Stable export demand and lower gas prices are expected to keep the operating profitability of ceramic tile makers firm this fiscal despite the impact of the Covid-19 pandemic on domestic demand.

An analysis of 87 CRISIL-rated players with an aggregate turnover of Rs 10,000 crore, or around 25% of the sector revenue, indicates their operating margin will hold ~11%, similar to the average of fiscals 2015-2020.

Exports, comprising ~35% of the sector’s revenue of Rs 38,900 crore last fiscal, are unlikely to de-grow this fiscal.

Indeed, exports to key markets such as the US and the UK, which contribute to ~9% of overall ceramic tile exports, are expected to grow a robust 50% following the anti-dumping duty (ADD) imposed by the US on Chinese tiles earlier this year. Exports to the US spurted ~50% on-year in the first half of this fiscal.

All that, in turn, will help mitigate a decline of ~10% in exports to the Gulf Cooperation Council (GCC) countries, with the imposition of 41% ADD from June this year. The GCC nations contribute ~Rs 4,000 crore, or ~30% of the total ceramic tile exports, annually.

About 203 countries make up the remaining 61% share of exports, with no country contributing to more than 4%. These exports are expected to remain stable because of India’s cost competitiveness and the ability to cater to orders with small batch sizes. Thus, ceramic tile exports are seen at Rs 13,500 crore this fiscal, similar to last year.

That said, the domestic market, which accounts for 65% of the sector’s revenue, is expected to see a de-growth of ~18% due to the nationwide lockdown in April and May. Demand from institutional real estate, constituting 65% within the domestic market, is expected to decline 35% on-year in the current fiscal, as fresh construction activity has moderated. However, retail demand is expected to grow 15%, mainly from Tier 2 and 3 cities, cushioning the fall to an extent.

Says Nitin Kansal, Director, CRISIL Ratings, “Net-net, ceramic tile revenues are likely to de-grow 12% this fiscal, compared with a growth of 4.5% on average in the past five fiscals, with exports limiting the slide in domestic sales. However, despite the revenue contraction, operating profitability of ceramic tile companies will remain ~11% due to lower gas prices.”

Gas prices, which contribute to ~22% of the total cost for tile makers, have fallen 30% to $2.3 per mmBtu in September 2020 from $3.3 per mmBtu during April 2020. Prices are expected to decline further to $1.8 per mmBtu by the fiscal end, supporting the operating profitability of these players.

Says Himank Sharma, Associate Director, CRISIL Ratings, “Credit profiles should be resilient as key debt protection metrics are expected to improve due to deleveraging this fiscal. Interest coverage and the ratio of total outside liabilities to tangible net worth are expected to improve to 3.1 times and 1.5 times, respectively, compared with 2.8 times and 1.9 times in fiscal 2020. A moderation in capital expenditure, due to sufficient availability of capacity, will also support the debt protection metrics.”

Notably, the 87 companies in the sample analysed have doubled their gross block in the past five fiscals, against a growth rate of 4.5% in revenue. Thus, they have enough headroom to meet any incremental demand even beyond fiscal 2021.

The pandemic’s spread and further containment measures will be key monitorables, though.