kajaria ceramics ltd Management discussions

Economic overview

India is now an established player in the global economy driving excellent economic growth for the second consecutive year. FY23 was one such "Resilience" year. Registering a GDP growth of 7.2%, India has secured its position as one of the fastest-growing major economies of the world. The ripple-down effects of the Russia-Ukraine war and other GPR (Geo-Political Risk) factors escalated oil and gas prices and overall inflation. However, RBIs intervention through interest rate hikes tamed inflation to 5.7% in March 2023 (below RBIs upper tolerance limit of 6%) bringing the average inflation for FY23 to 6.7%.

Industrial production reflected in IIP grew by 5.1% notwithstanding inflationary headwinds. Wading through recessionary environment in developed nations, Indias overall exports scaled new heights with a growth of 13.84% in FY23 over FY22 achieving USD 770.18 billion. This growth demonstrates Indias increasing relevance in global trade. GST collection in FY23 was C18.10 lakh crore registering a growth of 22% over the previous year. The union governments net direct tax collections increased by 17.63% to C16.61 lakh crore in FY23, against C14.12 lakh crore in FY22. This reflects high domestic demand. Fitch Ratings afirm Indias Long-Term Foreign-Currency Issuer Default Rating (IDR) at BBB- with a stable outlook. This rating indicates a robust growth outlook compared with other economies and resilient external finances, both of which have supported India in navigating the huge external shocks over the past year.

Indias economy is expected to grow in the range of 6.0-6.5% in FY24 supported by strong domestic drivers and robust capex momentum of the government. Though elevated interest costs, high inflation, and persisting global risks could interrupt this growth momentum, India is still expected to continue to be among the fastest-growing economies.

The Tile Industry

Tiles play a crucial role in residential, commercial, and industrial, offering versatile options for flooring, walls, and other surfaces. The industry caters to a wide range of customers, with tiles available at various price points to suit the budgets of first-time homebuyers as well as meet the aesthetic aspirations of high end customers.

Tile showrooms have proliferated across India, not limited to urban areas as they were a couple of decades ago. In recent years, massive tile showrooms have emerged even in Tier 2 and 3 towns, indicating the growing demand and popularity of tiles. This trend suggests that the demand for tiles will continue to accelerate. Since the implementation of the Goods and Services Tax (GST), the tiles industry has evolved into a more organised market and has grown by 8.2% CAGR from FY17-2022.

As the Indian tile industry continues to grow and innovate, it holds great promise for the future. With an expanding reach, continuous improvement, and a focus on meeting the diverse needs of customers, the industry has the potential to reshape skylines and contribute significantly to the evolving construction landscape in the years to come.

Indias economy is expected to grow in the range of 6.0-6.5% in FY24 supported by strong domestic drivers and robust capex momentum of the government

Structure of the tile industry

The Indian tile industry can be divided into two segments: branded players and non-branded players. The branded players consist of national and regional brands. They are instrumental in making tiles accessible pan India, with their strong distribution networks. Their dedicated efforts have resulted in the emergence of grand tile showrooms, adorned with glitz and modernity. They have ushered in a wave of transformation in the tile industry in terms of marketing, product visibility, and customer experience.

The non-branded segment is predominantly concentrated in Morbi, Gujarat, housing over 600 tile manufacturing units. These manufacturers benefit from low production costs and the proximity to ports in Gujarat, which makes them well-suited for exporting their products. Apart from their domestic presence, they have contributed significantly to the growth of the Indian tile industry in the global market, showcasing the prowess of Indian manufacturing.

Performance of Tile Industry in FY23

In 2023, the global tile industry, particularly in Europe, faced significant challenges. The European tile industry was impacted by the ongoing Russia-Ukraine war, which resulted in a gas shortage followed by a more than tenfold increase in gas prices. Additionally, other geopolitical risks such as inflation hindered the growth of the industry. On the other hand, the Indian tile industry witnessed one of the highest growth rates in tile exports and established a significant position in the global market. Although the country faced internal challenges such as increased gas prices (though of much lower magnitude compared to Europe), there were also sky-high ocean freight costs for a couple of months, which impacted exports during that period. As a result, manufacturing operations and exports were temporarily suspended from August 10th to September 10th, 2022. However, exports showed promising growth after December 2022, taking total exports amounting to C17,500 crore, a notable increase from C12,700 crore in the previous year. India emerged as the largest exporter of tiles to the USA, with GCC countries such as Saudi Arabia and the UAE closely following. The domestic tile market faced similar challenges, including subdued demand, disruptions in supply and increase in cost of natural gas, which hindered the industrys growth in FY23 leading to mid-single digit growth.

Growth Outlook

The growth prospects in Indian tile industry are reinforced by several key factors. Firstly, the advancements in the real estate sector, along with government initiatives like the Pradhan Mantri Awas Yojana (Prime Ministers Housing Scheme), the Smart Cities Mission, and the Government insistence on creating world class infrastructure are expected to provide an additional boost to the industry.

Furthermore, the rise in disposable incomes has brought about a shift in consumer mindset. Today, consumers have a strong inclination towards enhancing the aesthetics of their living and working spaces, leading to a surge in the demand for modern and stylish tiles for new construction and renovation purposes.

Moreover, the adoption of work-from-home models in the IT and services sectors, coupled with increasing aspirations, has contributed to substantial growth in the housing sector across various cities. Despite inflationary pressures, there is a robust consumer confidence, including in home buying, driven by a stable domestic economic environment.

Some of the foreseeable demand catalysts include:

1) The Indian Railways may be on way to becoming the countrys biggest operator in real estate, with plans to develop around 43,000 hectares of surplus land. The Rail Land Development Authority (RLDA) is betting big on interest coming back into the real estate sector to commercially develop railway land parcels, and in the process, more than triple award of its lease contracts to over C10,000 crore in FY24. 2) The Airports Authority of India (AAI) is working on a draft to amend the AAI Act, 1994, which will allow the state-run airport operator to monetise land parcels near airport terminals across the country. AAI has 55,000-60,000 acres of land across more than 150 locations, including airports and airstrips.