We see that near term catalysts which includes 1) imposition of anti-dumping duty on China 2) declining trend in fuel (natural gas) cost and 3) likely implementation of GST to benefit tile industry
We expect some revival in volume growth in H2FY16 on the back of lower base affect and pick up in government Expected anti-dumping duty to also have positive impact on domestic demand while export opportunities continues to remain strong
Organised players continue to gain market share (leading three players now account for 53% of organised market against 43% in 2010) and outsourcing / JV model is helping these players to benefit from low capital cost and higher operating efficiencies resulting into sustained margin expansion
Kajaria has emerged as an undisputed market leader (increased market share to 20% from 13% in organised industry) and is likely to maintain its position on the back of its strong brand equity, extensive dealer network and superior margin Somany ceramics, Asian Granito and Orient bell are other emerging players in the industry
Demand is expected to pick up in H2FY16, We believe that tile industry growth is likely to rebound in H2FY16 on the back of pick up in government projects and demand from retail consumers, mainly from Tier- 2/3 cities. However, project sales from the private builder space is likely to remain sluggish (we do not see much improvement in real estate activity). Our channel checks suggest that organised players are benefiting from shift towards brands.
Near term catalysts to drive industry margins and profitability
We believe that ceramic & tile industry is likely to witness some structural changes in the near term which should drive demand growth and margins of the industry players. 1) Imposing anti-dumping duty (ADD) on China is expected any time soon. PVT segment has been worst affected by imports from China and accounts for 14% of PVT segment demand. Implementation of ADD can spur domestic industry demand by 2-3%. 2) Lower gas cost and negotiations with Ras gas to lower long term contracted prices to benefit the industry players in terms of margin expansion. (Somany ceramics may witness 25% increase in profitability (FY17E consensus estimates) while Kajaria ceramics can witness 5% increase. We also believe that any further reduction in gas prices may partially passed on to end consumer to gain market share. 3) Likely implementation of GST (there may be some delays) to benefit organised players as lowering of duty differentials and evasion of tax by unorganised players is likely to come down.
Kajaria continues to maintain its leadership position
From our visit to Morbi, we conclude that JV model is a win-win situation for both the parties. The organized players can focus on branding and marketing, while the JV partner can focus on manufacturing and lowering production cost. Kajaria is likely to maintain its leadership position on the back of its strong brand equity, extensive dealer network and sourcing arrangement with Morbi players. We believe that Somany Ceramics has emerged as a strong player in the domestic market on back of its focus on branding and strengthening its dealers’ network.
Volume growth to improve from H2 FY16 onwards
Over FY10 to FY15, the domestic tiles industry clocked a growth of 15% CAGR, driven by healthy increase in volumes and rise in realisations. The demand during this period was largely driven by increase in construction activity and a rise in urbanisation with the growth of tier III and tier IV cities. Over this period, realisations also increased at a healthy pace as the increase in LNG prices was passed on to end consumers. Also, premiumisation towards value added products like vitrified and digital tiles supported growth in realisations. With rising disposable income, consumer’s preference has shifted towards high-end products with high aesthetic appeal.
Weakness in the industry mainly due to slowdown in real estate industry, dumping by China is also impacting domestic players
In the last three years, the growth in the tile industry has slowed down to about 12% CAGR
In the last three years, the tile industry has grown at a slower pace of 12% CAGR compared to 15-16% earlier. The slow growth is mainly due to slowdown in real estate market, with inventories being stuck with builders and investors. This has impacted volume growth of the industry. Moreover, in the past 1-2 years, both volumes and prices were impacted due to increasing dumping by China.
Imports from China have adversely affected growth of domestic players
From FY06 to FY08, there was significant increase in imports from China, which adversely impacted the domestic industry. Subsequently, to protect the domestic industry against dumping from China, the government imposed anti-dumping duty of around Rs. 137 per sq mt on Chinese tiles, which led to a decline in imports from China. However, anti-dumping duty was revoked in 2013, and has not been re-imposed since then. Thus, increasing dumping by China, has significantly affected the industry both on pricing and volume front.
Dumping from China is hurting domestic players, mainly in the coastal and southern regions. Though China does not have any cost advantage, they are resorting to dumping in PVT segment (due to large capacities in their local markets), thereby exerting pressure on realisations in the domestic market. Imports from China have increased over the last six months, even as many European countries, Brazil, Vietnam, Korea etc have imposed anti-dumping duty on China. This has led to increase in share of imports to about 10% from the earlier 2-3%.
Weakness in demand seen in H1 FY16
In H1 FY16, aggregate revenues for the industry witnessed weakness in overall growth, which has come down to 10-11% from the earlier 14-16%, mainly due to slow down in private real estate space with sharp downfall in growth from metros and Tier 1 cities. Tier 2 / Tier 3 cities however, are holding on to sales growth, mainly driven by retail sales / small builder projects / housing projects etc. Softness in prices (2-3%) (as industry has largely passed on the benefit of lower fuel cost) has also affected industry revenue growth.
ShareShare Industry to witness structural changes,Building materials – Tiles sector