SecConstruction-Emkay-130716

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Emkay
India Equity Research | Ceramics
July 12, 2016
Sector Report
Building materials – Tiles sector
©
Your success is our success
Dealer insight: Kajaria, Somany best
bets
 H&R Johnson, Kajaria Ceramics, Somany Ceramics, RAK and Nitco are the top brands
in Tamil Nadu market. Kajaria and Somany are consistently gaining market share and
are likely to outperform the industry in the coming years.
Kajaria Ceramics
ACCUMULATE
CMP
Target Price
1,225
1,280
 Growth in the Tamil Nadu tile industry has slowed down from the previous 25-30% to 1520% currently, mainly due to high unsold inventory at builders’ level. Retail level sales
and pick up in government projects to support growth
 Anti-dumping duty is a big positive for the industry, as share of imports has come down
from around 25% to 5%. Implementation of GST to benefit organised players as it will
reduce the price gap between organised and unorganized (currently around 20-30%)
 Organised players to enjoy advantage of rising preference for brands, strong supply chain
management and increase in penetration. We continue to maintain our preference for
Kajaria and Somany
Somany Ceramics
CMP
Target Price
588
545
Kajaria Ceramics
Price Performance
(%)
Absolute
Rel. to Nifty
GST can be the next big trigger, post anti-dumping duty
Recently imposed provisional anti-dumping duty is very favourable for the industry and has
already resulted in sharp decline in imports from 25% to 5%. Further, players like Kajaria
Ceramics are expecting 3-4% higher volume growth during the year only because of antidumping duty. We believe, the next big trigger can be GST implementation, which is likely to
bring the down the 20-25% price gap between organized and unorganised players.
Kajaria and Somany Ceramics are preferred brands for dealers
Although H&R Johnson is having the highest market share in Tamil Nadu market, the company
is mainly into commoditized low margin products, which are directly sold to projects. Nitco has
good brand presence in premium category products. However, the company faces frequent
supply chain and product availability issues, which discourages the trade. RAK Ceramics
continues to be a global brand for tiles and is struggling in the Indian market due to current
issues in management. Of all the brands, Kajaria and Somany remain the top brands in tiles
and are consistently gaining market share.
“Brand equity” and supply chain management is critical for long term
sustainability of brand
Our interactions with dealers suggest that brand preference is majorly based on ability to
provide wide variety of designs, consistency in supply and steady flow of new product
launches- all of which are met by branded players like Kajaria, Somany etc. Many Morbi based
brands are unable to provide consistency in supply of required products. Further, brands like
Kajaria and Somany are preferred over unorganized players despite higher prices, mainly
because of increasing brand awareness. Customers are ready to spend higher for getting
good brand products.
ACCUMULATE
1M
3M
6M
12M
7
28
27
63
(2)
16
14
63
Somany Ceramics
Price Performance
(%)
1M
3M
6M
12M
Absolute
14
50
55
49
-
36
39
49
Rel. to Nifty
Asian Granito
Price Performance
(%)
1M
3M
6M
12M
Absolute
22
46
23
118
Rel. to Nifty
17
32
10
118
Orient Bell
Price Performance
(%)
1M
3M
6M
12M
Absolute
19
13
8
22
Rel. to Nifty
15
3
(4)
22
Capacity additions in South will help completely replace imports
Nellore in Andhra Pradesh is expected to be the next big destination for tile capacity additions.
Currently, large amount of demand in South is being met by imports as cost of freight from
Morbi to South is relatively higher than cost of imports. Further, the cost of transportation is
around 17% of the total cost. Thus, with recent implementation of anti-dumping duty and
capacity additions in South, the market will be supplied by domestic players like Kajaria
Ceramics, Somany Ceramics, Asian Granito and Cera who have plans to add capacity in
South.
Emkay Research is also available on www.emkayglobal.com, Bloomberg EMKAY<GO>, Reuters and DOWJONES.
Rohan Gupta
[email protected]
+91 22 66121248
Sneha Talreja
[email protected]
+91 22 66121313
Emkay Global Financial Services Ltd.
Building materials – Tiles sector
India Equity Research | Sector Report
Dealers view on tile industry
We recently met up with India’s largest retailer of tiles. This dealer mainly caters
to the Tamil Nadu market and is the largest dealer for companies like Kajaria and
Somany Ceramics. Following is the view that we got from the dealer:
H&R Johnson, Kajaria and Somany – Top tile brands in Tamil Nadu market
H & R Johnson is the largest
player in Tamil Nadu in terms of
turnover; however, its products
are commoditized and are directly
sold to projects
The total size of the Tamil Nadu market is Rs 25 bn, including 30% share of sanitaryware
segment. The Tamil Nadu tiles market, at ~Rs18 bn, is around 7% of India’s ceramic tile industry
size (pegged at Rs 240 bn as of 2014-15). The top three players constitute nearly one third of
the total market size. Remaining market is being catered by other organised players (like RAK
Ceramics and Nitco), imports and Morbi based branded players (like Simpolo, Varmora, etc) and
unbranded players.
Exhibit 1: Market share of major tile players in Tamil Nadu market
H&R Johnson,
16%
Kajaria Ceramics,
9%
Somany Ceramics,
7%
Imports/ other
organised and
unorganised
players, 68%
Source: Industry, Emkay Research
Growth has slowed down from 25-30% CAGR to 15-20%
Growth in Tamil Nadu market has slowed down from 25.-30% CAGR seen in the past 5 to 6
years, to 15-20% currently. The growth in consumption has been impacted by slowdown in real
estate sector. Due to high unsold inventory with builders and relatively low demand for new
houses, growth is unlikely to come back to previous levels of 25-30%. Further, revenue growth
has been impacted because of fall in prices. Post the renegotiation of LNG prices, companies
have taken price cut across categories by 5-8% and prices are likely to remain weak in the current
year as well.
Anti-dumping duty on Vitrified tiles to drive growth
With imposition of anti-dumping
duty, imports have come down
from 25% to 5%
