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ICICI Securities has warned that a possible rise in the price of crude oil could hurt paint businesses, especially the bigger ones are expected soon. One of the most important raw materials for the business is crude oil.
As crude oil prices rise, established players may have less pricing power and ad budgets, according to the firm. To make its point, ICICI securities used a reference to the HUL-P&G price war.
The brokerage said that HUL’s profits went down because of rising costs, while peer P&G did better because it was bigger. This was a similar situation in the paint business.
Concerns about a full-scale war in West Asia were stoked by the note, which came at a time when tensions between Israel and Iran were growing. Now, though, the price of oil has leveled off.
The firm said that while rising crude oil prices could make things harder for big companies, Grasim might not be affected as much.
What do ICICI Securities Analysts predict
Analysts say that as summer gets going, consumer goods stocks will heat up D-Street. Consumer goods stocks are going to get hot.
Analysts at ICICI Securities further said that the paint industry may not be balanced properly and suggested that big paint companies not invest in the industry. To try something new, they recommended Akzo Nobel, Indigo Paints, or Kansai Nerolac.
Tensions in geopolitics could cause crude prices to rise, which would make paint and other products made from crude more expensive. Other goods are also likely to go up in price, like titanium dioxide, which is used as a white color in paints, and vinyl acetate monomer, which is an intermediate used to make many consumer and commercial goods, including paints.
While Asian Paints’ profit margins got better even though oil prices were unstable, incumbents are now having a harder time because of rising costs and more competition. Like the fight between HUL and P&G over detergents, leaders may have to choose between market share and profit.
The study also said that HUL’s stock performance missed indices by a large amount during CY03-07. This meant that the company took years to recover its profits.
Based on the fact that Birla Opus has priced its paints 17% less than the market, the firm said that established players don’t have much room to raise prices.
It will also be under a lot of pressure to start bigger trade and consumer plans.
“We think there will be lower gross margins with a cap on realization and rising commodity prices.” It could mean less ammo to deal with the increased competition. The report said, “We think the budget to invest in 1) spend on ads and 2) higher trade and consumer spends may get cut.”
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