Paint Companies Find Some Respite As Costs Ease

The declining crude oil prices, driven by concerns of a global recession, have had a positive impact on the prices of crude-based derivatives. This is particularly good news for paint and adhesive companies, as it eases the cost of key input chemicals like titanium dioxide and vinyl acetate monomer. However, the benefits of lower input costs may be partially offset by higher selling expenses.

Paint companies are expected to increase their advertising and sales efforts to counter competition from new entrants, which could offset the margin outlook. Asian Paints and Berger Paints have already seen the power of digital adversiting, and how it created a good impact on sales.  Analysts anticipate a gradual improvement in gross margins due to easing input costs, but it remains to be seen if these savings will be passed on to customers through price reductions. 

The entry of Grasim Industries, JK Cement, and Pidilite Industries into the paint sector further intensifies this ( in a good manner ).  Companies are likely to step up their advertisement spends and introduce dealer discounts or schemes to protect their market position. Additionally, paint companies are expanding their product offerings to include adjacent categories like waterproofing. 

However, the high entry barriers in the paint industry may lead to increased pricing pressure and potentially impact profitability for incumbents. Moreover, the cost of imported materials could be affected by the relatively high average rupee-dollar exchange rate, which is expected to remain at around ₹82-83 per dollar in FY24. 

While demand for decorative paints is expected to be reasonable in the coming year, there is a potential risk to rural demand from an El Niño event. Despite these challenges, shares of paint companies have shown resilience, with Asian Paints, Berger Paints, and Kansai Nerolac Paints experiencing significant gains in the past year. However, the valuations of paint stocks are considered to be relatively expensive.