A major positive development in the recent months has been imposition of preliminary antidumping duty of $1.37 per sq mt (~25% of realisations). Anti-dumping duty is a very positive step
for tile industry, including Kajaria Ceramics. With implementation of anti-dumping duty, imports
have declined significantly from about 25% to 5%. PVT segment will be the largest beneficiary
of anti-dumping duty, as almost 75% of imports in India are of PVT segment. Further, players
like Kajaria Ceramics are likely to see 2-3% boost in volumes, only because of imposition of antdumping duty.
GST to be the game changer
Currently, the price gap between organized and unorganized sector stands at 20-30%. With
implementation of GST, the price gap is likely to come down significantly and help organized
players gain market share. Organized payers are also likely to benefit from significant tax evasion
in unorganized segment, since GST is likely to reduce the incentives for tax evasion.
Emkay Research | July 12, 2016
2
Building materials – Tiles sector
India Equity Research | Sector Report
Dealer’s perception about various brands
Exhibit 2: Dealer’s perception about various brands
Various aspects
Kajaria Ceramics
Somany Ceramics
H & R Johnson
RAK Ceramics
Nitco
Market share
Highest market share
gaining company
Consistent market share
gaining company
Consistent market
share losing company
Able to maintain
market share
Losing market
share
Promoter
Success of Kajaria
Ceramics is largely
attributed to vision of
Mr.Ashok Kajaria.
Strong promoter
background with Mr.
Abhishek Somany driving
the company
Strong company
background but
diversified business
leads to lack of focus
on tiles division
RAK Ceramics is one
of the leaders in tiles
in the word but is
facing issues in India
Needs proper
management to
drive growth
Second level management The company is also
Company is constantly
having strong second
focusing on developing
level management with
middle level management
Mr. Chetan and Mr. Rishi
taking care of two
separate divisions namely
Ceramics and Vitrified
(GVT/PVT) respectively.
Focus towards tiles is
missing
Company is in search Needs a
of a leader in India to turnaround with
drive growth
management
Brand Image
Clearly the best brand in
tile industry in India
The next best to Kajaria
Ceramics
Strong brand image
Global tile brand
Products/
Innovations/designs
Strong at new product
launches
Strong at new product
launches
Presence in
India division for RAK Presence in
commoditized products lags behind in new
premium product
having low margins
and innovative
category
product launches
Connectivity with dealer
Strongest connect with
dealers
Good connect with dealers
Weak as company is
Weak due to current
directly working with
managerial issues in
projects and
India
institutional customers
Good connect
Financial capability
Very strong
Strong
Strong
Strong
Weak
Overall Perception
Leader in tiles industry
providing new and
innovative products from
time to time. The
company will also
continue to remain a
leader
Company is trying to follow
the industry leader, Kajaria
Ceramics, by increasing
focus on value-added
segment
Having presence in
low margin
commoditized products
that are being directly
supplied to institutional
customers
RAK globally is a
good brand with good
product line. In India,
the company is facing
management issues,
which is also leading
to lack of innovative
products being
launched. Change in
management can
definitely turnaround
the company
Overall, a good
brand providing
good margins to
dealers. The
problem is
consistent supply
of products and
proper
management to
drive the growth
Premium brand
Source: Industry, Emkay Research
Emkay Research | July 12, 2016
3
Building materials – Tiles sector
India Equity Research | Sector Report
Does brand really matter in Tiles?
Design and availability more important than brand……
The dealer we met initially started his outlet by selling single brand tiles. However, with time, he
realized that customers in India generally need options while taking decisions. Thus, there was
a move from single brand to multi brand store. Today, the dealer sells close to around 20,000
SKUs of various brands, sizes and designs. According to the dealer, the pricing of the product is
dependent on size and not on designs.
“Brand equity” and supply chain
management is critical for long
term sustainability
According to the dealer, while brand is important for project sales, design and availability are the
two most important factors that play a role in selecting tiles for retail consumers. In the retail
segment, it’s generally the architect or contractor (70-80% of customers come along with
architects or contractors) who influences the customer about any brand and in turn, these
architects are influenced by their past experience with any brand. Further, dealer also plays a
crucial role in deciding which brand, design and size to select.
…but “Brand equity” and supply chain management is critical for long term
sustainability of the business
Players like Kajaria and Somany are successful in bringing innovative products to the market.
These companies at least come with 2-3 new product launches in a year. Generally, 15-20%
new products get added during a year and 30-40% revenues come from new product lines.
Further, large players like Kajaria and Somany also maintain consistent supply of catalogue
products that lead to increased availability of their products. According to the dealer, this is also
one of the factors, which Morbi based brands are failing to understand. Although some of the
Morbi based brands have pan India presence, weak supply chain management and brand is the
biggest deterrent in their growth, which is the major reason Kajaria and Somany are preferred
over other brands. Further, why brands do command a premium is because of innovative product
line and availability of products in a timely manner.
Branded vs unbranded players – does quality really differ?
Although more than 80-90% of tiles are being manufactured at Morbi, what really differs them
from the branded players is a question that is always raised. It’s correct that most of the organized
players are having manufacturing tie-ups with Morbi based players, but the quality still defers
mainly because of the following reasons:

