The Indian Tile and Bathware Industry: Which companies are better placed – Part 1

The ₹27,000 Crore Indian tile industry is fragmented, 55% of it is with small regional players and the remaining 45% with large organized players. Somany and Prism Johnson have 6% each of the overall market and 15% of the organized pie. The market leader, with 11% overall share is nearly 2x the 2nd largest player in terms of sales, and more than 2x the after-tax Profit. They have recently forayed into the Bathware segment and have seen encouraging initial results. 

In the first of this two-part series, we look at the size, structure, companies and drivers of the tiles segment.  Part 2 will go into the bathware segment and some interesting crossovers in play.

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We recently did a deep dive into the Indian Paint industry and looked at why Asian Paints has and will continue to dominate the space.

An interesting trend is taking place in the tile and bathware segment. Tile players are entering the bathware (sanitary and faucet ware) space and the bathware companies are entering the tile space. Is moving from tiles to bathware easier than moving from bathware to tiles?

Tiles 101

Tiles can be used on floors, walls and roofs, they are made from clay and other materials. China clay and Ball clay constitute 33% and 23% of raw material by volume in manufacturing of tiles. All tiles are largely classified as ceramic tiles, there are two sub groups under this classification

• Ceramic (non – porcelain)
• Vitrified (porcelain)

Some of the characteristics of ceramic tiles in comparison to vitrified tiles are – porus – high water absorption, less durable, less scratch resistance, less strength, not slippery, cheaper, not easy to maintain and difficult to install.

Vitrified tiles on the other hand are more porus, stronger, durable, high scratch resistance, slippery, expensive, easy to maintain and install. Different types of vitrified tiles are

• Full body – have a uniform colour in the entire body of the tile. Used in high traffic areas – airports and malls
• Double charge – 3 to 4 mm thicker than other tiles and hence more durable. Used in homes, offices and commercial projects
• Glazed vitrified tiles (GVT) – manufactured through digital printing technology, offer vast variety of designs. Used in low or medium traffic areas
• Polished glazed vitrified tiles (PGVT) – Similar to GVT with polish on top. Suitable for homes
• Soluble salt – printed with screen printing technology and then polished. Cheapest in the vitrified tile family. Used in low traffic areas
• Nano polished – Application of liquid silica on vitrified tiles fills the micro (nano) pores and makes the tile smooth. Excellent water, dust and anti bacterial properties

Global Tile Market

The top manufacturer of tiles in the world is China. It manufactured 5,683 MSM (million square metres) in CY18. China accounted for 43% of the global tile production.

China is the largest manufacturer of tiles in the world, accounting for 43% of world tile production. Click To Tweet

Below are the top manufacturers in CY18 and the trend in world tile production and top manufacturers for the CY14-18 period

Observations from the above table

• 80% of the world tile production is by 10 countries
• 43% of the tile production is by China, however this has fallen from 48% in CY14
• Vietnam has the fastest production growth – 14%
• Production in India, Egypt and Spain has grown by 9%, 8% and 6% respectively
• Total world production has fallen by 4% in CY18. This is lead by China, which saw production fall by 11%
• Indonesia has seen production growth of 25% in CY18, the best among all countries

China is also the largest consumer in the world. Chinese domestic consumption in CY18 was 4,840 msm, 38% of world consumption.

Below are the consumption countries in CY18. Trend in total world consumption and top consuming countries for the CY14-18 period

Observations from the above table

• 67% of the world tile consumption is by top 10 countries
• China is the largest consumer in the world, 38% of total consumption. This is 6X the second largest consumer – India
• Vietnam has recorded consumption growth of 15%, fastest amongst all the countries
• Fall in consumption growth in CY18 is in line with fall in production growth
• Indonesia’s consumption/production was 117% in CY18, this implies that its consumption is more than its production. The country has relied on imports to fulfil its consumption
• India’s consumption/production was 66% in CY18, this metric in CY14 was 92%. This implies that exports have picked up drastically over the years for India

The largest exporter in CY18 was China, exporting 854 msm or 31% of the world’s exports. Spain and Italy occupy the 2nd and 3rd spot, with exports of 414 and 328 msm. India is the world’s 4th largest exporter, it exported 274 msm or 10% of world’s exports in CY18.

