ICICI Securities warns of paint players' pricing power taking a hit on rising crude

ICICI Securities believes the paint industry's balance might be off-kilter, advising against big paint company investments

ICICI Securities has warned of potential crude oil price hike impacting paint companies, especially the bigger players. Crude is one of the essential raw material for the industry.

Pricier crude could squeeze pricing power and ad budgets for established players, the brokerage said, as it cited the HUL-P&G price war to drive home the point.

Rising costs hurt HUL's profitability while rival P&G managed better due to its size, the brokerage said, drawing a similar scenario for the paint industry.

The note comes amid rising Israel and Iran tensions, fanning worries of an all-out conflict engulfing the entire West Asia that sent crude and gold prices zooming. Oil, however, has since stabilised.

Rising crude oil prices could make things tougher for established companies but Grasim might not feel the pinch much, the brokerage said.

Grasim Industries, the flagship company of the Aditya Birla Group, entered the paint business in February with the launch of Birla Opus.

The paint industry's balance might be off-kilter, ICICI Securities’ analysts  said, advising against big paint company investments.

They suggested Akzo Nobel, Indigo Paints or Kansai Nerolac for a different approach.

Geopolitical tensions could drive crude prices, inflating costs for paint materials, and crude derivatives. There is a high probability of inflation in other commodities such as  titanium dioxide, which is used as a white pigment in paints, and  vinyl acetate monomer, is an intermediate used in a manufacturing a range of consumer and industrial products such as paints.

Asian Paints improved margins despite volatile crude prices, but inflationary pressure now hampers incumbents amid heightened competition. Similar to HUL-P&G detergents battle, incumbents may face margin versus market share dilemma.

HUL's margins suffered during CY03-07, taking years to recover profits and stock performance lagged indices significantly, the report added.

As Birla Opus has priced its paints 17 percent lower than the market, for established players, the scope to raise prices is low, the brokerage said.

There will also be pressure to roll out higher trade/consumer schemes.

"With a cap on realisation and increase in commodity prices, we believe there will be weaker gross margins. It may result in lower ammunition to combat the rising competitive activity. We believe the budget to invest in – 1) ad-spend; and 2) higher trade/ consumer spends – may get curtailed,” the report said.

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