ICRA: Rising production cost will shave off 100-200 bps on operating profitability of domestic tile players

27 Jan 2022 , 04:26 PM

With an industry size estimated at Rs. 300 billion, India is the second largest manufacturer and exporter of tiles in the World after China. The country’s tile exports have grown at a CAGR of ~27% over the last four years and the same constitutes 40% of the share while domestic market accounts for the balance 60% of the share. 

The industry has been grappling with rising input costs like that of Piped Natural Gas (PNG), freight rates and container shortages — all of which will adversely impact operating profitability as also pre-tax profits of tiles players.

More importantly, PNG which forms 25-30% of the total cost for a tile manufacturer has disturbed the industry cost structure. The PNG prices for the state run- Gujarat Gas Limited  has increased by 129% over the last 12 months from Rs. ~27 per SCM  in December 2020 to Rs. ~63 per SCM in December 2021, and there are further expectations of an increase of Rs. 5-8 per SCM in the near term.

The prices of natural gas prices have remained elevated owing to global issues like odd weather patterns, supply disruptions, low inventory levels, lower renewable and hydro power generation; and higher charter rates. Further, growing demand and increase in crude oil prices due to shift from coal to crude derivatives could keep the gas prices at elevated levels in CY2022.

Commenting on the realisation trends, Mr. Mayank Agrawal, Sector Head and Assistant Vice President, Corporate Sector Ratings, ICRA Ltd said, “While the tiles players have taken periodical price hikes to pass on such unprecedented surge in PNG price, they have been unable to pass on the hike fully to their customers. The average prices of tiles for key players increased by 12-15% during Q3 FY2022 compared to Q3 FY2021, with expectations of a further increase by another 5-7% during Q4 FY2022. The medium to small players have been under pressure to pass on these hikes due to limited retail presence and dependence on a few customers/contracts which limits the ability to pass on such hike frequently. Further, some of the organised players have also started using propane as an alternative to PNG, which remains cost competitive. However, majority of the players are unable to explore this option due to space and capital constraints.”

As regards other cost increases, the export container freight has increased multi-fold which, along with container shortages, has further exacerbated the issue. The increase in gas and container freight has been a double whammy for small and medium sized players, who are unable to pass on the hike in input costs. Elevated sea freight rates and container shortages has impacted exports and resulted in inventory build-up. The industry is already working capital intensive in nature and the additional burden will put further pressure on the liquidity of the affected players. The reduction in exports demand has also pushed export focused players into the domestic market, thereby constraining price expansion in domestic market due to increased supply.

Speaking about the margins, Mr. Agrawal said, “ICRA expects that on an overall basis, the increase in gas prices will adversely impact the operating margins of most tiles players by 100-200 bps. In addition, the finance cost is also expected to increase due to increased working capital borrowings to fund inventory build-up for exporting entities. The pressure on earnings and build-up of inventory could adversely affect the liquidity profile of small to mid-sized players while larger players have better financial flexibility and liquidity cushion to absorb this.”