Crude shock! Paint stocks tumble up to 11%

New Delhi: Rising crude prices sent paints stocks tumbling up to 11 per cent in Monday's trading session, with Indigo Paints hitting a fresh 52-week low level.

Oil prices soared more than 6 per cent, touching their highest since 2008 after the United States and European allies mull a Russian oil import ban while delays in the potential return of Iranian crude to global markets fuelled tight supply fears.

This clouded the outlook for paint stocks as they use crude derivatives. Any increase in oil prices raises input costs, thus decreasing profitability and margins for paint companies. Increasing competition and rich valuations also added to the woes.

Recently, JK Cements has announced plans to enter the paint business. Prior to it, JSW Group also marked its entry in the arena, increasing the number of organised players.

Santosh Meena, Head of Research, Swastika Investmart said paint stocks are tumbling as there is a double whammy situation for them where boiling crude oil prices is a key challenge because it will dent the margin as crude is one of the key raw materials for the paint companies.

"Rising competition is another headwind for the paint companies as other corporates like Grasim, JSW Steel, JK Cement and more are entering into the paint business, however, the outlook for the industry is still promising despite near term jitters," he adds.

Shares of Indigo Paints tanked about 11 per cent to Rs 1497.65, its new 52-week low before recovering to Rs 1,511.10 on 10.25 am. The scrip had settled at Rs 1673.55.

Asian Paints and Kansai Nerolac Paints dropped over 5 per cent each to Rs 2,601 and Rs 423.50, respectively. Beger Paints and Shalimar Paints also shed over 4 per cent each during the trading session. Akzo Nobel India fell 2 per cent.

BSE barometer and benchmark Sensex was trading 1,744.65 points or 3.21 per cent lower at 52,589.16 at the time of writing this report.

Likhita Chepa, Senior Research Analyst, CapitalVia Global Research said, "The stocks were trading at a relatively higher valuation, and when raw material inflation rises, erosion of pricing power impacts margins. Higher crude oil increases input costs for paint companies, which use crude derivatives."

According to Meena, Asian Paints and Berger paints may continue to outperform and the recent correction is providing a favourable risk-reward opportunity for the long term investors.