Multiple headwinds to keep tiles sector under pressure in the near term

The tiles sector is facing a double whammy due to falling exports and weak domestic demand which will weigh on their March quarter. Further, a weakness in exports and lower volumes brought on by reciprocal tariffs could result in increased competitive pressures in the domestic market and impact margins. 

 

Given the multiple headwinds, the largest listed player Kajaria Ceramics is down 43 per cent over the last six months, followed by Somany Ceramics (41 per cent) and Cera Sanitaryware (32 per cent). Near term triggers such as the Q4 results or exports data does not indicate that there could be a recovery in prices any time soon. While Kajaria Ceramics and Cera Sanitaryware are trading at 26-30 times their FY26 price to earnings estimates, Somany Ceramics trades at 16 times on the same metric.   

 

Volumes in the March quarter saw marginal growth given weak demand conditions both in the domestic and export markets. The country’s tile exports are down 13 per cent Y-o-Y in 9MFY25 largely on account of higher freight rates, sluggish residential markets in Europe and potential anti-dumping duties in the US. 

 

Jyoti Gupta of Nirmal Bang Research believes that the current slowdown in the sector is linked to adverse export conditions, marked by a significant increase in container and vessel charges, which have risen four to five times due to reduced demand for ceramic products. The domestic segment is currently facing a reduction in demand from mid-segment apartments, which have traditionally accounted for a significant portion of the market, she adds.

 

The ultra-luxury apartments demonstrate significant demand, driven by rising disposable incomes and a preference for high-end options. However, the overall effect from the luxury segment remains limited, likely inadequate to offset the decline in demand from the mid-segment, points out Nirmal Bang Research.

 

The domestic market is expected to be remain sluggish given the pressure on the residential sector which is impacting the volume offtake of key tiles and ceramics players. Gas offtake by companies has also come down given the economic slowdown. This is leading to voluntary shutdowns and the situations is unlikely to recover in the near term. 

 

The sector is expected to post an operating profit decline of 16 per cent over the year ago quarter. This, according to Utkarsh Nopany of BOB Capital Market Research, is due to lower revenue (-1.4 per cent Y-o-Y), higher discounts offered to dealers in a weak demand environment and negative operating leverage.

 

The Street will keep an eye on the export market as this could have an impact on the domestic market fortunes as well. Says Dharmesh Shah of JM Financial Research, “Any further slump in export demand owing to US reciprocal tariffs (8 per cent of total exports of Rs 1,300 crore) may lead to dumping in the domestic market, which may adversely impact domestic tile producers. Increasing competition from Morbi-based players could impact margins.” The brokerage expects operating profit margin of Kajaria and Somany to decline by 100 basis points/ 240 basis points respectively. However, margin is likely to be flat sequentially. 

 

Analysts led by Keshav Lahoti of HDFC Securities believe that Morbi remains a structural challenge to the tiles industry, as its practice of volume dumping in the domestic market is expected to persist. Therefore, it is projecting a single-digit volume growth for Kajaria and Somany in FY26 and FY27.