Harish Rao, Director, sawdust
Unnerved by the economic disruption caused by the sudden and unexpected government decision to demonetize higher value currencies at the fag end of calendar 2016, people in general and architects and interior design professionals in particular only hoped that they will see some light at the end of the tunnel by the end of 2017. But the length of the tunnel proved to be much longer than one would have expected and we will be entering the new year with no solutions visible in the near future. The problems which one faced in 2016 persisted in 2017 and fortunately it didn’t get aggravated during the year which may be the sole consolation one could derive out of the performance in 2017.
When things appeared to fall in place in early 2017, two events put a break on the wheels of revival. First, it was implementation of Real Estate (Regulation and Development) Act (RERA) which put a spoke in the wheel of already subdued real estate market. Secondly and lastly, it was implementation of GST (Goods and Services Tax). Lot of destocking took place just before the implementation of the new indirect tax regime and restocking was done at a slower pace which also impacted festival demand. Confusion and fear regarding GST and its implication and compliance were at the top of the mind of every businessman and everyone preferred to follow wait and watch policy to be on the safer side. Also, there was complaints about the wide disparities in the rates of certain items in the GST vis-à-vis earlier regime. GST rate change, that is, rate reduction, in November, was a welcome change and in a way sentiment booster.
Budget 2017-18 contained many incentives to boost the real estate sector. For example, affordable housing was given infrastructure status thus, bringing down the funding cost for the affordable housing projects. The limit of 30 square metres for affordable housing was made applicable only in the case of four metros while for the rest of the country, the limit would be 60 square metres. The Pradhan Mantri Awas Yojana (‘Housing for All by 2022’) expanded its scope to cater to the housing needs of the mid-income groups, economically weaker sections and low-income population. An interest subsidy of 3% to 6.5% was announced for loans ranging between Rs 6 lakh and Rs 12 lakh.
However, all these incentives were not sufficient to change the sentiment and the market remained subdued. Home improvement market mostly remained weak with many people deciding to postpone their expenditure till the liquidity situation improved. On the whole, it was a difficult and forgettable year for home improvement market.
Building materials industry too faced sluggish demand situation:
Cement industry faced challenges on all fronts
2017 was a year full of events for cement industry many of which had direct bearing on its demand. The first quarter of the calendar year saw demand dwindling due to general liquidity crunch as an after effect of demonetization. Poor demand also affected cement prices which saw a rapid fall during the period. There were signs of demand revival in April as a result of which prices again started moving up. In May cement prices had not only covered the lost ground but also had crossed the January peak which prompted some states like Chhattisgarh government to impose price cap on cement which is still continuing.
In January there was minor relief for the cement manufacturing companies because of a Supreme Court decision. The Supreme Court of India provided relief to mining companies by stipulating the date of payment to District Mineral Foundation (DMF) much later than what was anticipated as per the directions of the Union Government.
Implementation of RERA and GST are the two major events which had their impact during rest of the year. RERA, considered to be good for long term orderly growth of real estate industry, had its impact on cement demand in the short term as the new project launches saw considerable dip. As a result, institutional demand saw poor growth. On the other hand, demand from individual home builders has started going up, especially in the later part of the year. This may be mainly due to falling interest rates on home loans and also interest subsidy scheme announced by the government.
Destocking due to implementation of GST and prolonged Monsoon which extended till mid-October delayed the revival of demand in the second half. In November cement manufacturers had a disappointment waiting for them when the government reduced the GST rate for most of the items from 28% to 18% but cement’s GST rate was kept unchanged at 28%.
Sand mining ban affected the supply of sand in several states like Bihar, Madhya Pradesh, Uttar Pradesh, Tamil Nadu, Rajasthan and Maharashtra. Though the National Green Tribunal has lifted the ban October, complete normalcy is yet to return in sand supply.
Ban on using pet coke in NCR to control air pollution in October too will have impact on operating cost of many companies. Further, rake crisis at coastal ports on fuel import by industry, non-availability of coal due to prioritization to power sector and rising slag prices are some of the other problems faced by the industry during the year. Logistics cost went up during the year due to increase in diesel costs and also due to change in commercial terms from ex-works to FOR in some of the markets.
Paints industry hopes for a revival in 2018
Like any other building materials, paint sector too was affected by the disruptions on account of demonetization and the rollout of GST within a span of seven months. Also, there was effect of RERA which affected the launch of new real estate projects. All these events happened in rapid succession and had some impact on the demand. In paint industry too destocking took place on the eve of introduction of GST and it took little more time than expected for restocking. In fact, restocking took place only towards the end of September.
Festive demand too was not encouraging for the industry due to extended monsoon. This time monsoon extended till mid-October. Usually monsoon stops in early September by when demand starts picking up. But this time extended monsoon delayed the revival of demand.
In November, GST of many building materials was brought down from 28% to 18% but paints continued to attract 28% GST which again is a dampener for the industry. Still the industry is hopeful of rate revision in the new year.
