By Jyotivardhan Jaipuria
Cy22 saw a big jump in commodity prices hurting margins in many user industries. With prices now falling, we see margins expanding in many of these industries. Amongst these beneficiaries, one of our favourite segments is the tiles industry, where we see multiple drivers for secular growth.
Firstly, industry dynamics are favourable to larger companies with a steady shift in the share of the organised sector. Organised players account for roughly half of the market size, and few top players such as Kajaria Ceramics, Prism Johnson, Somany Ceramics, Nitco and Asian Granito control the majority (~55% of organised players). Organised players have gained not just from the introduction of GST, but also better product innovation and branding outreach.
Secondly, the industry is likely to see strong and secular growth. India is the second-largest producer and seller of ceramic tiles globally. It has ~14/11% share in world tile production/ consumption, second to China. It is also among the top five exporters of tiles in the world. Yet, India’s per capita consumption of tiles is estimated to be ~0.6 sqm compared with 4.0 sqm for China, 3.4 sqm for Brazil and 1.4 sqm for the global average. The Indian ceramic tiles market is estimated to grow at close to 9% CAGR over the next five years. Low per capita consumption of tiles combined with greater consumer aspirations towards better living standards, and government initiatives such as Smart City and Pradhan Mantri Awas Yojana are key drivers.
Thirdly, export demand is reviving and FY23 has seen a more than 30% jump in exports relative to the `128 billion in FY22. We would attribute the jump partly to a move away from China and partly due to increasing non-competitiveness of European countries like Italy and Spain due to their high energy costs. This has helped overcome fears of exports declining in GCC countries due to imposition of anti-dumping duty in CY20. While near-term exports have jumped, tiles exports have seen a rosy decade. We have seen a jump in tiles export from India from Rs 2.4 billion in FY14 to Rs 128 billion in FY22 on the back India’s cost-competitive advantages and the right manufacturing ecosystem built in and around Morbi (Gujarat). A jump in exports helps larger players since the Morbi players are more focused on exports, reducing competitive intensity in the local market.
Lastly, we should see a sharp jump in margins as gas prices that account for nearly 25% of costs have fallen substantially. After a 3x spike during September 2020 to March 2022, natural gas price has fallen 25-30% from its peak in March 2022. Leading manufacturers had switched consumption partly to alternative fuels such as LPG or propane, which were then meaningfully cheaper. With prices falling, margins for tile manufacturers, which had fallen 400-500 bps over the past two years, should slowly revert to their peak levels.
(The writer is founder & MD, Valentis Advisors)