Industry Risk Score : Ceramics & Sanitaryware

Ceramics remains a diverse industry, constituting of varied segments, including products such as ceramic tiles, sanitary ware, refractories and advanced ceramics. These products in fact are of daily use in consumers’ life who have shifted their consumption patterns from just being a decorative product to a hygiene product. Due to it becoming an integral part, it is being widely used in bathrooms, kitchens, hospitals, schools, public offices and primarily servicing the construction industry.

The domestic ceramic industry is majorly dominated by ceramic tiles industry which comprises of the organised and the unorganised sector. The organised sector comprises of a few large players. On the other hand, the unorganized sector which largely operates from Morbi in Gujarat makes up around 55- 60% of the total industry thus reflecting a further growth potential in the sector. The tile segment can be further classified into floor, wall, and vitrified and porcelain tiles.

During FY19, production of ceramic tiles fell by 7.8% y-o-y to 2.1 million tonnes (mt) owing to the low demand. Since, the major market for ceramics is servicing the housing and commercial real estate, the domestic demand is contingent to the growth in the said sectors. Government initiatives such as the Swachh Bharat Abhiyan (SBA), Pradhan Mantri Awas Yojna (PMAY) are thus likely to support demand.

On the export front, Indian exports of tiles and sanitaryware constitute markets of US, Saudi Arabia and Mexico. In terms of the world production for ceramic tiles, India had a 7% share in overall production and was the world’s second largest tile manufacturer, producing 955 million square meters.

In the medium term the industry is likely to witness some headwinds in demand on account of continued stagnation in the real estate sector owing to the implementation of the RERA (although bringing in its benefits in longer term), GST (Goods and Services Tax) which is likely to be a key attribute to monitor in terms of demand growth.

Key Risks & Attributes

• Cyclical nature of real estate
• High competition intensity between organised and unorganised market
• Any volatility in input prices

During FY19, production of ceramic tiles fell by 7.8% y-o-y to 2.14 million tonnes (mt) from 2.32 in the previous year. Consumption, which had been falling since FY17 owing to the low replacement demand and lower construction activity in residential segment of the real estate sector has been the major factor for the same. With the major market for ceramics, servicing the housing and commercial real estate, the domestic demand is contingent to the growth in the said sectors. In fact, owing to the several government initiatives such as the Swachh Bharat Abhiyan (SBA), Pradhan Mantri Awas Yojna (PMAY) demand for ceramics can witness an uptick albeit remaining a key monitorable.

The Union Budget of 2018-19, in fact, doubled the allocation for affordable housing to Rs. 8.9 billion. Moreover, plans to extend the rural road network scheme connecting all eligible habitations under Phase III of Prime Minister Gram Sadak Yojana is also expected to support demand. The government has also decided to adopt cement instead of bitumen for the construction of all new road projects as cement is more durable and cheaper to maintain than bitumen in the long run. Further, projects such as dedicated freight corridors, ports and metro rail projects are underway expected to be positive. Cement industry (including gypsum products) attracted foreign direct investment worth US$ 5.2 billion between April 2000 to March 2019 and is likely to witness increase in investments going ahead as well.

The world production of ceramic tiles witnessed a growth of 5.7% y-o-y during CY16 (latest available data) aggregating to around 13 billion square meters. Further, the consumption during the corresponding period too rose by 5% signifying a recovery in the global market. Consequently, India which had a 7% share in overall production was the world’s second largest tile manufacturer, producing 955 million square meters. On the export front, Indian exports of tiles and sanitaryware constitute markets of US, Saudi Arabia and Mexico.

In the medium term the industry is likely to witness some headwinds as reflected from the previous year’s dip in demand on account of continued stagnation in the real estate sector owing to the implementation of the RERA, GST (Goods and Services Tax) impacted the MSME (micro, small and medium-sized enterprises) sector, a key in the distribution segment, which put off purchasing decisions. Going ahead it is likely to be a key attribute to monitor in terms of demand growth.

Acuité believes that demand risk in the sector is persistent owing to the distress in the real estate market. Exports too, remain a key segment to be monitored going ahead.

The domestic ceramic tiles industry comprises of the organised and the unorganised sector. The organised sector comprises of a few large players. On the other hand, the unorganized sector which largely operates from Morbi in Gujarat makes up around 55- 60% of the total industry.

With aggressive advertisements and promotions to capture domestic market, the organised players continue to introduce stylish and aesthetic products to expand their consumer base. Further strong branding and market position too ensures customer loyalty in times of higher prices. Pan-India presence through retail outlets and wide dealership network favour them over unorganised market.

The unorganised sector in the Morbi ceramic cluster of Gujarat have some cost advantages over organised market due to ease of access to raw material, ample availability of skilled manpower and reliable power supply. Due to aforementioned factors and established production technology, large players resort to source semi- finished products rather than investing in new manufacturing facilities.

In the organised sector, Kajaria remains the dominant player in tiles market with a market share of 20- 22% followed by H&R Johnson and Somany Ceramics. On the other hand, HSIL (Hindware) 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), Jaguar and Parryware.

> Acuité believes that the competition intensity remains high in this fragmented market. Further, high costs involved in branding and distribution network too present a challenge.

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 charges on coal/gas, power form a major cost component. The sector is vulnerable to gas prices due to constrained domestic availability, and inadequate pipeline infrastructure. Since the industry is volume driven, freight cost also forms high and the strategically located plants in Gujarat having proximity to Kandla port thus save on transportation costs on exports and import.

Acuité believes that the input risk remains manageable owing to adequate raw material supply to the industry. However, supply and pricing of natural gas to remain a key monitorable going ahead.

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.

In fact, government programmes such as Swacch Bharat Abhiyan, Housing for All, 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 also augurs well for the industry.

GST implementation has reduced the price difference between organised and unorganised market. Although, reduction in GST rate from 28% to 18% will make the tile and sanitary ware products more affordable to consumers. Implementation of E-way bills has also helped in removal of inter-state barriers and improved supply chain management.

Acuité believes that the regulatory risk to the industry remains low because of government’s favorable policies and its focus on clean India mission.

The industry as such is less exposed to drastic technological advancements, atleast in the medium term.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.

Acuité believes that the technological risk to the sector is low since the industry caters to basic sanitation needs with only advancement likely to happen is in terms of becoming more energy efficient.

Industry financial performance risk score

Operating Margin
(Marginally unfavorable)

Interest Coverage Ratio
(Marginally favorable)

Return on capital employed
(Marginally unfavorable)

Debt/ Equity
(Marginally favorable)

GCA days
(Marginally unfavorable)

Note: The industry financial performance risk score is provided on a 6-point scale