Industry Risk Score : Ceramics & Sanitaryware

Executive Summary

 

The ceramic and sanitary ware market is one of the fastest growing markets in India. The Indian Ceramic industry ranks second in the world after China and produces about 12.9% of global output. For FY18, the total market for tiles and sanitary ware was recorded approximately at INR 34,000 crore giving employment to about 5,50,000 individuals. The tile segment contributed a major share to ceramic industry worth Rs. 26,500 crore in FY 2017-18.The ceramic hub of India, Morbi in Gujarat, has around 700 units and accounts for 70% of total ceramic production in India. It is also the world’s second largest tile manufacturing zone with a total installed capacity of 2.8 MSM per day. The region is the top exporter of ceramic ware in India and exported tiles to more than 150 countries worth Rs. 11,000-12,000/- crore in FY18.

India has a low per capita consumption of tiles as compared to other nations showing a strong growth potential. The industry is witnessing increase in demand for tile and sanitary ware products as a result of increasing disposable incomes, rapid urbanisation, untapped rural market and stable replacement demand. Housing sector remains the top demand driver contributing to 70% of total demand followed by commercial realty at 15%. The realty sector is displaying a spike, having positive impact on industry after becoming more compliant and transparent due to RERA and GST reforms. Government’s aggressive focus on Housing for All by 2020 and provision of proper sanitation facilities through its pilot programme-Swachh Bharat Abhiyan has brought lucrative business opportunity to the industry. The market is highly fragmented (60% unorganised) and provides opportunities to organised sector to consolidate and scale up operations in a cost effective manner. The competition is cut-throat amongst both the sectors with large players trying to build strong position in the market by aggressive advertisement campaigns, extensive presence across the country, introduction of stylish and innovative products and even diversifying into end to end lifestyle solutions. The unorganised sector has also made heavy investments in R&D and technological up gradation to increase quality production and capture the market. Also, with the implementation of GST, the wide price differential between both sectors is expected to narrow down setting a level field.

The industry is largely indigenous as raw material, skilled labor and technology is available locally. However, since the production is highly energy intensive, the sector is vulnerable to fluctuation in availability and prices of natural gas impacting the profit margins.

The tile segment is projected to almost double its turnover to Rs. 50,000 crore by 2020 given the increasing domestic demand, surging realty sector and rising exports to Middle East, Europe and other countries. The industry will continue to contribute to India’s economy and support infrastructural growth in the country.



Key Risks & Attributes

  • Cyclical nature of real estate
  • High Competition Intensity between organised and unorganised market
  • High entry barriers due to high working capital requirement
  • Vulnerability to natural Gas availability and prices
  • Foreign exchange fluctuations

Demand & Supply Scenario

4/6

The tile market is segmented into glazed/non glazed wall tiles, floor tiles, vitrified tiles and industrial tiles. The sanitary ware market comprises of bath fittings, closets, wash basins, urinals and other hygiene products. The tile segment contributed a major share to ceramic industry worth Rs. 26,500 crore in FY 2017-18. The production in 2017 increased by 12% from 850 to 955 MSM (million square metres) while consumption grew by 2.9% to 785 MSM.

Around 70% of demand in India comes from housing sector, 15% from commercial realty and rest from replacement market. Also, India’s per capita consumption of tiles is low as compared to other nations showing a strong growth potential. The per capita consumption of tiles in India is a mere 0.60 sq.m. as compared to China’s 2.6 sq. m, Brazil’s 3.4 sq. m. and Europe’s 5-6 sq. m.

The industry is posed to grow with growing population and rapid urbanisation leading to demand for more housing. Increase in disposable income has triggered demand for branded, aesthetic and stylish sanitary ware and ceramic products. Also, increase in number of bathrooms per flat and new tiling application on building exteriors and interior walls (apart from kitchen and bathroom) have increased demand in the industry. Refurbishing of homes with superior tiles and emergence of concept bathrooms have benefitted sale of premium products catering to high end consumers.

Government’s Housing for All scheme which aims to provide affordable housing to urban and rural poor has been a major demand trigger in the mass market. Swacch Bharat Abhiyan which aims at constructing community and household owned toilets has had a positive impact on the market. Rural sector too remains an untapped area with a lot of demand potential as majority of rural households still do not have toilets and live on mud floors throwing a sizeable opportunity for the tile and sanitary ware industry.

The realty market in India underwent a massive change in FY18 as a result of implementation of regulatory reforms including RERA and GST. The year witnessed slowdown in the sector due to fewer launches of new home and more focus on completion of existing projects by the builders. RERA has made the realty sector more transparent driving residential development activity. Going forward, the real estate market is up for consolidation and consumers are looking for any price corrections in wake of regulatory stability which shall also have a positive impact on ceramic industry.

Also, the market is segmented quality wise as low end, mass market, premium and luxury. The high-end categories are entirely serviced by established brands whereas the mass-market supplies are undertaken both by organised and unorganised sector. The institutional and retail sales (through dealers and distributors) witness a mix of own manufactured products, joint venture sales and outsourced sales- both from indigenous market and imports. The large integrated manufacturers in organised sector have been increasing and upgrading production capacities through inorganic/organic expansion in wake of growing demand.

