Chip shortages have plagued industries ranging from automobiles to consumer electronics. Now, the supply crunch has claimed a potential victim: the Indian paint industry.
Chip shortages, analysts warned, could affect the supply of tinting machines and the expansion plans of paint companies. These machines help the shops to manufacture paints of different colors within the store as per the requirement of the customers. Dealers who use tinting machines do not need to keep large quantities of shades in stock. As such, if the chip shortage persists for a long period of time, it could impact paint companies in terms of expansion through new dealerships.
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“We expect delays in (supply) of tinting machines for a few quarters for most paint companies. We expect less impact on the top two companies, Asian Paints Ltd and Berger Paints Ltd, as they already have higher tinting machines than smaller peers, analysts at Edelweiss Securities Ltd said in a report on September 22.
The broker sees greater impact on Indigo Paints Ltd, which had the highest rate of tinting machines in the past few years, given its small base and aggressive plans. The Edelweiss report said the average annual tinting machine rate for Indigo Paints is around 51% from FY18 onwards, as compared to 15-20% for Asian Paints and Berger Paints.
New entrants to the paint industry will also have to face this challenge first. An analyst at a domestic brokerage house, on the condition of anonymity, said, “Apart from the existing paint makers, it (shortage of chip) may also delay the expansion plans of new entrants like Grasim Industries Ltd., which is entering the space.” are doing.”
“It says a major trigger for this sector and stock prices remains volatility in input costs and volume of price increases,” the analyst said.
Investors believe the recent rise in the prices of titanium dioxide and other crude-based monomers could dent margins if not passed on enough.
Meanwhile, shares of paint companies have seen a rise in the past one year due to improved demand in the key decorative paint segment.
However, despite improving demand, the costly valuation of paint stocks is hardly justified, analysts said.
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