Stocks of paint and tyre companies faced significant declines on Thursday as crude oil prices reversed their previous downtrend, surging over four percent amid escalating geopolitical tensions in the Middle East.
Shares of Asian Paints fell 2.5% to Rs 3,196 on the NSE, while Berger Paints saw a decrease of 1.7%, and Kansai Nerolac sank by over 1.2%. The tyre sector also experienced similar losses, with shares of CEAT, Apollo Tyres, Balkrishna Industries, and JK Tyres declining between 1% and 5%.
Stock Performance Today
Over the past year, Asian Paints shares have remained largely flat, gaining approximately 1.2%. In comparison, Berger Paints has performed slightly better, with an 8.5% increase. However, Kansai Nerolac shares have decreased by 5% during the same period. This performance stands in stark contrast to the frontline Nifty 50 index, which has surged 31% over the last year.
Crude Oil Prices and Supply Concerns
The recent ballistic missile strike by Iran on Israel has raised concerns about a broader regional conflict, contributing to the spike in crude oil prices overnight due to fears of potential supply disruptions.
Impact on the Paint Industry
Rising crude oil prices pose a significant risk to the decorative paint industry, which is highly raw material-intensive. The production of paint relies on more than 300 ingredients, many of which are petroleum-based. Raw materials account for approximately 55-60% of input costs, directly impacting gross margins for manufacturers.
Tyre Manufacturing Costs on the Rise
Similarly, Brent crude is a major source of synthetic rubber and other petrochemical products essential for tyre manufacturing. An increase in crude oil prices raises the costs of these raw materials, leading to higher production expenses for tyre companies and reducing profit margins in the absence of lower raw material costs.
Upcoming Challenges for Paint Manufacturers
Furthermore, increasing crude oil prices also elevate the production costs of titanium dioxide, a crucial ingredient in white paint. Consequently, rising crude prices negatively affect paint manufacturers by increasing input costs and limiting their ability to maintain higher margins.
Brokerages Downgrade Amid Concerns
In a recent report, international brokerage Morgan Stanley maintained its ‘underweight’ stance on the paint companies under its coverage, including Asian Paints and Berger Paints. The brokerage set a target price of Rs 2,522 per share for Asian Paints, indicating a potential downside of 24%. For Berger Paints, Morgan Stanley reiterated a target price of Rs 497, suggesting a 20% downside.
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