Crude oil prices are back near $100 per barrel level in the international markets as escalation in the US-Iran war continues to cause supply disruptions. While the Strait of Hormuz remains effectively blocked, the situation is likely to get worse, with rising fears of imported inflation in India.
Brent crude oil price surged 6.6% to $98.04 a barrel, while the US West Texas Intermediate (WTI) crude futures jumped 6.37% to $92.80. However, oil prices are still below the recent high of near $120 a barrel touched earlier this week.
One of the key sectors that is facing the heat of higher energy prices is the paints sector. Paint companies have earlier managed to pass on any inflation via price hikes in the long run. If crude oil inflation persists, analysts believe paint companies would need to raise prices either via increases in dealer price list or cut trade spend.
While paint price hikes are warranted, the competitive intensity also remains high. But steep price hikes may also dent volumes.
“There will likely be an impact on utilisation levels and operating leverage too, in case of a volume decline scenario. While the equation remains dynamic, we reckon – crude oil prices at $80, $100, $120, instead of our base case of $70 per barrel, would necessitate a price hike of 7.5%, 21.5%, and 35.5% for Asian Paints to maintain its EBITDA margin at 18% (lower end of the guided range of 18–20%),” analysts at ICICI Securities said.
Saurabh Jain, Head of Fundamental Research, SMC Global Securities highlighted that the sharp surge in crude oil prices due to the escalating US-Iran war is posing a clear near-term headwind for the Indian paints sector where crude derivatives constitute roughly one-third of total input costs and over 60% of raw materials — potentially denting EBITDA margins by ~25 bps for every $1 rise with a 1-2 quarter lag.
“This pressure is compounded by persistent domestic challenges including soft urban/rural demand, intense competition and muted volume growth. The resulting sharp correction in paint stocks has improved risk-reward, but near-term margin and pricing concerns are likely to persist,” said Jain.
Channel checks by Systematix in the decorative paints segment pan-India showed that if crude oil prices sustain at current high levels, most dealers expect product price hikes of 2-5% in April.
Analysts at Systematix noted that the margin impact would largely depend on where, when, and for how long crude prices stabilise, as well as the timing of price hikes. Historical analysis suggests that a 10% quarter-on-quarter increase in crude oil prices has, on average, resulted in a 130 basis points quarter-on-quarter decline in gross margins in the past.
Paints Stocks To Buy
While there is near-term caution on the impact of volatile crude oil rate on pricing, margins and volume growth, Systematix notes this is still an unfolding story with multiple possible endgames.
It continues to prefer Berger Paints India, noting its consistent growth outperformance with momentum across decorative and industrial. While Asian Paints’ pricing power is positive in the current environment, the brokerage firm said it awaits industry demand acceleration before turning more positive.
Systematix has a ‘Buy’ call on Berger Paints shares with a target price of ₹570 apiece. It has a ‘Buy’ rating on Asian Paints with a share price target of ₹3,160 apiece.
With a strict long-term investment horizon, Saurabh Jain advises to accumulate Asian Paints, a dominant market leader with unmatched pricing power and resilience and Berger Paints, having superior volume momentum and margin track record as the top picks.
“Asian Paints and Berger Paints have the potential to navigate volatility while riding structural tailwinds of urbanization, housing recovery, and premiumization,” said Jain.
ICICI Securities remains constructive on the paints sector. It believes key upside risk is better-than-expected gross margin led by correction in input prices, while key downside risk is unexpected irrational competition due to deceleration in general consumption demand.
Top picks by ICICI Securities in the paints sector are:
Akzo Nobel India | Add | Target Price: ₹3,200
Asian Paints | Add | Target Price: ₹3,000
Berger Paints | Add | Target Price: ₹525
Indigo Paints | Buy | Target Price: ₹1,200
Kansai Nerolac Paints | Add | Target Price: ₹250
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before making any investment decisions.
