Asian Paints cracks over 16% in the past month. Here's what crude oil spike means for the sector

The global crude oil price hike has left Indian paint companies colourless. The cost dynamics changes, especially with the increase in crude prices — Brent at around $110 a barrel now — the incumbents including Asian paints and Berger paints have already increased the product prices multiple times. However, they are reaching the end of the road. 

The Organization of Petroleum Exporting Countries (OPEC), which controls the majority of global oil production, expressed unwillingness to ease the tight oil markets and maintained its targeted monthly production increase of 4,00,000 barrels/day for April even after the disruption to Russian supplies.

Price Hikes Are Not Enough

Raw material accounts for 55-60 per cent of input costs and directly impacts gross margins. Indian paint companies increased prices several times in the past few months but they were clearly not enough to offset higher raw material costs.

Paint companies have been trying to pass on higher input costs to consumers through calibrated hikes. Prices are 22 per cent higher year on year and the next increase is expected in April 2022.

“The prices of wood finish are hiked by 8 per cent from March 2022 by paint companies. If paint companies plan to hike prices in April, there will be some inventory uploading in March,” ICICI Securities said in a note.

Asian Paints has taken an overall price hike of 19 per cent in the 2020-2021 financial year. It had highlighted during its third-quarter earnings call that, the current input cost inflation was unprecedented in 40 years. The current crisis will further aggravate the situation

Brokerages had reported that Asian Paints had increased prices of its products by 7-9 per cent in November 2021, while Berger Paints had raised the prices in high single digits. 

While another paint company, Akzo Nobel India, had taken a cumulative price hike of 14 per cent in the first half of FY21 and might raise the prices further going ahead.

Other Players Into the market 

It is at this point in time that Grasim Industries is preparing for the launch of its paint business in the second half of this year. The Aditya Birla Group company targets to invest ₹5,000 crores in the paint business by the end of 2023. 

JSW Paints, which entered the market just before the Covid-19 pandemic, is also gaining ground. Sajjan Jindal promoted JSW Paints had grown about 120% in the first half of FY22.

Driven by economic recovery, the paint maker reported monthly sales of over ₹100 crore in October for the first time, thanks to the three-fold growth of the decorative paints business with the completion of its national roll-out. It targets to achieve ₹1,000 crore revenue in FY22. 

The group’s flagship business JSW Steel had approved ₹750 crore strategic investment in JSW Paints in 3-4 tranches between FY 2021-22 to FY 2024-25.

While Birla eyes the second position in the pecking order. The company management recently said it took a cumulative price hike of around 22% compared to 25% raw material inflation in April-December 2021.

In the December quarter, the company’s gross margins improved by 200 basis points (bps) sequentially to 36.8%, although it was down by 830bps year-on-year. 

But the net profit dropped 18% over the previous year to ₹1,015 crore during the quarter. Billionaire Mukesh Ambani’s Reliance Industries owns a 4.9 per cent stake in Asian Paints, which is valued at ₹3 lakh crore in the stock market. 

For Reliance, paint is a natural extension of its petroleum and petrochemicals business. The Ambani-led conglomerate bought the stake in 2008.

JSW group is in the steel and cement business, which connects them to paints. Sajjan Jindal’s son Parth Jindal heads the business. JSW Paints supplies industrial paints to the customers of JSW Steel and JSW Cement. It is also ramping up its retail presence with Colourvista Senses retail stores across the country.

The Stock Price Crash

Meanwhile, Shares of Asian Paints declined by nearly 16.61% in last month. The counter has declined 19.4% from its record high of ₹3,588.05 posted on 10 January 2022.

In the last one month, the stock has moved nearly 16.61% lower as compared to the Nifty 50 index which fell 5.8% in the same period.

The counter saw selling pressure following a steep rise in crude oil prices. Higher crude oil increases input costs for paint companies, which use crude derivatives. Higher input prices decrease profitability and margins for paint companies.

In the commodities market, Brent crude for May 2022 settlement jumped from $4.55 to $117.48 a barrel. Crude oil prices surged after OPEC and its allies on March 2022, decided to hold production steady despite the recent dramatic spike in oil prices.

On the technical front, the stock's RSI (relative strength index) stood at 29.180. The RSI oscillates between zero and 100. Traditionally the RSI is considered overbought when above 70 and oversold when below 30.

The stock is trading below its 50 and 100 days simple moving average placed at 3278.72 and 3223.54 respectively. These levels will act as crucial support zones in the near term.

Asian Paints is a leading paint company in India. The company along with its subsidiaries has operations in 15 countries across the world with 26 paint manufacturing facilities, servicing consumers in over 60 countries.

On March 2 2022, MG Motor India has announced that it recently become the world's first automotive brand to use Ultrax Degreaser, a liquid alkaline degreasing cleaner developed by PPG Asian Paints.

For the quarter ended 31-12-2021, the company reported a Consolidated Total Income of ₹8599.05 Crore, up 18.87 % from last quarter Total Income of ₹7234.21 Crore and up 24.87 % from last year same quarter Total Income of ₹6886.39 Crore. Company reported anet profit after tax of ₹1016.33 Crore in the latest quarter.

Going forward, demand growth will be the focus of the paint industry, which faced one of the worst commodity inflations in recent times. The prices of titanium dioxide and tinplate increased exponentially, while shipping charges went through the roof. The companies have also been struggling with supply chain issues.