For FY 2017-18, Morbi region exported ceramic tiles to about 150 countries worth Rs. 11,000-12,000/- crore , almost double than last year exports of Rs. 6,200 crore. Heavy investment in digital printing, automation, research and development and technological up gradation by them has resulted in higher production and exports. Quality products at competitive prices have revived Morbi production units to compete in international market, especially, China. Various Expos and road shows being held have helped exporters to showcase their products in international market and get new orders.

However, overproduction of vitrified tiles in the region has started to put pricing pressures in the industry. The demand increase is about 20% per annum whereas production capacity has surged 4.5 times in two years. Due to 133 new units being set up in past two years, production capacity of vitrified tiles has escalated from 4 lakh boxes to 18 lakh boxes per day leading to greater supply than demand and forcing manufacturers to lower their prices by about 10%. Units are even forced to under produce or shut their operations for some time to remain competitive.

Acuité believes that demand risk to the sector is moderate as a result of recovery in real estate market and launch of new housing projects. Rising exports and government’s focus on housing and sanitation needs has maintained stability in the industry. The manufacturers have envisaged expansion plans to capitalise on rising demand for additional housing units due to rapid urbanisation.



Nature & Extent of Competition

4/6

The industry is dominated by unorganised sector, clustered in Morbi region of Gujarat. They have cost advantages over organised market due to ease of access to raw material, uninterrupted power supply and ample availability of skilled manpower. Use of latest technology and imported equipment for production has also substantially increased quality of products from the region. In the organised sector, Kajaria remains the dominant player in tile market with a market share of 22% followed by H&R Johnson(18%) and Somany Ceramics(7%). HSIL (Hindware) at 46% is the market leader in sanitary ware having a strong brand presence and widespread distribution network of dealers and retailers. The other well-known companies are CRS (Cera brand), Jaquar and Parryware.

The organised players aggressively focus on advertisements and promotions to capture domestic market. They continue to introduce innovative, stylish and aesthetic products to attract appeal-quotient of consumers. Their strong branding and position ensures customer loyalty even if prices are increased. Pan-India presence through multi manufacturing bases, retail outlets and wide dealership network favour them over unorganised market. The large companies are also increasing their market presence by entering into joint ventures with SMEs and even have resorted to their acquisition at times. This has created a win-win situation for both as established players are able to penetrate the regional market with a much lower capital investment and the smaller units gain through economies of scale, arrive at optimum product mix and spreading their market reach through wide distribution network of large players.

Apart from competition from unorganised sector, the organised sector also faces competition from MNCs such as Kohler, Duravit, Roca in premium/super-premium segment; some of these MNCs have even set up their manufacturing facilities in India for profitability reasons. The domestic industry also faces tough competition from cheap vitrified tiles from China.

Sanitary ware companies have been diversifying into related bathroom products including faucets, geysers and water purifiers leveraging their existing distribution strength. Wellness products such as massage tubs, shower panels and enclosures help in positioning them as complete bathroom solution provider.

Entry barriers are huge for new entrants due to high working capital requirement and costs involved in branding, distribution network. Acuité believes that the competition intensity would remain high in the fragmented market in wake of growing competition between unorganised and branded players.



Input Related Risk

4/6

The industry is majorly indigenous with ample supply of raw material such as sand/silica, labour, technical skills and infrastructure facilities. However, the manufacturing process is highly energy intensive and fuel charges on coal/gas, power form the largest component of cost. The sector is vulnerable to gas prices as its availability is constrained due to low domestic output, less LNG terminals and inadequate pipeline infrastructure. Due to rising international prices, domestically produced gas prices have been increased by government by 6% hard hitting the ceramic industry Since the industry is volume driven, component of freight cost is also high for the sector. Strategically located plants in Gujarat having proximity to Kandla port save on transportation costs on exports and import of machinery so on.

Although there is ample raw material supply available to the industry, Acuité believes that the input risk remains moderate given its vulnerability to fluctuation in supply and pricing of natural gas, the main feed stock for the highly energy intensive industry.



Regulatory Risk

5/6

India being the second most populous country still has low sanitary coverage. Government has been aggressively focusing on provision of proper drinking and sanitation facilities. Increased budgetary allocation towards hygiene facilities would benefit the mass market in sanitary ware.

Government programmes such as Swacch Bharat Abhiyan, Housing for all by 2020, Skill India, Smart Cities Mission and Make in India have continued to support the industry. Improvement of infrastructure in tier 2 and tier 3 cities has given push to the industry. Rs. 21000 crore have been earmarked by government for building 5.1 million rural houses in FY19 under Pradhan Mantri Awas Yojana (PMAY). Housing interest subsidy schemes for rural population and creation of dedicated housing fund for affordable houses will benefit the sanitary ware and tile industry.

GST implementation has streamlined the tax structure and reduced price difference between organised and unorganised market and create a level playing field among all manufacturers. Implementation of E-way bills has also helped in removal of inter-state barriers and improved supply chain management. Also, reduction in GST rate from 28% to 18% will make the tile and sanitary ware products more affordable to consumers.

