Shares of paint companies led by newest entrant JK Cement fell as the steady rise in crude oil is expected to drive up input costs amid uncertain demand.
JK Cement, which announced its foray into a highly competitive paint business through a wholly-owned subsidiary, plunged 12% to ₹2,335, while Indigo Paints slid 9% to ₹1,525 .
Berger Paint and Kansai Nerolac Paint fell four percent each to ₹629 and ₹431. Asian Paints and Shalimar Paints were down 1% each at ₹2,708 and ₹134.
The cost of titanium dioxide (TIO2), an essential raw material for paint manufacturing, is expected to skyrocket with rising crude oil prices. TIO2 is a derivative of crude oil. Soaring raw material prices will increase production costs and impact gross margins for paint companies.
Antu Thomas, senior research analyst at Geojit Financial Services, said paint stocks saw a steep decline in the market as the rich valuation and significant rise in oil prices continued to weigh on investor sentiment. Paint companies have already implemented an 18-20% price hike over the past nine months to pass on rising input prices to end consumers, he added.
Crude oil prices rose more than 6% to their highest level since 2008, thanks to US and European allies planning to ban imports of Russian oil. Additionally, global markets are expected to face a tight supply scenario with a potential delay in the return to Iranian crude.
Despite the gross shock, JK Cement’s board had approved an investment of up to ₹600 crore over the next five years to set up factories in various locations and establish a brand. The company aims to manufacture various products with a revenue target of ₹850 crore in the next five years.
Dharmesh Shah, research analyst at Emkay Global Research, said JK Cement management is aiming to commission the paint plant within the next two years, which looks aggressive given that land acquisition and various regulatory approvals are still pending.
“We believe that building a management team, building stronger brand equity and investing in tinting machines remain major challenges. In an optimistic scenario, if the company meets the targets for the paint sector, it could potentially add 5% to its market capitalization,” he added.
March 07, 2022