The largest importer in CY18 was USA, importing 209 msm or 7.6% of world imports. 72% of USA consumption is met by imports. Iraq and Saudi Arabia hold the 2nd and 3rd spot, with imports of 124 and 113 msm. 98% of Iraq’s consumption is met by imports and 64% in the case of Saudi Arabia. The top 10 countries account for 38% of world’s imports.

India’s Tile Industry

Below are the key metrics of the Indian tile industry for the FY14-19 period

Observations from the above table

• Production has grown by 9% and stood at 1,145 msm in FY19
• Consumption growth has been 1%, poor consumption has lead to oversupply in the market
• Exports have seen phenomenal growth – 38% over the 5 year period
• Exports as % of production was 24% in FY19 as compared to 7% in FY14
• Inventory build up has been seen in the last two years, inventory at the end FY19 was 126 msm

The largest importer of Indian tiles is the GCC region, 40% of Indian exports are to this region. However realizations of Indian companies are lower than the world average. The world average realization is 5.5 Eur/sqm as compared to 3.1 Eur/sqm for Indian companies. This implies that Indian players have played the volume game to gain market share in exports.

Recently there has been anti dumping duty on exports from India. GCC the largest importer had announced a provisional duty of 40% to 106% on Indian tiles. These duties will impact Indian players.

Volumes and value of sub segments of tiles for the FY14-19 period is shown below

Ceramic tiles have a lion’s share of the volumes – 57% in FY19 in comparison to 59% in FY14. Volumes in this segment have degrown by 1%. GVT’s share in total volumes is 11%, as compared to 5% in FY14, GVT volumes have grown by 16%. PVT volumes have seen degrowth of 2%, it constitutes 33% of volumes as compared to 36% in FY14.

Ceramic tiles constitute 44% of the total tile industry in terms of value, the realizations per sqm for ceramic tiles was Rs 283 as compared to Rs 241 in FY14. GVT segment has grown by 12% and forms 15% of the industry in value terms. The value growth has been less than the volume growth. This implies that this segment has seen some pricing pressure. GVT realizations are the highest at Rs 506/sqm as compared to Rs 605/sqm in FY14. Latest PVT realizations stood at Rs 445/sqm as compared to Rs 354/sqm in FY14.

The size of the industry is Rs 27,000 Cr, 45% of the industry is organized, with the rest 55% held by the unorganized players. 75% of the industry is domestic, the balance 25% are exports.The Indian tile industry is fragmented, with lot of small regional players operating in the unorganized space. The organized space also has about 10-12 players.

The ₹27,000 Crore Indian tile industry is fragmented, 55% of it is with small regional players and the remaining 45% with large organized players. Click To Tweet

Kajaria is the market leader, with 11% share of the overall market and 25% of the organized market. Somany and Prism Johnson have 6% each of the overall market and 15% each of the organized pie. Other players in the organized market are – Simpolo, Varmora, Qutone, AGL, Nitco, RAK, Orient bell and Sunheart.

Somany and Prism Johnson have 6% each of the overall market and 15% of the organized pie. The market leader has 11% overall share. Click To Tweet

70-75% of the tile demand comes from the residential segment, 10-15% from the commercial space and 10-15% is the replacement demand. Tiles unlike paints do not require frequent replacement.

Snippets from the Tile Industry

Morbi in Gujarat is the hub for tile production. 70% of India’s tile production happens there. The other tile clusters in the country are in Rajasthan, West Bengal, Andhra Pradesh and Tamil Nadu. Why is Morbi the tile hub in India?

Some of the reasons are

• Easy access to raw materials
• Uninterrupted supply of power and gas
• Labour availability
• Proximity to ports

In the tiles business, companies can adopt a combination of these models to manufacture tiles – own, joint venture (JV) and outsourced. The return ratios in the outsourced model are better than the other models, however the company does not have control over the quality of the product. 55% of Kajaria’s capacity is its own, with 45% being through JVs and outsourcing. However in the case of Somany, 42% of its capacity is own, while 58% is through the JV and outsourced route.

Manufacturers of tiles do not have pricing power, this is due to intense competition. In addition, large customers require customised designs and sizes and which manufacturers have to fulfil to be in business. Another reason why companies do not have pricing power is due to the large part of the industry being unorganized. Unorganized players can compromise on quality, larger cash structure in manufacturing and share resources to keep prices competitive.