Acuité believes that the regulatory risk to the industry remains low because of government’s favourable policies and its focus on Clean India mission. Increased spending on housing schemes and infrastructure development has given boost to the industry. Driven by massive schemes launched by government, the market will remain positive in future.


Technology Risk

5/6

Tiles have advantage over other conventional forms due to low water absorption rate, resistance, durability and design. However, easy to install- waterproof wall sheets made of PVC/ acrylic are available in the market as an alternative to tiles. They are affordable, maintenance–free and come in variety of colours and textures. Waterproof wall panels laminated on water resistant plywood is another substitute to bathroom and kitchen tiles.

Concealed cisterns have water and space saving benefits. Geberit, one of the key players has already installed over 1 million concealed cisterns across residential and commercial properties in India using constraint based innovation keeping in mind modern technology and the Indian mindset.

Acuité believes that technology risk to the sector is low since the industry caters to basic sanitation needs. Ceramic companies keep introducing innovative products on a continuous basis to offer customers unique and high quality products.



Operating Margin

5/6

In terms of net sales, Ceramic industry has witnessed stagnancy and registered less than 1% of growth during FY16-FY18. However, efficient production cost management has led to 17% growth in the operating margin during FY16-FY18, reflecting a favourable position.



Interest Coverage

6/6

With limited leverage and reducing interest expense, the overall interest coverage ratio was highly favourable, with an average of 6.9 times during FY16-FY18. Average industry interest coverage ratio marginally improved to 6.9 times in FY2017-18 compared to 6.8 times during FY2016-17.



Return on Capital Employed

2/6

Industry ROCE remained unfavourable during the period FY 16-18 as PAT continued to shrink and Capital infusion had increased continuously during the period. Industry ROCE was reported as 5% in FY 2017-18, and the average ROCE for the three-year period was 6%.

Debt / Equity

6/6

The industry showed a stable and highly favourable debt-equity ratio with an average of 0.5 times, during the three-year period. Debt-Equity ratio has reduced and remained at around 0.5 times during FY 16-18.



GCA Days

4/6

Though gross current assets (GCA) remained marginally favourable during FY 16-18, the industry presented a concerning trend in terms of GCA increasing from 110 days in FY2015-16 to 152 days in FY2016-18. The industry had an average GCA of 130 days, during the three-year period.



Industry Financials and Industry Average

Fact Sheet (As on Year Ended March 31st)SUM Unit 201803 201703 201603
Net Sales Rs. Cr. 9,813 9,662 9,662
OPBDIT (Excl. NOI) Rs. Cr 1,531 1,196 1,142
Depreciation Rs. Cr. 355 310 784
PAT Rs. Cr. 389 421 451
Net Cash Accruals Rs. Cr. 744 732 1,235
Networth Rs. Cr. 5,072 3,704 3,392
Total Debt Rs. Cr. 2,473 1,947 1,871


Average Unit 201803 201703 201603
EBITDA Margin % 15.6% 12.4% 11.8%
PAT Margin % 4% 4% 5%
ROCE % 5% 6% 7%
Interest Coverage Times 6.9 6.8 6.9
Debt to Equity Times 0.49 0.53 0.55
Debt to EBITDA Times 1.6 1.6 1.6
GCA Days Days 152 128 110

The entities considered in the static pool are as under:

  • Aro Granite Industries Limited
  • Cera Sanitaryware Limited
  • Divyashakti Granites Limited
  • Euro Ceramics Ltd.
  • Glittke Granite Ltd.
  • HSIL Ltd.
  • Kajaria Ceramics Ltd
  • Madhav Marble & Granite Ltd.
  • Murudeshwar Ceramics Limited
  • Nitco Limited
  • Orient Bell Limited
  • Oriental Trimex
  • Somany Ceramics Limited


IRS Definitions

Acuité Industry Risk Scores are assigned on a six-point scale, with 1 indicating ‘High Risk’ and 6 indicating ‘Highest Safety’. The intermediate scores are defined in the table below:

Industry Risk Score Risk classification of the Industry
ACUITE IRS 1 Highly Unfavourable
ACUITE IRS 2 Unfavourable
ACUITE IRS 3 Neutral
ACUITE IRS 4 Marginally Favourable
ACUITE IRS 5 Favourable
ACUITE IRS 6 Highly Favourable


Disclaimer:

Acuité IRS should not be treated as a recommendation or opinion that is intended to substitute for a financial adviser's or investor's independent assessment of whether to buy, sell or hold any security of any entity forming part of the industry. Acuité IRS is based on the publicly available data and information and obtained from sources we consider reliable. Although reasonable care has been taken to ensure that the data and information is true, Acuité, in particular, makes no representation or warranty, expressed or implied with respect to the adequacy, accuracy or completeness of the information relied upon. Acuité is not responsible for any errors or omissions and especially states that it has no financial liability whatsoever for any direct, indirect or consequential loss of any kind arising from the use of Acuité IRS.

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