After a weak FY23, tilemakers gain from higher demand, lower gas prices

Analysts see investors to be out on the tiles

Stocks of the country’s bigger tile and ceramic makers were major gainers over the past week. The leaders in this space -- Kajaria Ceramics and Cera Sanitaryware -- were up 7 per cent each.

In the past three months, Kajaria Ceramics and Somany Ceramics were up 29-32 per cent, while Cera Sanitaryware gained 22 per cent. The segment has been the best performer in the building materials space.

After a muted FY23, tilemakers are expected to benefit from the improvement in domestic volumes, lower pricing pressure and margin recovery. The same is expected to reflect in the June quarter results, which may sustain the rally in these stocks.

Most brokerages expect top players to post volume growth of 8-10 per cent on the back of robust domestic demand and a pick-up in exports. Analysts led by Achal Lohade of JM Financial Research believe that demand was impacted during April on account of unseasonal rainfall but was offset by an improvement in May and June. The brokerage believes that demand for premium tiles and large vitrified tiles is robust and outperforming other categories.

Besides healthy domestic demand, increasing exports from Morbi, Gujarat, has had a positive impact on the domestic market. Rajesh Ravi and Keshav Lahoti of HDFC Securities point out that average monthly exports were Rs 1,700 crore, against Rs 1,300 crore on average for FY23. The brokerage expects a decline in realisations as tilemakers have partially passed on the gains from falling fuel costs to customers.

HDFC Securities, however, believes that competitive intensity among domestic players remains high as regional players expand their distribution footprint and product portfolio. This is expected to put realisations under pressure.

The key gain for the sector has been lower gas prices. Gas cost for tile companies, according to JM Financial, is lower on account of a reduction in the price of RasGas which is down 3 per cent sequentially and 10 per cent YoY, while that for Gujarat Gas is down 13 per cent sequentially and 36 per cent over the year-ago quarter. Further, the switch to alternative fuels, such as liquefied petroleum gas, propane, and biogas has brought down the prices. The brokerage expects a 5-12 per cent sequential fall in fuel cost per square metre for Kajaria and Somany, with some of the gains being passed to the channel in the form of discounts/schemes.

 Falling prices of gas, which account for a quarter of costs, should help expand the margins for tilemakers. After a 250-basis point sequential gain in the March quarter, Systematix Research expects lower gas prices to have added 50 basis points to margins in the June quarter. Strong traction in India’s tiles exports (Rs 1,700 crore per month) and lower gas prices augur well for Kajaria Ceramics and Somani Ceramics, says the brokerage

At the current price, while Kajaria is trading at 45x its FY24 earnings estimates and Cera is available at 39x; Somani is valued at 23x. Given the recent rally, investors can look at these top players on dips.