Triple whammy for paint sector: Rough road ahead

Paint is everywhere—protecting buildings and bridges, decorating cars, cupboards, and fridges. While some paints are now water-based to reduce emissions, most paints remain oil-based and use pigments to ensure a long-lasting effect. But the cost of pigments and crude oil inputs is on the rise. Complicating matters is the declining rupee. If paint manufacturers end up raising prices, business could suffer.

HIKE IN INPUT COSTS

The main components of paint—pigments and petroleum products—have become more expensive. The cost of pigments like titanium dioxide, zinc oxide, and other metallic compounds has been moving upward over the past two years.

Besides, petroleum products have nearly doubled their prices from a couple of years ago. And crude oil prices are expected to increase to USD 90 per barrel when sanctions against Iran commence next month. That means input costs will rise further, driving up the cost of paint manufacturers.

DECLINING RUPEE

Before the Goods and Services Tax (GST) was introduced, manufacturers were paying two taxes on paint: 12.5% and 15%. With the introduction of 28% GST, the tax outgo largely remained unchanged. Bringing paints within a lower slab of 18% GST reduced this tax burden for a while. Manufacturers were thus able to manage the rising input costs by levying only small price increases of less than 5%.

But the current situation may not last as the costs keep going up. The fall in the rupee exchange rate is only multiplying the effect of the increase in costs.

The Indian rupee has fallen by about 14% this year. If the decline continues, the only way to offset the cost increases will involve pushing up paint prices.

DEMAND REDUCTION IN STORE

A rise in paint prices may push down demand. In turn, this may reduce volumes and profit margins, resulting in lower earnings for paint companies. However, rural demand is expected to increase as rural incomes grow.

But companies will have to increase their prices quickly. Margins will be under pressure due to the high input costs. The relief provided by the GST reduction may thus only be a temporary one.

OUTLOOK FOR PAINT COMPANIES

The next two years could see demand affected by crude oil prices and rupee exchange rates. However, some companies appear to be doing well, and prudent investments are likely to bring reasonable returns to investors.