Sluggish domestic demand, rising costs to hit prospects of tile firms

Sector reported record exports in July, expected to support setback in India market

Stocks of tile companies are down 9-11 per cent over the past month over concerns about a rise in input costs and sluggish domestic demand. While strong exports are expected to help stabilise prices in the domestic market, the surge in gas prices over the last couple of months could hurt companies' margins in the second half of FY24.

Tile companies posted a steady 7-8 per cent volume growth in the June quarter, but demand in the domestic market became sluggish in the September quarter. “Our recent channel checks suggest that the demand scenario weakened again in July–August. Channel partners and companies are hopeful of demand recovering from October given seasonality as well as healthy demand for plastic pipe/electric wire. Given the weak demand environment in 2QFY24, we trim our volume estimates by 1-2 per cent for FY24 for our coverage companies,” say Achal Lohade and Vineet Shanker, analysts at JM Financial Research,

Motilal Oswal Research, too, says that domestic demand for tiles is sluggish but will improve in the second half of FY24 due to the real estate sector. In Q2 FY24, the brokerage expects tile demand to remain flat compared to last year. However, it expects Kajaria Ceramics, the market leader, to outperform the market with a volume growth of 7 per cent year-on-year (YoY) led by market share gains.

Tile exports remain healthy and are expected to support prices in the domestic market. The sector reported record exports in July, with revenue of nearly Rs 2,000 crore. Tiles export in July stood at 55.6 million square metres, up 41.5 per cent over the year-ago quarter and 52.5 per cent sequentially. Arun Baid and Sohil Kaura, analysts with ICICI Securities, highlight that exports in the April-July period were up 30.8 per cent YoY, driven by lower gas prices and freight costs. The trend is expected to remain healthy in the near term as freight costs remain benign and gas costs (YoY) are lower as well, they say.

Gas prices may not have a big impact in the September quarter, but could weigh on margins of tile companies in the second half of FY24. Brent crude and spot liquefied natural gas prices spiked 25-31 per cent over the last 2-3 months, which we believe can raise fuel consumption costs of ceramics players (especially Kajaria) in the second half of FY24, says Motilal Oswal Research. The brokerage has reduced the operating profit estimates of Kajaria Ceramics for FY24/25 by 3-5 per cent on lower volume assumptions and expectations of gas price hike. It, however, has a 'buy' rating on the stock, citing strong return ratios and healthy balance sheet.

While the near-term remains challenging, JM Financial Research is optimistic on demand recovery for the sector in the second half of FY24. It has tweaked estimates, giving a 'buy' for Kajaria and Somany Ceramics and keeping a 'hold' rating on Cera Sanitaryware.