“Volume growth of paint companies
would be better in the coming quarters as rural economy has started improving and even the automobile sector has seen good growth,” said Kaustubh Pawaskar, analyst at Sharekhan.
How an expected increase in volume will reflect on paint companies, given the high input cost pressure, remains to be seen. Prices of key raw materials of paint companies, such as titanium di-oxide (TiO2) and other crude derivatives (owing to high crude oil prices, which affect prices of paint makers’ other key inputs with 45-60-day lag), are at elevated levels. High input costs have affected their gross profit margins in the past quarter and are likely to have weighed on their profitability in Q4, albeit at comparatively lesser extent.
“The paint companies
have taken price hikes in March 2018. Though those hikes are not sufficient enough to compensate the increase in TiO2 and crude oil prices, they will reduce some pressure on gross margin in Q4,” said Sachin Bobade, analyst at Dolat Capital.
However, the prices of TiO2 has started coming down. While companies have also undertaken price hikes in March 2018, another is expected in April-May 2018 (Asian Paints is said to have announced another price hike of 1.3-2.8 per cent, effective May 2018). Thus, analysts expect the gross margins to improve in FY19. If crude prices continue to soar (as anticipated by many experts), improving demand will allow paint companies to take additional price hikes to protect their gross margins.
Analysts also foresee some cost saving measures to provide additional support to the paint companies’ earnings before interest, tax, depreciation and amortisation (Ebitda) margin.
With the positive outlook, analysts are bullish on most of the major paint companies. Thus, it is also not surprising that stocks of paint companies have been doing well vis-à-vis the Sensex in the recent past.