Organized players hold ~51% share in manufacturing company. This helps them maintain
a strict control on product quality

Further, the raw material being manufactured is procured by the organized players, helping
the company maintain consistent quality

The products thus manufactured, also go through various quality checks as described by
the organized players
What has changed over the years?
The dealer we met, has spent almost 2 decades in this industry. So we asked him about what
has changed over the years:
Emkay Research | July 12, 2016

Aesthetical appeal vs necessity: Tiles have gradually replaced other materials like
cemented floors and mosaic and moved to being a necessity in every house. But, gradually
with increasing aesthetic appeal, tiles are playing a major role in designing homes.
However, majority of the demand is still new or replacement of other material like mosaic.
Replacement demand in tiles is yet to be seen and can be a major driving factor in coming
years.

Brand consciousness – According to the dealer, brand awareness has increased in
customers and they are ready to spend little bit more in order to get the branded product.

Increased spending power: According to the dealer, previously people used to be
conservative about spending on tiles, but now, they are more willing to spend money.
4
Building materials – Tiles sector
India Equity Research | Sector Report
What are the factors that help a company/brand sustain?
Since the dealer we met has spent more than 19 years in this industry and has seen market
share of many companies increasing or decreasing, we jotted down few factors according to him
that play an important role in long term sustainability of any brand/company:
Established brands with good
dealer connect are likely to
sustain in the long run

Management vision: According to him, truly Mr. Ashok Kajaria is a man of vision and has
led Kajaria Ceramics to success. Thus, such a long term vision is very important for any
company to sustain in the long run. The reason why many Morbi companies start and shut
is, because they have come up without any business plan, without any vision.

Policy with dealers and vendors: The firm that keeps the policy consistent for every
dealer is likely to be appreciated by all in the long run.

Second level management and marketing team: Apart from having a visionary top
management, it’s very important to have a second level management and an enthusiastic
marketing team that can drive the vision of top management.

Established dealer’s network: It’s true that dealers can influence the decision making and
thus, it is important for brands to have good relationship and connect with their dealer
network.

Established brand image: Manufacturing companies can come and go. However, it takes
time for a brand to establish and hence, consistent efforts in brand building helps the
company sustain in the long run.

