Demand recovery, buoyant exports to aid strong growth for tile makers

Improving product mix to boost realisations; while sales growth was impacted in the June quarter, there has been a recovery led by non-metro markets

Strong demand recovery, higher exports and market share gains are positive triggers for the domestic tile companies. While sales growth was impacted in the June quarter, there has been a recovery led by non-metro markets; most analysts expect the sector to post double digit growth in FY22.

Says Binod Modi, head of strategy at Reliance Securities, “Pickup in housing construction activities with improved availability of labour aided demand from June onwards. Trend is expected to see further improvement post monsoon with a recovery in the rural economy.”

A key trigger for the domestic tile sector has been the steady growth in exports. In FY21, exports from Morbi region in Gujarat witnessed a 15-20 per cent growth with revenues of Rs 12,000 crore. Growth is expected to improve to 20-25 per cent in FY22.

Highlighting the reasons for the growth this year, Manish Mahawar of Antique Stock Broking cites the anti-dumping duty on Chinese players, low cost advantage of Indian tile makers, customised services and government’s thrust on providing liquidity and financing schemes which has improved their working capital cycle. An incremental benefit has been rupee depreciation.

Increased sales in the domestic market by Morbi-based players and a weak real estate demand had dented the sales of the tile sector which reported a contraction of 3 per cent during FY17-21 as compared to a growth of 6 per cent in the FY11-16 period.

With export revenues of Morbi-based players expected to move up to 50 per cent (28 per cent in FY20), there is little possibility of an oversupply situation. Moreover, growth could sustain in the coming years given that exports are barely a tenth of Chinese exports at their peak.

In the near term, however, the sector lacks triggers given the sharp sequential fall in sales in the June quarter and rising gas prices which could impact margins. Given the lockdown and loss of sales in April and May and weak operating leverage, Kajaria Ceramics and Somany Ceramics are expected to post a 38 per cent q-o-q decline in sales and 60-70 per cent dip in the operating profit. While some of the input cost inflation is being passed on, Modi of Reliance Securities highlights that efforts by companies to improve their product mix and higher utilization levels are expected to aid steady margins in subsequent quarters. Pricing power too is expected to be strong given rising local demand and weaker competition from export-focussed Morbi-based players.

While brokerages have a buy rating on the larger tile companies, the preferred pick is Somany Ceramics. Analysts at Edelweiss Research have raised their target multiple of the stock from 22 times to 25 times on the back of an estimated 30 per cent sales growth over FY21-23, narrowing of margins and returns gap with leader Kajaria Ceramics and easing of governance issues. With most companies doubling their returns over the past year, investors should await better entry points before considering the larger players.