Indian ceramics industry – growing in size

Indian ceramics industry – growing in size

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During the last ten years or so Indian ceramics tiles industry has crossed some interesting milestones. In 2006, ceramics tiles production in India was around 340 million square meters and India ranked fifth in the world in the production of ceramic tiles. Come 2016, India's production had touched 955 MSM and had galloped into number two rank in world ceramic tiles producers list. Further, during these ten years, India's production almost trebled which no other major producer has been able to achieve

The size of Indian ceramics industry which consists of ceramic tiles, sanitary ware and crockery is estimated to be around Rs 27,000 crore (INR 270 billion). Ceramic tiles account for major portion of the industry, that is, about 85% of the total industry and rest is accounted for by sanitary ware and crockery.

Tiles are used in residential, commercial and industrial buildings. Tiles may be ceramic or vitrified. Again vitrified tiles may further be classified into glazed vitrified and polished vitrified tiles.

Product-wise share

  • Ceramic floor & wall tiles     42.5%
  • Polished vitrified tiles           42.5%
  • Glazed vitrified tiles              15%

Leading Players

  • Kajaria Ceramics                22%
  • Somany Ceramics               15%
  • Prism Johnson                    15%
  • Asian Granito                      09%
  • RAK Ceramics                     06%
  • Nitco                                      06%
  • Orient Bell                            05%
  • Others                                    22%

During the last ten years or so Indian ceramics tiles industry has crossed some interesting milestones. In 2006, ceramics tiles production in India was around 340 million square meters and India ranked fifth in the world in the production of ceramic tiles. Come 2016, India’s production had touched 955 MSM and had galloped into number two rank in world ceramic tiles producers list. Further, during these ten years, India’s production almost trebled which no other major producer has been able to achieve.

However, there is another angle to it. During the same period, China, the largest producer of ceramic tiles in the world doubled its production from 3,000 MSM to 6,500 MSM! And even now, India the second largest producer produces just 15% of what China produces every year. Thus there is huge gap between the production of first and second largest producers of ceramic tiles in the world who incidentally rank in the same order in terms of population also. Though this gap is narrowing over the years, but it is happening very slowly.  Further, as the second largest producer of ceramic tiles in the world, India produces hardly 7% of world’s total production. This also indicates that what our ceramics industry has achieved so far is commendable but there is scope and need to cover lot more space in the coming years.

Imports and Exports

In last ten years or so, capacity addition has been taking place at a faster pace than the domestic consumption. During the last 10 years, consumption has been growing at 10% CAGR which is considered to be low when compared to India’s GDP growth and growing population. However, saving grace has been exports which has grown manifold in last ten years. Interestingly, most of the exports went to the Middle East and Saudi Arabia accounts for 1/4th of India’s exports. India’s exports has grown 17 times during the period from FY07 to FY17 and now has crossed 50 mn sqm annually.

However, exports to Middle East is likely to suffer in the coming months as Gulf Cooperation Council (GCC) has decided to impose temporary anti-dumping duty on Indian tiles starting January 2019. Recent depreciation in Indian rupee may not be able to compensate entirely the cost hike due to anti-dumping duty on Indian tiles.

On the other hand, imports is showing declining trend mainly due to anti-dumping duty. Imports have come down from a peak level of 30.0mn sqm in FY12 to 8.5mn sqm in FY17 due to anti-dumping duty imposed by India on China products (USD 1.87 per sqm on glazed, unglazed porcelain & vitrified tiles with polished or unpolished finish and less than 3% water absorption), a depreciating INR and an increase in cost competiveness of the domestic industry.

Impact of demonetisation

Last 12-18 months have been eventful  period for the ceramics industry with various decisions of the government affecting the demand situation in the industry. Demonetisation announced by the government towards the end of 2016 disrupted the demand situation in the country and it took almost six months for the normalcy to return in the industry.

Impact of GST

As the normalcy was just returning, again the industry faced with phenomenon of de-stocking on the eve of introduction of GST, an ambitious indirect tax regime introduced by the government. On the eve of introduction of GST, distributors started de-stocking the products due to confusion and uncertainty about the impact of the new tax regime. At the same time, manufacturers in the unorganised sector dumped their products in the market before the new tax law became applicable as the GST was made applicable to all types of manufacturers.

