Paint companies fret about oil prices. But there are bigger worries ahead.

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Subscribe to enjoy similar stories. Major paint stocks dropped an average of 6% in the past week as crude oil prices spiked on fears of a full-blown war between Israel and oil-producing Iran. Analysts have characterised this fall as a “knee-jerk reaction".

While rising crude oil prices are a concern, analysts believe this could be a temporary issue for domestic paint companies. In the medium to long term, the industry faces more pressing challenges, including increasing competition and stagnant profit margins. “A change in market structure will guide paint stock prices in the long run while crude oil prices will dictate more sporadic movements (in the stocks), like what we saw last week," Ajay Thakur, research analyst at Anand Rathi Institutional Equities, told Mint.

“Paint stocks were overbought when oil prices went below $70 (per barrel) a couple of weeks back, just before the Israel-Iran conflict. Those who bought them tracking oil price movements are getting out now," Thakur said. If Brent crude prices rise beyond $80 per barrel and sustain there for some time, paint stocks will fall further, he added.

On Tuesday, Brent crude was down almost 2% from previous close at $79.69 per barrel. Paint companies depend on key raw materials like titanium dioxide and crude-based monomers. A rise in their input costs compresses profit margins when they are unable to pass on the same to consumers in the form of product price hikes.

Meanwhile, heightened competition has narrowed the scope of price increases, especially after the Birla group’s entry into the paint industry under the Birla Opus brand. This has kept overall profit margins in the paint industry stagnant at around 14-20% since the last few quarters. “Paint has become