There is a shift to digital tiles, by using the digital technology companies can offer a variety of designs and reduce its working capital (low inventories), also tiles can be made to order. On the flip side, companies have to invest regularly in technologies to keep up to the latest offerings. Recurring investments impacts profitability and return ratios. Larger tiles are being preferred to smaller tiles.

With the GST, shift from the unorganized to organized may be seen in the future. Some of the reasons that will help in this transition

• Distribution and branding are key drivers in the tile business. Organized players are better placed to benefit as they have deeper distribution networks
• Margins in the B2C segment are better than the B2B segment, organized players with their dealers, retailers, large company outlets are well placed in the B2C business
• NGT ban on coal gasifiers will narrow the gap between organized and unorganized players
• Organized players can outsource manufacturing through the JV and outsourcing route and focus on branding and distribution, thereby getting stronger
• Consumers wanting to buy branded products, even though it means paying a little more

The Market Leader : Kajaria

Kajaria is the largest manufacturer of ceramic/vitrified tiles in India and 9th largest in the world. The largest tile company in the world is Mohawk Industries in the USA, it has an installed capacity of 223 msm and sales of $3,631 million in FY19.

The largest tile company in the world is Mohawk Industries in the US. It had sales of $3631 Million in FY19 Click To Tweet

Kajaria has a market share of 11% in the overall industry, this was 6% in FY10. The industry has grown from Rs 12,000 Cr in FY10 to Rs 27,000 Cr, registering a growth of 9%. Kajaria in the same period has grown by 16%, 1.7X of the industry.

The Indian tile industry has grown from Rs 12,000 Cr in FY10 to Rs 27,000 Cr, registering a growth of 9%. The leader in the same period has grown by 16%, 1.7X of the industry. Click To Tweet

Some of the reasons for Kajaria doing better than the industry are – branding, wide distribution network, higher SKUs, change in product mix and entry into the bathware segment.

Kajaria’s capacity is 73 msm, highest in the country. 38% of this capacity is ceramic tiles, with the balance 62% being split equally between PVT and GVT. GVT capacity has grown by 19% in the last 5 years as compared to 2% for the other segments. GVT tiles fetch higher realizations and margins than ceramic and PVT tiles.

Kajaria has a dealer network of 1,500 dealers, the company had 900 dealers in FY14. The company is expanding its dealer base in tier 2 and 3 cities, it has added GVT capacity in the South, this will enable the company faster access to the Southern markets. It has separate showrooms for different segments of tiles – Kajaria Star, Kajaria Prima, Kajaria Prima Plus and Kajaria Eternity are some of the showrooms of the company.

Kajaria has 3,300 SKUs. 60% of these are ceramic tiles, 33% GVT and 6% PVT. Share of GVT has been increasing over the years, 24% of the SKUs in FY14 were from the GVT segment. GVT has gained at the expense of ceramic tiles, ceramic had a share of 71% in FY14.

Advertising and promotion are key in developing a brand. Kajaria’s advertising expenses as % of sales in FY19 was 3.1%, this has been inching up over the years. It also has famous personalities endorsing each of its segments – Tiles, Bathware and Plywood.

Financials

We look at the important financial metrics of the company and compare the same with other standalone tile companies – Somany and AGL.

Revenues of Kajaria in FY19 stood at Rs 2,956 Crs, it registered the highest sales growth of 10% in the FY14-19 period. Somany’s topline grew by 6% and AGL by 9%.

The growth in the case of Kajaria has been entirely on the back of volumes. Volumes have grown by 9% from 52 msm to 80 msm. This implies that companies in the tile space have been facing pricing pressure, that is on the back of over supply in the market. A point to note is the split in volumes by ceramic and vitrified tiles (PVT and GVT). The share of vitrified tiles was 52% in FY19 versus 45% in FY14. Ceramic tiles have lost share from 55% in FY14 to 48% in FY19.

Below is the breakup of Kajaria’s sales, segment wise for the FY17-19 period

Observations from the above chart

• Highest revenues are from the ceramic segment – 38%
• GVT has seen the fastest growth in the tile space – 12%, this segment forms 26% of revenues
• PVT has seen no growth, however it contributes 29% of sales
• Bathware has seen phenomenal growth – 25%, however this is on a small base

Below are the operating (EBIT) margins of the 3 players in the FY14-19 period

Kajaria’s margins are way ahead of the other companies. The average margins for the 6 year period for Kajaria is 14%, whereas for Somany and AGL the margins were 7%. Some of the reasons – distribution, SKUs and advertising have been discussed earlier. One more point to note and that helps in better margins is the share of GVT sales. GVT sales were 28% of total tile sales in FY19 for Kajaria, for the industry this stands at 10-15%. GVT fetch better realizations and margins for companies.