Post introduction of GST  chaos type of situation prevailed with check posts at the state borders being removed and the manufacturers in unorganised sector having a field day as they could freely move the products from one state to another without any checks. Infact, un-billed transactions jumped up immediately after the introduction of GST as the proper surveillance mechanism was not in place.

Industry faced with the problem of destocking once again in October 2017 when the dealers were expecting a GST rate reduction in the GST Council meeting which eventually came true and GST rates were reduced to 18% from November.  However, manufacturers in the unorganised sector continued to have field day as there was no check on inter state movement of goods.

It was expected that with the introduction of e-way bill system from 1st April 2018, things would improve and inter state movement of goods would be monitored. Even after implementation of the e-Way bill, there has been no major impact on prices, as the same e-Way invoices were used by multiple trucks to dispatch different consignments.

While the industry has made representations to the tax authority for creation of check posts at Morbi where eWay bill data could be captured, even now under-invoicing could be used by unorganized firms to reduce tax incidences. In case of 100% tax compliance by the unorganised sector, they may have to take a price increase of 10-14% which in turn may bring them on par with branded products. If this happens, there may be considerable shift in consumer preference from unbranded to branded tiles. However, the government is slow in implementing proper surveillance mechanism and it may take another six months for the things to get stabilised.

Price crash

GVT prices came under pressure in the second half of last financial year due to additional capacities going on stream, especially amongst unorganized players. Price war had become intense in the fourth quarter of the last financial year and had continued in April too. It is believed that most of the players who have set up plants recently are operating at breakeven level and further correction in GVT price will force them to shutdown production.

Higher competitive intensity from unorganised players ahead of E-way bill implementation continued to impact price scenario in the market. Originally, the government had announced the introduction of the E-way Bill system from February. However, the decision had to be postponed till April 1st due to system breakdown in February. Suppliers in unorganised sector , however, had started dumping the products fearing that E-way Bill will become a reality in February. As a result, market saw over supply deppressing the price of tiles in the process. Though most of the tiles manufacturers registered volume growth (in single digits) their margins got hit due to price war.

However, price fall in GVT has abated and  no further price correction is expected in the coming months. At the same time, price is unlikely to rise from the current level due to excess GVT manufacturing capacity in Morbi area and tiles makers expect the price to languish at the current level for next 2-3 quarters.

Price war in sanitaryware

Last quarter of FT 2018 also saw price war in the sanitaryware segment. A leading South based sanitaryware maker having presence all over the country cut its price for most of its sanitaryware brands in February-March period to push up its top line. One of the reasons to go for price cuts is the aggressive marketing strategy displayed by Jaguar in recent months. Jaguar has around 29% market share presently in the organised sanitaryware market and the brand is gaining further popularity, thanks mainly to its aggressive marketing strategy. Other players in the industry are also alarmed by the decision of Jaguar to double its sanitaryware capacity in the coming months. However, isolated incidents of price cuts by some players has not yet triggered a major price war in the industry much to the relief of the major players.

Capacity additions

Around 50 new tiles manufacturing plants are expected to come on stream next year, primarily at Morbi in Gujarat. This may result in capacity addition of anywhere between 120-180 mn sqm.

However, capacity addition has started abating of late due to various adverse conditions prevailing in the market. In fact last year’s rising fuel cost and intense competition in market had forced some of the manufacturers in the Morbi to pull down the shutters.

Natural gas price

GVT manufacturers last year had received double whammy in the form of falling price of tiles and rising gas prices.  Till recently gas price was consistently moving up in tandem with crude oil price. Also rupee depreciation during the same period has not helped the cause of LNG users who had to shell out more for the gas supplied. Natural gas price is the greatest uncertainty which continues to haunt the tiles manufacturers.

