Paint stocks were bleeding during the trading session on Friday as the crude oil prices surged higher amid the rising geopolitical tensions. Crude oil is a major component in making paint products and rising crude oil prices dent the margins of the paint makers and increase their input cost.
Amid the selling spree in paint makers, shares of Asian Paints dropped 2.7 per cent to Rs 3,065 on Friday, with its total market capitalization falling below Rs 3 lakh crore. The biggest paint maker in the country settled at Rs 3150.20 during the previous trading session on Thursday.
Its next biggest peer, Berger Paints tumbled more than 4 per cent to Rs 576.70, with its market capitalization falling below Rs 68,000 crore mark. The stock had settled at Rs 597.05 on Thursday. Smallcap Paint company Kamdhenu Ventures was locked in the lower circuit of 10 per cent Rs 27.22 for the day. The stock has halved its value since September 27.
Akzo Nobel India tumbled 4.3 per cent to Rs 3,655.95 during the session, against its close at Rs 3,820 on Thursday. Kansai Nerolac Paints crashed nearly 3 per cent to Rs 292 on Friday, compared to its close at Rs 300.95 in the previous session. Shares of Indigo Paints declined 2.34 per cent to 1,455 during the day.
Pravesh Gour, Senior Technical Analyst, Swastika Investmart said that the rising tensions in the Middle East brought on by the Israel-Iran confrontation caused a 3 per cent increase in the price of crude oil on the international market. Crude oil prices have a significant impact on production costs for paint businesses.
"Around 300 products are derived from petroleum during the manufacturing process. With raw materials accounting for 55-60 per cent of total input costs, any spike in oil prices directly impacts profitability. Paint producers find it more and more challenging to keep their profit margins stable when crude prices rise," he said.
Demand environment continues to remain sluggish and no significant improvement is expected sequentially, said Nirmal Bang Institutional Equities while commenting on Berger Paints. The mix is likely to improve in 2QFY25 leading to a reduction in volume and value gap, as it is seeing some traction in the premium part of the portfolio," it added with a 'hold' rating with a target price of Rs 590.
Phillip Capital said that Indigo Paints was one of the few paint manufacturers to enter the industry in the last 20 years and maintained both their profitability and presence in the market as the fifth largest paint manufacturer. "It is a category creator that has allowed them to enter the Tier 3 and 4 markets easily, giving them a first mover advantage and pricing power," it said.
Once current capex starts reflecting in the revenues, we will see an improvement in return ratios, said Phillip Capital. "With strong industry tailwinds and multiple growth levers we project 19.9%/ 23.7%/ 23.26% in Revenue/EBITDA/PAT in the period between FY24-27E. We initiate a coverage with a target price of Rs 1,937," it added.
Overseas brokerage firms Morgan Stanley has maintained an 'underweight' stance on both Berger Paints and Asian Paints with a target price of Rs 497 and Rs 2,522 respectively.
Crude and markets Crude oil exhibited significant volatility and extended its gains, with WTI prices reaching 5-week highs, testing $74 per barrel in the international markets. Rising tensions between Iran and Israel have been driving up oil prices. Reports suggest that Israel may retaliate against Iran following missile attacks, said said Rahul Kalantri, VP Commodities, Mehta Equities.
Brent crude futures were at $77.51 a barrel on Friday but were headed for a weekly gain of about 7.7 per cent, the largest since February 2023. Crude oil prices have surged sharply this week, and further escalation of the conflict in the Middle East could continue to buoy prices.
Indian markets are under severe pressure. A sudden spike in the Indian VIX has emerged, which negatively impacts short-term market sentiment, further contributing to the cautious outlook among investors, said Ajay Garg, Director & CEO, SMC Global Securities.