As crude oil prices continue to rise, concerns are mounting for domestic paint manufacturers. However, analysts suggest that these fluctuations in oil prices may only be a temporary hurdle, with more significant challenges looming on the horizon. The paint industry is grappling with intensified competition and shrinking profit margins, which could pose issues in the medium to long term.
Market Dynamics and Stock Performance
“A change in market structure will guide paint stock prices in the long run while crude oil prices will dictate more sporadic movements, similar to the volatility we witnessed last week,” stated Ajay Thakur, a research analyst from Anand Rathi Institutional Equities. He added that the surge in paint stock prices earlier this month, when oil dipped below $70 per barrel, was likely a result of overbuying prior to the geopolitical tensions surrounding the Israel-Iran conflict.
If Brent crude prices continue to rise and surpass the $80 per barrel mark for an extended period, analysts anticipate further declines in paint stocks. As of Tuesday, Brent crude had fallen nearly 2%, closing at $79.69 per barrel.
Dependence on Raw Materials
Paint manufacturers are heavily reliant on significant raw materials, including titanium dioxide and crude-based monomers. A notable increase in input costs can reduce profit margins, especially when companies are unable to transfer these costs to consumers through price hikes.
Challenges from Increased Competition
The paint industry’s competitive landscape has changed dramatically, particularly with the entrance of the Birla Group under the Birla Opus brand. This has exacerbated the existing challenges, leading to stagnant profit margins, which have remained around 14-20% for the past several quarters.
“The dynamics of the paint industry have shifted to resemble that of the cement sector,” remarked Dharmesh Kant, head of equity and derivative research at Chola Securities. “Companies are now prioritizing market share over profit margins due to escalating competition and capacity additions across the board. It’s become a volume-driven industry.”
Earnings Expectations and Market Trends
Nuvama Institutional Equities predicts that the Ebitda margins of major players like Asian Paints and Berger Paints India will contract by 70 and 60 basis points, respectively, for the quarter ending September. Asian Paints is expected to see its margins drop to 18.2%, while Berger’s will fall to 16.3%. On a slightly more optimistic note, Indigo Paints might experience a marginal increase in its Ebitda margin by about 20 basis points during the same period.
Despite cutting prices in recent quarters, paint companies have implemented a price increase of 1-2% in July. However, analysts foresee a decline in overall profitability in Q2, primarily as companies strive to maintain their market shares amid subdued industry demand.
Marketing Strategies and Demand Fluctuations
To fend off competition, established players have ramped up advertising expenditures and offered deeper dealer discounts. However, Thakur noted that volume growth in Q2 may lag slightly behind Q1, projected at around 6-8% year-on-year due to an erratic monsoon season impacting demand for exterior paints. Nonetheless, the minor price adjustments made in July and August may yield slightly better revenue figures compared to Q1.
Concerns Regarding Overvaluation
Analysts have adjusted their expectations for Q2 earnings and express concerns over potential overvaluation within the paint sector. Gaurav Garg, a research analyst at Lemonn Markets Desk, stated, “Current valuations of paint manufacturers are not justified by their profit or revenue growth, resulting in a slowdown in profit growth due to margin pressures that skew the industry towards overvaluation.” The median PEG (price-earnings to growth ratio) stands at approximately 2.8, indicating potential overpricing.
Despite the looming risks, experts predict that paint stocks will stabilize around current levels in the medium to long term until there is more clarity regarding the industry’s market structure.
Future Outlook and Market Structure Changes
“The competitive landscape is expected to intensify in FY26-27 as Birla Opus ramps up production and expands operations significantly,” commented Aniruddha Kekatpure, head of research at Edelweiss Mutual Fund. The pace of this ramp-up and the subsequent increase in market share could cause shares of established players to decline or gain, contingent on market dynamics.
While new entrants face challenges in establishing market share due to the strong brand recognition and diversified portfolios of existing leaders like Asian Paints, Berger Paints, Kansai Nerolac Paints, and Akzo Nobel India, mergers or acquisitions may become a consideration for current players if competitive pressures lead to shrinking margins.
In summary, investors should remain vigilant as the paint industry navigates through changing market conditions. Analysts recommend a “hold” position on all paint stocks for the time being while awaiting further developments in market structure.