The 6 year average EBIT margins of the market leader are 2X of Somany and AGL. Click To Tweet

Somany’s operating profit profits have seen the fastest growth – 15% in the FY14-19 period. Kajaria and AGL have registered growth of 9% and 10% respectively.

Source: Cera, Q2FY20 conference call

Source: Cera, Q3FY20 conference call​​​​​​​

Below are the PAT margins for the 3 companies in the FY14-19 period

Kajaria’s PAT growth has been the highest 13% in the 5 year period as compared to 11% and 5% for Somany and AGL. Kajaria’s average PAT margins for 6 years are 8% as compared to 4% and 3% for Somany and AGL. Superior EBIT margins are flowing into the bottom line and Kajaria debt/equity ratio in FY19 was 0.08 as compared to 0.93 and 0.80 for Somany and AGL.

Working capital is an important metric in any business, how does Kajaria fair here? Below is the cash conversion cycle of the 3 companies for the FY14-19 period

One of the sources of competitive advantage for Kajaria is its cash conversion cycle (CCC). The CCC of Kajaria is way better than Somany and AGL. Kajaria’s receivable days are the best in the industry, its average receivable days for the FY14-19 period is 40 days, as compared to 72 and 82 days for Somany and AGL. Its inventory and payable days are also better than the industry.

Observation from the above chart

• Cumulative CFO is 1,555 Cr, cumulative net profits 1,245 Cr.  Cumulative CFOs are 1.25X of cumulative net profits. CFO is positive in each year
• Cumulative FCF 337 Cr
• Cumulative CAPEX on business assets 437 Cr as compared to cumulative CFI of -1,219 Cr

Entering the Bathware Business

Kajaria has entered the bathware segment through the Kerovit brand. Its sanitaryware and faucetware capacity is 7.5 lakh pieces and 10 lakh pieces per annum. Revenues from the bathware segment were 185 Cr in FY19, 6% of total revenues. The segment has grown at 37% in the FY16-19 period, though this is on a low base.

Companies in the tile space are entering the bathware segment and bathware players in the tile space. This is to provide total solution to the customer. Kajaria’s bathware growth has been phenomenal and it has all the ingredients to scale this up.

Kajaria’s average ROE and ROCE for the FY14-19 period is 24% and 31%. Its debt/equity ratio at the end of FY19 was 0.08

Closing Thoughts

Tile companies do not have pricing power and with the introduction of digital tiles, companies have to constantly invest in new technologies. Per capita consumption of tiles in India is 0.55 sqm as compared to world’s per capita consumption of 1.55 sqm, this is one of the biggest drivers of the tile industry.

Organized companies in the space are well placed to take advantage as they have strong distribution networks across the country, strong brands and can outsource their manufacturing and focus on the other levers of the business.

Kajaria among the organized players is well placed to take advantage of the developments happening in the tile and bathware industry. The company is also entering the bathware space, growth rates have been very impressive, though this on a small base.

Already well-placed among branded Tile makers, this company recently entered the Bathware segment with encouraging results so far. Click To Tweet

Kajaria trades at TTM PE of 20X. Median PE for 8,5 and 3 years is 33, 36, 37. The current EV/EBITDA of the company is 12X, its average EV/EBITDA for 8,5 and 3 years is 16,18,18. It has negligible debt on its books and generates positive cash flows. However there is uncertainty in the current environment and results over the next few quarters will not be up to the mark. The market may provide with opportunities during those times to enter the stock.

In part 2 of the post we look at the bathware industry, we also try and answer the all important question

“Is moving from tiles to bathware easier than moving from bathware to tiles?”

Read Part-2[Premium access] on how tile makers are moving into faucets and adjacent segments.

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NOTE: As a disclosure some Capitalmind authors may own the above company in their stock portfolios. There is no other relationship between Capitalmind and the above company. Please do not consider this article as a recommendation, It is purely for informative purpose only.