Just as opportunities emerged in hordes for Morbi tiles manufacturers in 2020-21, problems too have started arising in plenty. For the Morbi tile industry entrepreneurs who are known to take the challenges in stride, this too will pass on, probably much sooner than one expected. However, at present, the situation is bad and may not take much time to turn into worse.
Reports coming from the markets too are not encouraging as they suggest slowing down in demand. Feedback from the dealers suggest that demand has slowed down in April- May period thanks to slowdown in construction activities. Slowdown in construction activities is due to various reasons. Demand was poor during the first two months of the new financial year and it’s unlikely to recover in the remaining period of the current busy season as the Monsoon is expected to arrive earlier than expected. Report from the ground suggest that the rising cost inflation have hindered new construction activity over the last six months.
Cost inflation is worrying
Cost inflation is mainly due to increasing gas price as natural gas cost accounts for 30-35% of the total production cost of the ceramic manufacturer. Long-term cost (for the 80% of contractual quantity) of the gas has gone up from Rs 52-53/scm levels over the last 3-4 months to Rs 68/scm plus taxes currently. The additional 20% is purchased on spot basis which is even higher than the contracted price at above Rs 100/scm. The industry has been able to pass on only 60% of the cost inflation. Going forward, however, tile manufacturers will find it difficult to take price hikes without impacting the demand.
Shifting to propane gas
With propane prices at a 5% discount to natural gas currently, many players have switched over to this alternative fuel to curb rising fuel costs. Propane costs are expected to fall by a further 5-7% next year which will, in turn, push down gas prices. Steep rise in gas price affected its consumption which has reduced to 4mmscmd from 7.0-7.2mmscmd, with a 1.5-2.0mmscmd decrease in consumption and 1.0-1.2mmscmd of substitution by propane and LPG.
Out of 850 manufacturing units in Morbi, about 60-70 already have a propane facility and now 8-10 units per month are adding this facility. Companies take 4-6 months (including government approvals) to set up and operationalise propane capacity. Capital cost ranges from Rs 3mn-10mn for a capacity of 10-60t which the tile manufacturers feel worth spending as the natural gas price has gone through the roof.
New capacity additions
Further, there is new capacity addition overhang in Morbi. The Morbi industry is setting up about 100 new units, out of which nearly 50% have already commissioned during the past year and another 30 are expected over 4-6 months. Last year, 60-70 units closed down despite which the industry saw a net addition of 2-3 times the size of the closed capacity.
In the tiles business, for a capacity of 600,000sqm/month Morbi players invest Rs 80-90 crore and achieve breakeven in 6-8 months. A branded player invests Rs 100-120 crore and takes 12-14 months to breakeven with a similar capacity. In sanitaryware, for a capacity of 2,000 pieces/month, Morbi players invest Rs 30-40 crore and reach breakeven in 1.5-2 years. For a branded player, the investment is Rs 40-50 crore for similar capacity with a 2-2.5-year breakeven point.
Last year, despite odds, the industry was able to achieve double digit growth to reach Rs 50,000 crore. This year also, despite the slowdown in demand during the first quarter, is expected to achieve the same growth rate as in the previous year. On the export front also, while sluggishness continues in the first quarter (due to logistics issues and higher freight rates), the industry expects recovery in exports from the second quarter onwards. In fact, prospects for exporters in the international market is so bright that exports are expected to double in the next four years. Further, sanitaryware segment is still in infancy stage with a market size of Rs 800 crore. With many branded tiles manufacturers realising the potential of this segment are entering sanitaryware manufacturing. The segment is expected to clock growth of 15-17% during the current year.