Somany Ceramics Ltd

Economy growth

The global economy witnessed a negative growth of 0.6% in 2009 and rebounded to 4.9% in2010 and is expected to grow at 4.2% in 2011, owing to rising oil and commodity prices andthe European debt crisis (Source: Economic times, 25 May, 2011). The Indian economygrew 8% in 2009-10 and 8.6% in 2010-11.

Indian economic growth

(Source: Indian economic survey, 2010-11)

Global ceramic tiles industry

The world economic slowdown in 2009 adversely affected the ceramic tiles sector, andthe world tile production fell for the first time in the sector’s industrial history.

World tile manufacturing areas

(Source: Ceramic World Review)

Production: World tile production dropped to 8,515 mn sqm in 2009 against 8,520 mnsqm in 2008. There was a geographical shift in tile production from the industry’straditional European base to the nascent economies of Asia, North Africa and the MiddleEast. The 27 EU nations, accounting for a substantial share in the global tile production,reported a 25% production drop in 2009. Despite a sharp downturn in Europe and

America, there was a positive trend in Asia and Africa, which grew 7.1% and 11.9%respectively. Asia produced 5,542 mn sqm in 2009, bringing its share of the worldproduction to 65.1%. Of the total production in Asia, China alone accounted for nearlytwo-thirds of tile production and 42.3% of the tile industry’s global output. Indiaemerged as the world’s third-largest manufacturer and consumer of ceramic tiles.

Consumption: The world tile consumption grew only 1.3% to 8,460 mn sqm in 2009compared with 3.6% in 2008 and an average of 8% during the previous five years. Europeantile demand declined by 18.8%, while Asia continued to dominate with the highest demandgrowth at 8.2% resulting in a total consumption of 5,273 mn sqm.

Top 10 tile producing countries (mn sqm)

(Source: Ceramic World Review, February 2011)

Top 10 tile consuming countries (mn sqm)

(Source: Ceramic World Review, February 2011)

Indian ceramic industry

The Indian ceramic tile industry is estimated at ` 14,000 crores, growing at a 15% CAGRper annum over the last five years, except 2009, beating the global average growth of 6%per annum (Source: Business standard, 6 May, 2011).

The industry is estimated to be equally divided between branded and unbranded products.The manufacturing of unbranded products is concentrated in Morbi (Gujarat). There is achanging industry trend, with an increased preference for branded products.

Production: India is the third-largest ceramic tiles manufacturer in the worldafter China and Brazil, with a total annual production of 490 mn sqm in 2009, registeringa growth of 25.6%. This growth was driven by substantial investments in end-user segments(housing, commercial and retail, real estate, healthcare, hospitality and infrastructure).

Consumption: Rapid Indian economy growth at around 8% over the past few years,resulted in rising disposable incomes, affordability and urbanisation, leading to a surgein ceramic tile consumption. The annual ceramic tile consumption grew to 494 mn sqm in2009 against 403 mn sqm in the previous year

(Source: Ceramic world review, February 2011).

Indian ceramic tile industry (mn sqm)

*Estimates

(Source: Ceramic World Review, February 2011)

Industry growth drivers

Rising discretionary spending: Per capita income grew from ` 46,492 in 2009-10 to `54,527 in 2010-11, increasing affordability in the hands of the Indian consumers, who aregradually shifting to lifestyle products (Source: Economic Times, 31 May, 2011).Discretionary spending in premium products is expected to increase to 70% of householdannual spending by 2025.

Growing urbanisation: Over the last decade, India’s population grew 1.38%,while urban population grew at 28%. Urban India accounts for 28% of the total population,which is expected to touch 41% by 2030, resulting in further growth for the real estatesector (CRISIL Research, December 2010).

Housing shortage: The housing shortage in India’s urban areas is expected toincrease from 19.3 million units in 2008 to 21.7 million units by

2014. Shortage in rural areas is expected to decrease from 26.7 million units in 2008to 19.7 million units by 2014 (CRISIL Research, December 2010).

Housing shortage in India (in million units)

Replacement demand: With an increase in disposable incomes, urbanisation andlifestyle changes, consumers are replacing traditional low-end tiles with superiorquality. The demand from the replacement market is a mere 12% in India compared with 40%in Spain, Italy and China, indicating a huge opportunity for high-end tile makers.

Growing middle-class: The Indian middle-class (annual income of ` 3.5 to ` 17 lacs)is expected to increase from 160 million people in 2009-10 to 267 million people by2015-16. By 2025-26, the number of middle-class Indian households is likely to double from2015-16 levels to 547 million individuals (Source: Economic Times, 6 February 2011)

Shifting preference towards tiles: A growing awareness of tile usage and exposureto global trends through the electronic media, led to a transformation in the concept oftile usage. From a convenient product, tiles are now fashion and lifestyle products.

Favourable macro-economic policies:

Availability of affordable credit propelled a growth in the Indian housing space, withhousing loans increasing from ` 2 trillion in 2006 to ` 2.9 trillion in 2009 (Source:Emkay Research)

Low per capita consumption: India’s per capita tile consumption is 0.42 sqm,one of the lowest in the world compared with China’s 2.26 sqm, and more than 5 sqm insome European countries (CRISIL Research, December 2010). The increase indisposable income and urbanisation is expected to enhance Indian tile consumption.

Per capita tile consumption

(Source: Ceramic World Review)

Commercial real estate: With the emergence of India as a preferred globaloutsourcing hub for manufacturing and service industries, commercial real estate demandgrew. Progressive liberalisation and relaxation of FDI norms will drive demand growth forcommercial spaces at 20-22% over five years. Major demand is expected from the IT/ITeSsectors, requiring more than 250 million sq. ft of office space by 2012-13 (Source:IBEF)

Organised retail: The Indian retail sector is estimated at about US$ 500 billion in2009-10. With increasing disposable income and rising aspirations, retail sector size isexpected to reach US$ 900 billion by 2014 (Source: PwC research). Further, retailspace of 323 million sq. ft is expected to be added by 2012. (Source: Cushman &Wakefield)

Hospitality sector: With India emerging as a preferred tourist destination, Indiantourism is expected to grow at a 9% CAGR over the next 10 years. The country expects toadd nearly 90,000 rooms in the next five years in luxury, upscale, midscale and budgethotels, 143% more than the existing 62,404 rooms in 2009-10, providing an impetus tohigh-end ceramic tile demand. (Source: Economic Times, 18 May, 2011)

Healthcare sector: The Indian healthcare sector is valued at US$ 50 billion andaccounts for 5% of GDP. With India emerging as a medical tourism hub, growth inlifestyle-related health issues, improved healthcare insurance penetration, risingtreatment expenses, government initiatives and increasing disposable income, the sector isexpected to double its size to US$ 100 billion by 2015. (Source: Economic Times, 28 Jan2011)

Airport modernisation: The government will invest around US$ 7.5 billion forairport infrastructure development under the revised Eleventh Five Year Plan (Source:Emkay Research). It plans to modernise, re-develop and upgrade around 80 airports.Further, the Airports Authority of India (AAI) will upgrade 35 non-metro airports in thecountry at an estimated cost of around US$ 1 billion and modernise the airports of variousmetros, owing to a growing thrust in the tourism industry and airport infrastructuredevelopment, providing a tremendous opportunity to tile manufacturers.