During the year some manufacturers resorted to moderate, 3-5%, price increase. Price increase mostly took place in the first half of the year.
Though the raw material price remained stable, rising price of TiO2 is matter of concern. Since there is no significant capacity addition envisaged in the market, the trend (of rising price) may persist for longer duration unless Chinese suppliers who had faced some constraint during the last few months in terms of production restart their production.
Due to subdued market conditions competitive intensity increased. Apart from durability, cost and quality, manufacturers had to add some other features to their products to attract consumer attention. The case in point was Asian Paints introducing paints with air purifying qualities.
Some of the paint companies had already ventured into other fields like waterproofing chemicals business. But the subdued conditions in the paint industry only reinforced their efforts to diversify more rigorously.
However, towards the end of the year some Green shoots were visible and demand revival is expected in the new year.
Plywood and Boards – A year full of problems
In a major policy decision, the government during year gave licensing authority to permit new plywood units to the state governments. Earlier, there was a central empowered committee, which used to give licence. Abundant supply of plantation timber in some of the North Indian states and a big mismatch in demand and supply of timber (due to which timber prices fell to ten year low) had forced the government to take such important and environmentally sensitive decision. However, there were not many takers for setting up new units due to uncertainty prevailing over GST and its implications.
In June there was destocking taking place due to uncertainty and confusion over the impact of GST. When GST was introduced in July, plywood attracted 28% tax while laminates attracted 18%. As the industry is crowded by numerous suppliers in the unorganized sector, higher GST attracted protests from them who observed four days closure of their businesses from July 14 to 17 demanding tax rate reduction. In later part of the year, the industry was expecting the government to reduce the rate and traders played it safe by keeping minimum stock which impacted sales in the first two quarters of FY 2018. However, reduction of rate to 18% in November has come as great relief to the industry which is expecting a pick up in demand in the coming months.
Due to 18% GST on laminates price variation between organized and unorganized suppliers narrowed down substantially and there was considerable shift in demand for branded products in the market. The trend is expected to continue in the coming months and manufacturers in unorganized sector may find the going tougher in the coming months with customers preferring to buy laminates from the manufacturers in organized sector. Similar situation may be repeated in case of other plywood products as the government has reduced the rate to 18% which has narrowed down the price gap between unorganized and organized sector substantially.
The industry is struggling to keep its raw material cost low. During first and second quarter raw material price went up as the material was not coming from Laos and Myanmar. Though the Myanmar government has allowed felling of trees with strict adherence to law, import (of veneer) from that country to India has not yet started. It may start from the first quarter of next calendar year.
In the mean time, Laos has banned the export of veneer from that country. During the last few months there was disruption in supply of veneer from Meghalaya also due to which price had jumped up from Rs 250 to Rs 400. However, the situation has come back to normal and the price is now moving back to its original level. Some of the leading plywood manufacturers have now started importing wood from African countries which is not only of superior quality but also available at competitive price.
During the year some manufacturers resorted to some nominal price hike for their products which was in the range of 1-3%.
For Ceramics – it was a year of consolidation
Trend in ceramics industry reflects trend in home construction industry. In short, it was a year of consolidation for the industry. Among the sub-categories, tiles and faucets saw a better growth vis-à-vis sanitaryware. Slower or subdued growth in sanitaryware is mainly because its demand comes mainly from new building and negligible demand from replacement market. Strong replacement market helped faucets and tiles to post healthy growth.
Like all other industries, Ceramics too underwent destocking of goods by the distributors before the introduction of GST. However, many in unorganized sector resorted to presale of products before the introduction of GST at the then prevailing price. So, post GST there was sudden fall in the dispatches which was not actually indicative of demand scenario.
The industry was surprised when the government fixed GST for ceramics at 28% as the industry is the main supplier to government’s pet Swachh Bharat program. Also, revival of demand after the introduction of GST was not on expected lines. However, Q2 (of FY 2018) was better than Q1 in terms of demand and volume sales giving a remote hope of demand revival.
There was some disruption in production due to heavy rains in Gujarat but it was not more than 3-5 days. Some manufacturers resorted to price increase of 3-5% across various products and also geographical locations.
Destocking of goods by the dealers also happened in late October and in November as the dealers and distributors were expecting a rate reduction by the government. And the government, in fact, brought down the GST rate from 28% to 18%. Rate reduction has resulted in price reduction of 5-6% which was mostly passed on to the customers. This rate reduction would also help to narrow down price gap between the organized and unorganized players. This would also reduce working capital cycle of the industry. There is also a rumour that GST on affordable housing will be brought down from 12% to 8%.
Raw material price remained stable. However, faucet makers had to face volatile on price front in brass whose price surged 5-6% during the year. Fuel, that is, gas price remained stable. During the year the government imposed anti-dumping duty on tiles imported from China which mitigated threat from Chinese products.
