Are Tilemakers On The Road To Recovery In 2019?

Tilemakers are expected to recover after a poor run in 2018 as fuel prices fall and demand from the real estate sector improves.

Prices of gas have tumbled and companies regained pricing power. Brokerages, including HSBC and Nomura, expect the government’s focus on housing and toilet building to aid revival.

The real-estate sector—which contributes more than 90 percent of demand for wall and floor tiles—was under a prolonged slowdown for the past three to four years after back-to-back disruptions such as demonetisation, goods and services tax and the RERA legislation, which protects buyers from mis-selling, hurt housing demand.

Shares of tilemakers declined nearly 70 percent in 2018. Asian Granito Ltd. and Somany Ceramics Ltd. fell nearly 64 percent and 69 percent, respectively—the lowest since their listings. Kajaria Ceramics Ltd., India’s largest tilemaker, fell 33 percent, its worst performance since 2007.

Here’s Why 2019 Could Be Better For Tilemakers:

Cheaper Natural Gas

Prices of natural gas—which account for around 20 percent of tilemakers’ expenses—have corrected by over 40 percent from Rs 348.80 per mmBtu to Rs 205.20 per mmBtu following their worst quarterly decline in four years, aiding margins of manufacturers.

If Brent crude prices increase by $5 a barrel, then margins fall by 1-2 percent, said Mohit Khanna, research analyst at Nirmal Bang Institutional Equities.

The industry was unable to hike prices to offset rising costs as unorganised firms were ready to work on wafer-thin margins, according to HSBC.

Also, while demand growth was weak, unorganised players in the manufacturing hub of Morbi, Gujarat, ramped up capacity, resulting in demand-supply imbalance.

That seems to be changing as tilemakers announced a 1.5 percent price hike each in ceramic and vitrified segments in December. Channel checks by HSBC suggested that unorganised players, too, have hiked prices.

Long-Term Demand Drivers Intact

Nomura expects the real-estate sector to recover gradually over the next two to three years due to the government’s initiatives such as Swachh Bharat Abhiyaan, Housing For All by 2022 and Smart City mission. This may boost demand by 8-10 percent over FY20-23, the brokerage said in a report.

Valuation Comfort

The recent correction in share prices of tilemakers has brought valuations at multi-year lows. Kajaria Ceramics trades at a discount of 6.5 percent to its five-year average price-to-earnings multiple of 36.8.

However, oil—and the volatility in its prices—remains a risk. The price of natural gas is linked to oil and any sharp increase in oil prices can lead to higher gas prices, which can hit margin of tilemakers and result in lower earnings estimates.