Rising cost to shave off 100-200 bps from tile players’ operating profitability

In its report on the sector, the ratings agency said rise in input cost, particularly the increase in gas prices will adversely impact operating margins of most tiles players by 100-200 bps. In addition, finance cost is also expected to rise 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,” said Mayank Agrawal, sector head and assistant vice president, Corporate Sector Ratings, Icra Ltd.

With an industry size estimated at ₹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 accounting for 40% of the share while the domestic market accounts for the balance 60% of the share. 

PNG which forms 25-30% of the total cost for a tile manufacturer has disturbed the industry cost structure. According to Icra, PNG prices for state-owned Gujarat Gas Ltd has risen 129% over the last 12 month to ₹63 per SCM in December, with prospects of another ₹5-8 increase in the near term. 

Natural gas prices have remained high due to weather patterns, supply disruptions, low inventories, lower renewable and hydro power generation, and higher charter rates. Growing demand and an increase in crude oil prices due to shift from coal can keep prices elevated in calendar 2022 as well.

“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 has 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,” Agrawal said.

“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,” he added.

Meanwhile, export container freight rates have risen multi-fold which, along with container shortages, has exacerbated the issue. Increasing gas and container freight have 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 have impacted exports and resulted in inventory build-up.

A fall in export demand has also pushed export focused players into the domestic market, restricting price hikes due to increased supply.