Rising Crude Oil Prices May Hurt Margins Of Paintmakers In Fourth Quarter

Shares of the paint companies have come under pressure as a weaker rupee and the rising crude oil prices are expected to hurt margins and profitability in the quarter ending March 2019.

The prices of crude oil—a key raw material for paintmakers—have rebounded nearly 25 percent so far this year on the back of restrained production by the OPEC and its allies, falling U.S. rig count and expectations of settlement of U.S.-China trade dispute.

Most paintmakers reported mixed earnings in the December-ended quarter as lower margins on account of the higher input costs offset the double-digit volume growth. However, most brokerages had expected improved margins in the fourth quarter of the ongoing financial year as crude oil prices had crashed in the three months ended December. “Going ahead, with cooling of raw material prices and price hike, we expect margin to rebound,” Abneesh Roy, senior vice president of research at Edelweiss Financial Services wrote in a report post Q3 results.

As a result, analysts expect gross margins—the percent of total sales revenue that a paintmaker retains after incurring the direct costs associated with producing the goods and services it sells—to come under pressure.

The paint industry uses crude oil derivatives such as monomers and titanium dioxide as raw materials, which account for more than 50 percent of a company's total expense. Add to this, the Indian rupee has been the worst performing currency in Asia (excluding Japan) falling nearly 1.5 percent on a year-to-date basis. Royal Bank Of Canada sees the rupee weaken to 80 per dollar by September as a dovish turn by the central bank lowers the currency's yield appeal.