Crisil Paints A Gloomy Scenario For Ceramics
Credit Rating Information Services of India Ltd (Crisil), in its outlook on the ceramics industry, expects unabated pressure on profitability and cash flows to continue in the wake of a severe over-capacity situation, which is expected to continue over the near to medium term.
In anticipation of high rates of growth, the installed capacity of the organised layers in the industry has almost doubled over the past two years. However, the growth in demand for ceramic tiles, which was estimated at around 20 per cent per annum during 1994-96, declined to around 15 per cent during 1997-98. The slide in demand growth is attributed to the slowdown in construction activity. This over-capacity situation has led to a decline in profitability and higher working capital requirements during 1997-98 for players in the industry.
Realisations and profitability in the ceramic tiles industry is unlikely to improve in the short to medium term future and heightened competition is expected to lead to enhanced working capital requirements, a Crisil release said.
The rating agency feels players with a low cost position, geographically diversified manufacturing locations, and depreciated plants would be in a better position to withstand the impact of the overcapacity in the industry. The capital structure of a company will also determine its price flexibility in the current scenario. In addition, the marketing focus of players is expected to shift away from the institutional project segment towards the retail segment, Crisil said.
Given the capital intensity of the ceramic tiles industry, the debt usage levels of many players are considerably high on account of largely debt-funded expansion projects over the last two to three years. In view of the pressures on profitability and cash flows, the financial ratios including interest coverage and debt service coverage ratio are likely to be impacted adversely for major ceramic tiles manufacturers. Further, Crisil expects a phase of consolidation in the industry with increased dominance of larger players and closure of some of the economically unviable smaller manufacturers.
The future demand growth for ceramic tiles would be linked primarily to investments in housing and increase in construction activities, the Crisil release said. The pricing parity with mosaic tiles would also determine the industry's growth rate. Moreover, the current thrust of the government on housing is expected to improve the industry's long-term demand prospects.
In view of the challenging business conditions facing the industry, Crisil believes that ratings in the ceramic tiles industry would continue to be under pressure.