In general, margins of the manufacturers got affected. Many had to sacrifice some margins to achieve growth. In GVT there was intense competition from unorganized sector which may come down to an extent after the GST rate reduction. However, there are 15 plants coming up which may only start fresh bout of competition next year. It is also expected that with government giving big push to affordable housing, demand for double charge tiles may go up in the coming years.
Some leading manufacturers have started or on the verge of manufacturing or launching brands keeping in mind the affordable housing programs in mind. Many of them are going in for automation as the availability of labour is a big problem.
Roofing industry – at last turning around
The first two quarters of the calendar year are considered to be peak season for the roofing industry and coincidentally these two quarters bore the brunt of demonetization, pre-GST jitters and introduction of RERA. First quarter was washed out due to liquidity crunch resulting from demonetization. Manufacturers decided to go stock-light on the eve of GST introduction which in turn affected their sales.
The roofing industry and asbestos cement sheet roofing industry in particular has been de-growing for last 2-3 years. For example, asbestos cement sheet roofing industry’s market has shrunk from 4 million metric tons, three years ago to about 3.3 million as it stands today.
However, unlike some other industries who were at the receiving end GST stick, asbestos cement sheet roofing industry was one of the few sectors for whom the new tax regime turned out to be a blessing in disguise. Under GST regime, rate of tax has been brought down from 28% to 10% thus bringing it at par with the metal roofing products. Also, steel roofing sheet manufacturers had to resort to price hike during the year to cover their increasing cost which made the asbestos cement sheet prices attractive. As a result, demand for asbestos cement sheet went up substantially in the third quarter of the calendar year and since then momentum in demand has been maintained. However, AC sheet manufacturers gain was colored steel sheet manufacturers loss who suffered due to increasing cost and loss of market share.
Going forward, government’s big push given for affordable housing may not necessarily result in spurt in demand for roofing sheets. This is so because some states like Odisha, have gone for RCC roofing instead of sheet roofing though the former is four times costlier than the latter. Even then, affordable housing and house for all government program will benefit the industry substantially.
Home Textiles – slowly getting out of tight situation
It is a year of flattish growth for home textiles but the sector is entering the new year with a hope of revival in demand. Home textile industry is heavily dependent on exports for its survival and its growth and that too mainly on the US market. With new regime in US stressing on job creation thus creating policy uncertainties and also the market in the midst of transitionary phase struggling itself to find a balance between online and offline sales, the year saw lot of destocking taking place. However, sales in the third quarter in US is expected to be better (though final sales figures have not been published) due to early onset of winter this year. Last year’s sales were impacted due to extended summer in US.
There is every reason to be optimistic on the export front because in China several home textile units were closed down during the year due to pollution problems and now the business is concentrated in few Chinese manufacturers. This has impacted competitiveness of the Chinese suppliers in the international market. Also, competitiveness of Vietnam has diminished due to steep rise in the labour cost. All these factors automatically improve India’s competitiveness.
Poor market conditions in US forced many of our leading exporters to give extra push to their effort to establish themselves in Indian market. Most of them introduced several new brands and products in the domestic market. Though their domestic sales is still meagre, their foray into Indian market is part of their long term strategy. They feel that the combination of GST and push towards digital transactions will accelerate the shift towards organized sector.
There was a mix of positives and negatives on the policy front for the industry. The government came out with modified duty drawback rates for exporters, which came into effect from October 1, 2017. The government drastically reduced the rates to 2% as compared to 7.5% earlier. Further the ROSL rate was revised downwards to 1.55% from 3.9% earlier which was again made applicable from October 1, 2017. This had an overall impact of 2-2.5% on the margins of the exporters. After the representation by the industry to the government, the rates for incentives under an export promotion scheme were doubled — MEIS — to 4 per cent for readymade garments and made-ups.
Easing of the cotton prices have given some relief to the industry, increase in acreage nationally has resulted in a bumper crop thus putting pressure on the cotton prices in the new season. Earlier cotton prices were ruling around Rs. 42,000 a candy and now the market is quoting around Rs. 38,000 a candy. Other countries are also expected to harvest a bumper crop therefore, cotton prices are witnessing a downward trend.
Regarding capex spending, most of the players are done with their expansion plans for the time being and no major plans are announced during the year. Current capacities of most of the leading players are enough to take care of the demand for next couple of years.
Branded sales for most of the leading players is going up steadily. If it was, say, 9-10% of the total sales two years ago, it’s now around 15%. Sales on hospitality segment is doing reasonably well with some of the leading players clocking sales growth of 15%+ which in turn has helped them to improve overall performance.
All the leading players are calibrating their strategy that seeks to provide the customer with a seamless shopping experience whether the customer is shopping online from a desktop or mobile device, by telephone or in a bricks and mortar store. Making online presence and getting listed on market places are becoming important part of marketing strategy. So, most of the leading players are also in touch with leading market players like Amazon, apart from their regular customers and retailers. Though e-commerce may not add to the market size but it is impacting the way products are being sold.
However, sales from e-commerce is still an insignificant portion of the total sales – it’s not more than 2-3%.