After four muted fiscals, revenue of the Indian ceramic tiles industry is set to grow 400 basis points (bps) faster at ~8% compound annual growth rate (CAGR) over the current and next fiscals because of improved domestic and overseas demand, a CRISIL analysis shows.
Large, organised players, which use natural gas to bake tiles, should benefit more. That’s because, in March, the National Green Tribunal had banned the use of coal-based gasifiers in Gujarat, the state that houses a majority of India’s tile manufacturers. That took away the cost advantage of those in the unorganised segment, which could offer as much as 30% discount over branded products earlier.
Over the past four fiscals, domestic consumption of ceramic tiles grew at a mere 3% CAGR as demand was impacted by a slowdown in the real estate sector following demonetisation, and the implementation of the Goods and Services Tax and the Real Estate Regulation Act.
Over the next two fiscals, domestic consumption should grow 200-300 bps faster, or at a 5-6% CAGR, riding on the government’s push to affordable housing, smart city projects, and creation of new industrial corridors.
Exports, which account for a fourth of production, could grow at an even faster 15%, benefiting from reduced cost competitiveness of China. That country is struggling with higher cost of coal, levy of environment tax, and anti-dumping duties imposed by the European Union countries, Brazil, Taiwan, Korea, Vietnam and Chile.
Consequently, utilisation rates of ceramic tile makers should improve over the medium term, after being weighed down by significant overcapacity resulting from demand slowdown and capacity additions.
“Faster consumption growth would correct the demand-supply imbalance in the sector,” said Subodh Rai, Senior Director, CRISIL Ratings. “Players would sweat excess capacities and improve their operating rates from ~65% now to 70-75% over the next 2 fiscals.”
Large organised players, with revenues over Rs 500 crore account for half of the industry’s market share. Apart from the coal ban, organised players will improve their market share backed by superior technology, branding and efficient sales network.
Said Rahul Guha, Director, CRISIL Ratings “The use of expensive natural gas will slash as much as 400 bps from the profitability of unorganised players unless they raise selling prices by ~10%. That, and rising compliance cost for e-way bills, would land a double whammy". As a result, organised players should grow at thrice the pace of unorganised ones and increase their market share by around 500 bps to 55% by fiscal 2021.”
Higher cash flows and limited capex should improve the financial leverage of organised players and keep their debt-equity ratio below 0.5 time. On the other hand, that number could weaken for unorganised players because of cost pressures and continued high reliance on debt.
This analysis is based on 120 CRISIL-rated ceramic tiles players, which account for nearly a third of the industry by revenue.