Low Crude to Benefit Paint Companies

Paint companies have some of the strongest links to crude prices. That is because a whopping 60 per cent of their raw material costs are derived from crude-based products. Most paints companies have periodic contracts ranging between three-six months when sourcing raw materials. Any crude-related benefit, therefore, is likely to show up when existing contracts end in the coming quarters. In addition, since paints companies use derivatives of crude, the trickle-down effect may not equally correspond to the fall in the crude price. This was visible in FY09-10, says Kotak Securities, when derivatives saw a reduction of only around 50 per cent of crude price decline in that period. Most paint companies should see EBITDA margins expand by 500-600 basis points (Kotak estimates) but that is only so if organised players do not cut prices and go after unor