Weak demand, excess supply get tile makers walking on eggshells

Photograph: Courtesy, Kajaria Ceramics

Although some pressures are expected to linger in the near term, the Street is divided on the outlook.

While some brokerages accept as true that the demand situation has deteriorated, others hint at a modest improvement over the past three months and relief on account of lower gas prices.

The flint that will produce the spark will be the demand trajectory for the sector, given the sluggish sales trends.

While volumes of the largest listed player in the sector — Kajaria Ceramics — were down 1 per cent due to an extended monsoon and the festival season, Somany Ceramics saw a 3.7 per cent growth (lower than estimates) due to weak demand and higher supply from Gujarat’s Morbi-based units.

In contrast, Cera Sanitaryware’s performance was better than peers in the sector as the company recorded its highest-ever revenues, led by its focus on the business-to-consumer segment, product development, and improving efficiencies.

The company has been gaining market share from smaller players consistently over the past few years in the sanitaryware segment, while in faucetware, its growth has been 1.5x the sector’s.

Better product availability vis-à-vis peers due to lower dependency on China (3.7 per cent of total sales in Q3) and higher contribution (39 per cent in Q3) from new products weighed up against the industry average of 10 per cent, says IDBI Capital.

Further, Cera’s recently launched retail loyalty programme is helping the company improve stickiness with retailers, observe analysts Akhil Parekh and Kevin Shah of Centrum Research.

For the sector, however, demand has taken a turn for the worse, says Nuvama Research.

With weak global demand, units that were earlier exported are turning their attention to the domestic market.

The excess capacity is being utilised to satisfy an almost satiated domestic market.

This, in turn, has led to substantial undercutting in the domestic market by unorganised players, along with an increase in credit period to 60-90 days, say analysts of the brokerage, led by Sneha Talreja.

Consequently, organised play­ers, too, are being cornered into offe­ring various discounts/ sche­m­es to push sales volumes, they add.

Other analysts, however, be­lieve that demand has been steady.

JM Financial cites its dealer checks to say that demand in February and March this year was better than Q3FY23, led by construction activity and the home improvement segment.

Demand in tier II and below cities was better than in the metros and tier I cities, although competitive intensity in the tile industry intensified due to the expansion of the distribution footprint by regional players, coupled with higher spending on branding and launches, they add.

The analysts, however, say that tile exports from India remain robust in the face of a slowdown in global demand as Indian exporters have become more cost-competitive and European exporters face cost inflation and gas availability issues.

The other key metric to track is margin movement. Elevated fuel and power costs led to a 320-basis point (bps) drop in the gross margins of Kajaria, while its operating profit margins were down 500 bps.

Somany witnessed a 450-bps fall in margins at the operating level, given lower revenue growth and higher advertising expenditure.

Cera, however, maintained its margins at similar levels — both on a sequential and year-ago period basis.

Lower gas prices, however, are expected to ease cost pressures and are a thumbs-up for margins.

Brent crude declined 8 per cent sequentially in the January-March quarter (fourth quarter, or Q4) of FY23 and is down 18 per cent year-on-year, resulting in an 8 per cent sequential fall in Qatar’s RasGas price (in Q4).

Spot gas declined 43 per cent sequentially, says JM Financial.

Gujarat Gas price fell 23 per cent sequentially as the company cut prices sharply due to lower de­mand from Morbi players (many players switched to alternative fuels like liquefied petroleum gas/propane), adds the brokerage.

Most players are expected to pass on the lower costs of gas to boost volumes amid failing demand and higher competitive pressures.

Stock prices of key players have taken a divergent route, with Cera gaining 24 per cent over the past three months; Kajaria and Somany are down 10.5 per cent and 4 per cent, respectively.

Given the uncertainty on the demand front, investors should await steady demand and margin trends before considering the stocks.