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Paints: Raw material concerns

Mar 13, 2003

One of the key concerns facing the Indian economy is the sharp spurt in crude prices globally. As against US$ 26 range last year, the Brent crude is currently hovering at around US$ 33 levels, a 27% rise. With the US persisting for an attack on Iraq, oil prices have shown extreme volatility off late, which is not a good sign for India Inc. The impact on the paint sector in this context, will be pronounced if crude prices continue to remain firm for a long while.One of the key raw materials used in the manufacture of paint is titanium dioxide (around 30% of raw material costs), which is a crude derivative. In light of the surge in crude prices, dioxide prices have also been strengthening in the global markets. Since Indian paint companies rely heavily on imports due to the lack of a quality conscious manufacturer in India, the impact could be adverse. Prices of titanium dioxide have already increased in the international market in 9mFY03 by 13%. Rutile dioxide prices was ruling around US$ 1,700 per tonne at the end of December 2002 compared to US$ 1,500 per tonne in April 2002. Asian Paints attributed the rise in price to the increased demand in the US, China and the South East Asian countries.

High raw material costs…
(% of sales)FY97FY98FY99FY00FY01FY02
Asian Paints51.9%51.4%52.0%51.0%50.2%49.4%
Goodlass50.7%50.5%50.3%53.0%52.5%54.0%
Berger63.1%62.1%63.9%63.7%63.6%62.7%

We expect key raw material prices to increase from the current levels by atleast 5%-6%. Just to put things in perspective, data from Chemical Weekly for the month of March 2003 has some interesting numbers. Goodlass imported 40 tonnes titanium dioxide from Japan with an average price of US$ 1,782 per tonne. This means that the sharp spurt in crude prices has already forced titanium dioxide manufacturers globally to hike prices by 5%. In effect, the expansion in operating margins that one saw for paint majors in the first nine months of the current fiscal year is likely to be muted in the next two quarters.

Though paint manufacturers generally tend to lock prices by entering into futures contract, we expect operating margins in FY04 to remain under pressure. Not only have input costs risen, but also paint manufacturers will not be able to pass on this rise to consumers, given the current economic scenario with agricultural sector faring poorly. In this context, average realisation will also be under check. We also expect the impact to be more pronounced on Berger and Goodlass.

If one were to look at the price movements of the top three paint companies on the stock market, it is status quo. While Asian Paints has been languishing between Rs 325-Rs 340 levels since July 2002, Goodlass and Berger are also trading range bound. Until clarity emerges on the war front, one will not surprised if the trend continues in the near term also.

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