T Gnanasekar, director, CommTrendz, said: “The market is now focusing on demand, which is weakening. Crude oil prices are unlikely to see sharp upsides in the near term despite supply concerns or issues in West Asia.” Investors, however, should be watchful of news
flow on trade talks and geo-political tensions, that could trigger significant upside risk in crude oil prices, he said.
Benefits of low crude oil prices, however, would vary depending upon share of solvent-based products. Berger Paints has a higher share of solvent-based products than Asian Paints. In fact, in case of Asian Paints, a likely higher operating cost due to major capacity expansion (more than 50 per cent) in FY19 and the US (besides Taiwan) being a major supplier of TiO2 could cap the margin gains while benefiting Berger Paints. TiO2 prices in the US are expected to be comparatively higher. Another key factor in favour of Berger Paints is operating efficiency.
Pratik Poddar, analyst at Narnolia Financial Advisors, said: “Berger Paints’ operating efficiency helped it to restrict the impact of highly volatile crude oil prices at Ebitda (earnings before interest, tax, depreciation, and amortisation) level in FY19. Continuing the strong operational performance, any recovery in gross margins with the lower crude oil prices would comparatively reap higher benefits for Berger Paints in the near term.”
While Ebitda margin of Asian Paints is estimated to expand by 85 basis points in FY20 to 19.1 per cent, that of Berger Paints will go up by 110 basis points to 15.6 per cent. The earnings growth of the two firms would grow by 20 per cent and 28 per cent, respectively, in FY20. For Kansai Nerolac, on the other hand, revival in automobile demand is key for overall performance, as the company derives a large chunk of its business from the industrial segment. In FY19, too, the company posted a 12 per cent decline in consolidated earnings.