Natural gas is one of the major cost compnent of the tiles manufacturing and it accounts for nearly 20% of the sales revenue. Gas price is determined on the basis of some formula and it varies from place to place. For example in Morbi, which accounts for nearly 80% of the ceramics production in the country, gas price is determined by a three-month average price of RAS gas (weight 19%), six-month average British  Gas gas (weight 53%) and prevailing spot price (weight 28%). Prices of RAS gas and BG gas are linked to Brent Crude oil prices. It may be noted here that Gujarat Gas, supplier of natural gas to Morbi ceramic manufacturers had hiked gas prices by Rs 1.75 per 29.95 per SCM in June, 2018.

It is estimated that for every $ 5.0 per barrel increase in crude oil prices, there will be corresponding increase in gas cost by Rs 1.5 per SCM. Further, every Re 1 depreciation vs the US Dollar  will increase the cost of gas by Re 0.4 per SCM.

However, recent softening of crude oil price and also rupee appreciation should help the industry breathe easy. The industry is hoping for natural gas price cut in the near future.

Morbi – the hub of ceramics

Morbi, located in Gujarat, is the hub of ceramic manufaturing in India and accounts for nearly 80% of the country’s production.  Ceramics exports from Morbi amounts to nearly Rs 10,000 crore annually. Morbi Ceramic manufacturers export their products to 150 countries including some traditional ceramic producing countries like Spain, Italy, Mexico, Brazil and Turkey.

Morbi is probablythe second largest tile manufacturing cluster in the world after Foshan in China. It houses nearly 800 units which produce all types of tiles, from the basic ceramic floor and wall tiles to the most sophisticated PVT/GVT tiles. While most of the manufacturers are unorganised and small and mediam scaled units, a few have formed joint ventures with larger branded players. A few have been successful in creating their own brand.

Ceramics using coal-based gasifiers 

While almost all the ceramic manufacturing units in Morbi have PNG connection, nearly 50% of the ubits use coal gasifiers for ceramic manufacturing. But most of them prefer use of coal gasifiers to reduce fuel costs. Most of the suppliers in unregulated market use coal gasifiers due to lower cost. However, Gujarat High Court’s order directing  the Gujarat Pollution Control Board (GPCB) to close ceramic manufacturing units using coal-based gasifiers located in Morbi within stipulated time limits, is likely to impact the volume and cost of production of ceramics in Morbi region. Shifting to PNG will increase their cost of production thus, further leveling the playing field which is slowly becoming even post introduction of GST and e-way bill system. This will enhance the pricing power of the players in organised market. Also, cost of production advantage enjoyed by Morbi manufacturers vis-a-vis manufacturers in other regions, say Haryana, will narrow down.

Gujarat High Court’s order is the result of complaints filed before the Court and subsequently before the National Green Tribunal (West Zone – Pune) alleging severe irreversible damage to the environment (both water and air) owing to illegal manufacturing practices, particularly using coal gasifiers.

Government programs

Considering the prolonged depressed condition of Indian realty sector, ceramics industry too should have been in a bad shape as most of it revenue comes from domestic realty sector.  However, Indian ceramics industry is quite better off now vis-a-vis realty sector, thanks mainly to several government programs. Government schemes like Swachh Bharat Abhiyaan and Prime Minister Awas Yojana (Urban) are largely responsible for ceramic manufacturers order book ticking even under adverse conditions. These two scheme are expected to contribute as much as 60% of the incremental demand for low- to midpriced products, such as polished vitrified tiles (PVT) and ceramic tiles.

At the beginning of this financial year cumulative sanctioned houses under PMAY (U) stood at 4.4mn. There were 1.9 mn houses undergoing construction and0.4 mn houses were completed. In FY18 alone, 2.7mn new houses were sanctioned, 1.4mn houses are undergoing construction and 0.3mn houses have been completed. While the number of houses completed is low, what has been encouraging is the sharp increase in houses under construction as this will translate into rise in demand of ceramic as well as PVT tiles in the medium term.

Swachh Bharat Abhiyan

Swachh Bharat Abhiyaan is one of the best implemented government programmes. Under this program construction of toilets has already seen its peak and demand due to this program may not be much in the coming year.

Originally, the Central government had the target of stopping open defecation in India by 2 October 2019, but the deadline has been advanced to 31 March 2019. Under the scheme, the government has cumulatively built 73mn toilets (68 mn at March FY18, 81.8% of target) from 2 October 2014 to date, of which 30mn were built in FY18 alone. The government has achieved 84.3% of its cumulative target.

