Why crude oil surge may raise paint prices in India
What's the story
The recent surge in crude oil prices, now close to $100 per barrel due to the ongoing US-Iran war, could lead to a rise in paint prices. Crude oil derivatives—such as solvents, resins, binders, and additives—account for 35%-40% of total raw material volume. The Strait of Hormuz remains largely blocked, raising concerns over imported inflation in India. Analysts are optimistic about Asian Paints and Berger Paints amid these developments.
Price increase
Brent crude jumps to nearly $100 per barrel
Brent crude oil prices have jumped 6.6% to $98.04 per barrel, while US West Texas Intermediate (WTI) crude futures have risen by 6.37% to $92.8. The paints sector is particularly vulnerable to these rising energy costs as companies may be forced to raise prices or reduce trade spending if crude oil inflation continues.
Market response
Asian Paints may have to hike prices significantly
Analysts at ICICI Securities have predicted that if crude oil prices remain at current high levels, Asian Paints may have to hike its prices by 7.5%, 21.5%, and 35.5% for crude oil prices at $80, $100, and $120 per barrel, respectively. This is to maintain its EBITDA margin at the lower end of the guided range of 18-20%.
Margin impact
Crude derivatives account for over 60% of raw materials
Saurabh Jain, Head of Fundamental Research at SMC Global Securities, has warned that the sharp rise in crude oil prices due to the escalating US-Iran war could hurt EBITDA margins by some 25 basis points for every $1 rise with a 1-2 quarter lag. This is because crude derivatives account for nearly one-third of total input costs and over 60% of raw materials in the Indian paints sector.
Price forecast
Dealers expect product price hikes if crude remains high
Systematix's channel checks in the decorative paints segment across India have shown that if crude oil prices remain high, most dealers expect product price hikes of 2-5% in April. The margin impact will largely depend on where, when and for how long crude prices stabilize as well as the timing of these price hikes.
Past trends
Systematix remains positive on Berger Paints India
Historical data suggests that a 10% quarter-on-quarter increase in crude oil prices has led to an average 130 basis points quarter-on-quarter decline in gross margins. This highlights the potential impact of rising crude oil prices on the paint industry. Despite near-term caution over volatile crude rates, Systematix remains optimistic about Berger Paints India for its consistent growth performance and views Asian Paints as having pricing power but awaits industry demand acceleration before turning more positive on it.