-month-period for the current fiscal to off-set a raw material headwinds and other inflationary pressures which have seen costs rise by 25 per cent.

The last round of price hike in January was initiated by AkzoNobel India, which upped priced by 4.7 per cent. Market leader, Asian Paints, the country’s second largest player Berger and the number three player Kansai Nerolac did not announce hikes though.

“At present, there is sufficient stock which could see us through the short-term period without any major price hike. However, if crude continues the upward trend and geo-political tensions persist, add to that supply side uncertainties, then it becomes difficult to predict long term price movements. So at least for this quarter, we are not looking at price hikes,” Abhijit Roy, MD and CEO, Berger Paints India, told BusinessLine.

Berger is the country’s second largest paint-maker by turnover and market share.

Raw material price pressure

Paint companies use crude-based derivatives, monomers and titanium dioxide (TiO2) as inputs. Raw materials account for about 55 per cent of the sector’s total operating cost.

AkzoNobel India’s MD Rajiv Rajgopal believes that volatility in raw material prices, primarily crude derivatives, is expected to continue for paint companies for another three to six months before stability comes in.

“The hope is high raw material prices should start cooling or stabilising around August. So another three to six months of such up and downs are expected,” he said.

Titanium dioxide, although stable at the moment, is expecting a price rise primarily because of geo-political tensions. Monomer and solvent prices are also on the uptrend.

Berger’s Roy adds that demand-supply situation in Europe will also play a determining role in terms of price movements of monomers and TiO2.

Volume impact

Price hikes, the bulk of which was announced post Diwali, will see its full impact in Q4 (Jan – Mar) period. While gross margins are poised to see a gradual improvement, near-term volume growth may not be as bright, say analysts tracking the sector.

“There has been some slowdown in demand in upcountry markets that have not grown with the same pace as metros. Moreover, there was some hit in demand too with Omicron,” an analyst said.

In Q3, on a two-year CAGR (compound annual growth rate) basis, Asian Paints Ltd saw volume and value growth of 25 per cent and 27 per cent, respectively. Berger’s two-year CAGR volume and value growth stood at 20 per cent and 23 per cent say soruces.

Another factor that could impact volume growth is loading of inventory by dealers ahead of the price hikes in Q3 FY22. Since paint companies are now indicating that product price hikes may not be needed anymore, dealers may not add more inventory in the current quarter, keeping volumes low.

“Gross margins would see some improvement over pre-Covid levels, lets say on a two year-basis. But anticipating margins to be at last fiscal level – when crude prices and inflationary pressures were low – or looking at sky high EBITDA margins of over 25 per cent is unrealistic. Nor long term sustainable,” Roy explained.

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