Thus, under the scheme, toilets constructed in FY19 are expected to decline by 18% to 25mn. If the government is able to achieve its new target of open defecation free by end-FY19, no new toilets will be built under this program in FY20. In other words, there will be no fresh demand for ceramic products under this scheme beyond FY19.

Replacement demand

Replacement demand will be another area which the ceramic manufacturers will be concentrating to expand their revenue. Replacement demand is expected to grow in line with estimated GDP growth of 7.5% in FY19 and 7.8% in FY20. As replacement demand is primarily for value-added products, such as GVT, marble and quartz, growth would be determined by improvement in lifestyle.

Factors influencing future growth

Low penetration level

Despite being the second largest tiles manufacturer in the world, penetration level of tiles in the country is one of the lowest in the world. Mud, red oxide and cement flooring are still popular in India, especially in rural India.  According to the 2011 government census, only 10.8% of Indian houses had mosaic and tile flooring and penetration in rural India is far lower. Cereamic tiles present enough attractiveness through competitive cost with long shelf life and low maintenance cost for people shift to ceramic tiles for flooring purposes. With better distribution and reach in these areas, rural India could provide significant growth impetus to this industry.

Rapid urbanisation

Tiles penetration in urban India is seven times the rural demand. In the coming years, pace of urbanisation is expected to pick up further which in turn a good news for the ceramic sindustry. According to the Department of Economic and Social Affairs of the United Nations Secratariat, India would be the largest contributor to incremental urban population in the entire world until 2050. Disposable incomes and penetration of retail finance are higher in urban areas, hence, an increase in urbanisation and the growing number of nuclear families are key drivers of tile demand.

Low per capita tile consumption

While the global average per capita tiles consumption is 1.6 sqm, India, with 0.6sqm per capita, has one of the lowest consumption figures. Thus, there is lot of scope for the per capita tiles consumption to go up in the coming years. Increased brand awareness thanks mainly to popularity of electronic media should help to increase this average to a decent level.

Revival of realty sector

Demand for  tiles are a derivate of real estate demand which continues to be lackluster currently. However, increasing trend of nuclear families, improving income tables, falling age of first time home buyers, fairly attractive interest rate scenario, sustained commercial demand led by India’s decent GDP growth and Government initiatives (such as RERA will raise consumer confidence) should help in improving the medium-term outlook of Indian’s real estate industry, in turn improving the medium-to-long-term outlook of India’s home improvement industry.

Rising disposable incomes and young population

India has one of the youngest populations in the world wher the median age of India’s population is estimated at 28 years. India’s disposable income has grown at a CAGR of 12% over the past three decades. At this rate average Indian’s disposable income will double in next six years. Thus, rising income level and the young population will change demand scenario for tiles industry in the coming years. There will not only be increased demand for the tiles but also there will shift towards premium products from lower end products in the coming years.

Growth and trend

Tiles industry is expected to grow 4-5% during the year. However, bathware segment (sanitaryware and faucets) is expected to maintain double digit growth and many tiles manufacturers are giving more emphasis to this segment due to its growth prospects. Growing younger population and disposable income and also improving standard of living make this segment a sunrise one.

Slim tiles are now becoming the trend especially in high end constructions. Slim tiles are thin and lightweight yet incredibly strong. Special manufacturing process of these tiles make them tougher, longer lasting and much more resistant to water and frost than ordinary tiles. Manufacturers like Kajaria and Somany have already introduced several types of slim tiles and now are planning to give bigger marketing push for these products.

It’s not just the thickness but size too matters! Trend is towards ultra large from earlier large tiles. Leading manufacturers are going for ultra large slabs in GVT and larger sizes in ceramics wall & floor tiles

For example, Kajaria has launched new-size 1000×1000-mm PVT and 1×2 metres in GVT slabs (The Ultima collection). Somany Ceramics has launched GVT slabs with sizes 1200x2400mm, 800x1600mm, 800x2400mm and 1200x1200mm. Varmora Granito, Morbi-based manufacturer, has recently launched large slabs in GVT with sizes 1200x1200mm, 1200x2400mm, 800x1600mm and 900x1800mm in six series. Another Morbi-based manufacturer, Lioli Ceramics launched, at ET Acethech, for the first time in India – biggest ever slab (3200x1600mm).Qutone Ceramics too has ultra large slabs under its IMarble series.

