Berger Paints Navigates Crude Oil Surge With Price Hikes

Introduction

The Indian paint industry is facing significant headwinds from soaring crude oil prices and escalating geopolitical tensions. As a key raw material for paint manufacturing, the rising cost of crude derivatives is putting pressure on company margins. Berger Paints India Ltd., the country's second-largest paint manufacturer, is navigating this challenging environment through a strategy of calibrated price increases and a focus on maintaining volume growth.

The Direct Impact of Crude Oil

The profitability of paint companies is closely tied to the price of crude oil. According to Berger Paints' Managing Director & CEO, Abhijit Roy, approximately 30-35% of the company's raw material costs are directly exposed to crude oil fluctuations. This exposure varies across product categories. For solvent-based paints, which include industrial and decorative enamel paints, the impact is more direct and pronounced. In contrast, water-based paints have lower exposure, as the primary oil-linked inputs are monomers and emulsions used in wall coatings. The recent surge in crude prices makes price adjustments in these segments almost inevitable to protect profitability.

A Calibrated Pricing Strategy

In response to rising input costs, Berger Paints has adopted a careful approach to price revisions. Management has indicated a preference for waiting for some stability in raw material prices before implementing significant hikes. This strategy aims to avoid frequent price changes that could disrupt the market and consumer purchasing decisions. Abhijit Roy stated that the company intends to pass on most of the cost increases to consumers. The company has already implemented three price hikes between June and August to mitigate a cost impact of 1.5%. This move is expected to improve value growth, which has lagged behind volume growth in recent quarters.

Balancing Volume and Value Growth

Berger Paints has demonstrated strong volume growth, reporting an 11.8% increase in the first quarter of FY2025. However, value growth was a modest 2.5% during the same period, affected by earlier price decreases and changes in product mix. With the recent price hikes, the company projects value growth to improve to around 5% in the second quarter. Management remains optimistic about achieving strong single-digit to double-digit volume growth for the full year, although high inflation could pose a slight risk to overall demand. Historically, cyclical oil price increases have had only a minor effect on paint demand, and the company expects any potential dip in volume to be offset by higher value growth from price increases.

Financial Health and Market Performance

Despite the raw material challenges, Berger Paints aims to maintain its EBITDA margins within the 16% to 18% range. The company's financial performance shows a steady increase in sales, though EBITDA has seen some pressure.

Note: Financial data is based on half-yearly reports. All figures in INR Crores.

Analysts have noted the company's steady investment in less price-sensitive categories like premium and waterproofing products, which supports a constructive medium-term outlook. However, brokerage firm Nomura recently adjusted its price target for Berger Paints India from INR 675 to INR 625, while maintaining a 'Buy' rating, reflecting the broader market uncertainties.

Navigating a Competitive Landscape

The Indian paint sector is witnessing increased competition with the entry of major players like Grasim, Astral, Pidilite, and JK Cement. Despite these new entrants, Berger Paints' management believes that established players continue to dominate the market. Abhijit Roy has expressed confidence that the country's strong economic growth will allow for the coexistence of both new and existing companies, without significantly disrupting the market share of major brands.

Ambitious Expansion and Future Outlook

Looking ahead, Berger Paints has laid out an ambitious growth plan. The company's next major milestone is to double its turnover from Rs. 10,000 crore in FY2024 to Rs. 20,000 crore by 2029. To support this growth, Berger is investing between Rs. 1,800 crore and Rs. 2,000 crore in setting up new manufacturing facilities in Panagarh, West Bengal, and in Odisha. These plants are expected to become operational by 2027, increasing the company's total production capacity by 25%. This strategic expansion is designed to meet rising demand and strengthen the company's market position for the long term.

Conclusion

Berger Paints is proactively managing the challenges posed by volatile crude oil prices through strategic price hikes aimed at protecting margins without stifling demand. While navigating increased competition and inflationary pressures, the company's focus on volume growth, coupled with significant investments in capacity expansion, positions it to capitalize on India's long-term growth story. The successful execution of its pricing strategy and expansion plans will be critical in achieving its ambitious goal of doubling turnover by the end of the decade.