In recent years, many companies from Morbi have started manufacturing large sized tiles. In India there are 12-15 plants making large slab tiles competing all over the world. However, the market for these products is not very big and that’s the reason why large organised players like Kajaria and Somany are waiting for the market to grow. Although these innovative products enjoy higher margins, since demand is limited, even new players find it difficult to breakeven and at times these companies, in order to scale up their utilisation, get into contract manufacturing for large organised players. Thus, in such niche categories, Kajaria and Somany prefer to outsource and plan to set up their own plants only once the market attains decent size.

Trend is fast changing in bathware segment too thanks mainly to intense competition and evolution of e-commerce. New and innovative products are being introduced by the manufacturers to attract new customers and also to meet expectation of the demanding customers. Somany has launched 2×1 premium wall tiles with third fire technology with 16 SKUs.

Leading Manufacturers

Kajaria Ceramics

Kajaria Ceramics is the largest manufacturer of ceramic and vitrified tiles in India and is the ninth largest in the world. It has an annual aggregate capacity of 68.37mn sqm, distributed across eight plants: Sikandrabad in Uttar Pradesh, Gailpur & Malootana in Rajasthan, four plants in Gujarat and one at Vijayawada in Andhra Pradesh. Kajaria’s extensive range of products includes ceramic wall & floor tiles, polished vitrified tiles, glazed vitrified tiles, digital tiles, sanitaryware and bathware fittings.

Prism Johnson

Prism Johnson’s tiles, bath & kitchen (TBK) business enjoyed leadership position over FY03-12. However, in FY11 & FY 12 the company received a severe setback when its sizable percentage of total capacity in Andhra Pradesh and Karnataka suffered on account of power and fuel availability. Now, the company has addressed power & fuel issues in South India by installing three coal gasifiers in the AP plant (2 plants), winning bids for onshore micro gas wells and natural gas pipeline connectivity completed for Karnataka plant.

Somany Ceramics

Somany Ceramics is the second-largest manufacturer of ceramic and vitrified tiles in India. It has manufacturing facilities at Kadi in Gujarat, Kassar in Haryana and other JV plants. It has tiles capacity of 64mn sqm, comprising own capacity of 29mn sqm, JV capacity of 26mn sqm and outsourcing capacity of 9.0mn sqm. Somany also operates sanitary ware with 1.2mn pieces per year and bath fittings.

Asian Granito

Asian Granito India is the fourth-largest manufacturer of ceramic and vitrified tiles in India. It has manufacturing facilities at Dalpu, Idar & Dholka in Gujarat) and other JV plants. It has tiles capacity of 32mn sqm comprising own capacity of 15mn sqm, JV capacity of 11mn sqm and outsourcing capacity of 6mn sqm. The company also operates quartz manufacturing with 0.53mn sqm capacity and marble capacity of 0.73mn sqm.

Cera Sanitaryware

Cera Sanitaryware manufactures, markets and distributes sanitaryware and faucetware, and trades in tiles and other bathroom products. Its sanitary ware and faucetware plants are located at Kadi district of Gujarat. Its 3m piece-a-year sanitaryware division accounts for more than half of its revenue. The company recently commissioned a 2,500-piece-a-day state-ofthe-art faucetware plant, with which its present capacity has gone up  7,200 pieces a day, scalable to 10,000.

Orient Bell

Orient Bell Limited was established in the 1970s, with its base in New Delhi. The company is one of the largest manufacturers of ceramic and vitrified tiles as well as the first to manufacture ultra-vitrified tiles in India. At present, the company is the 7th largest tiles manufacturer in the country.

Nitco Ltd

Established in 1953, Nitco is known for premium brands. Nitco is one of the largest manufacturers of floor tiles in India and has a vast portfolio of floor and wall tiles, marble, mosaic and metal craft. The company also exports tiles to European and Middle East countries.