Strong communication: Communication with dealers about the availability and status of
the products (packed, dispatched, etc) should be communicated properly. This helps the
brand in creating a good or bad image in the dealer’s mind.
Margins for Sanitaryware and Faucets higher than Tiles segment
Kajaria Ceramics is offering the
highest margins in tiles segment

Dealers as well as profit margins for companies in sanitaryware and faucets is at least 45% more compared to tiles. Most of the sanitaryware and bathware companies provide
dealers margins in the range of 17-20%. Margins in this segment generally do not vary
much from one brand to another.

In the tiles industry, margins vary a lot from one brand to another and is generally 4-5%
less than margins in sanitaryware and faucets segment. In tiles industry, Kajaria is offering
the highest margins in branded segment (3-4% higher than other branded players like
Somany Ceramics). Further, unorganized players from Morbi offer margins ranging
between 20-25%, with higher creditor days of about 60 days compared to 30 days for
organized players.
Kajaria offering unique dealers model
Emkay Research | July 12, 2016

The distribution model of Kajaria Ceramics is slightly different compared to other players
like Somany. Kajaria generally has less number of dealers at single location compared to
other players. This leads to less competition amongst the dealers in same brand and also
restricts price wars amongst dealers.

Further, for Kajaria, the dealers are very large as they have to maintain a significant level
of billing every month, whereas for Somany the amount of billing required for each dealer
is very small. This also leads to much higher number of dealer network for Somany
compared to Kajaria.

Kajaria also does not maintain a large stock for dealers, while Somany and other small
players have depots at different places. This also restricts dealership in Kajaria as dealers
have to maintain stock of at least Rs.10 million.
5
Building materials – Tiles sector
India Equity Research | Sector Report
South – Next destination for capacity expansions
Leading organized players like
Kajaria Ceramics, Cera and Asian
Granito have announced capacity
plans in southern market.
Increasing capacity additions in Southern market
Currently, amongst all the organised players, only H & R Johnson and Murudeshwar Ceramics
have manufacturing facilities in South India. Moreover, Kajaria Ceramics has access to capacity
through a JV partner in Andhra Pradesh. Due to this huge opportunity in Southern market,
leading organised players including Kajaria Ceramics, Cera, Somany Ceramics and Asian
Granito have plans to add capacity in southern market.
According to the dealer, Nellore in Andhra Pradesh is likely to become the next major hub for tile
manufacturing. As South is a major market for tiles, new plants by organized players will be able
to cater to growing demand in South. Further, recently imposed anti-dumping duty on Chia, will
also help easy substitution of imports. Government in Andhra Pradesh is also promoting tiles
industry by offering various subsidies.
Exhibit 3: Recent capacity expansion announcements by large players
Company
Announcement
Kajaria Ceramics
Kajaria has announced another JV - Floera Ceramics, based in Andhra Pradesh by
acquiring 51% stake in the current quarter. This JV is in the process of putting 5.7mn
sqm capacity, which is likely to be completed by H1FY17 and will increase company’s
presence in southern region. Kajaria has only one plant in south – Vennar Ceramics
with capacity of 2.3mn sqm in ceramic wall tiles.
Cera
Cera, along with its JV partner Anjani Tiles, is coming up with a 10,000 sq.ft mt per
day plant at Andhra Pradesh, which is likely to commission in Q1FY17. The plant will
run on coal gasifier, which is legal in South. The project has a capex of Rs. 680 million,
which will be funded by equity of Rs 360 million and balance by debt. The company’s
share of 51% equity will cost approx. Rs.180 million. Scalability is possible with this
plant and company can scale up its capacity further by 3 to 4 times.
Source: Company, Emkay Research
Why there is a need for market in South?

According to industry estimates, the Southern market is one of the largest markets,
constituting around 40% of overall domestic demand

Around 75-80% of the demand is being met through imports as majority of the capacity in
India is in Morbi, Gujarat and due to poor infrastructure in India, the cost of transportation
from Morbi to South is very high as compared to freight rate for importing from other
countries.


17% of the total cost component in South is freight cost
It takes about 25-30 days by ship from Morbi to reach Southern region. Since customers
are not ready to wait for the material, maintaining stock is very important.
How will the market in South help?
Emkay Research | July 12, 2016

The number of days required to reach the dealers’ place is likely to come down from 25-30
days to 2-3 days

This will also help dealers reduce the inventory (Currently, the largest dealer is holding
stocks worth Rs. 400 million)

This will also help in reducing costs to customer, as currently 17% of the cost component
is freight
6
Building materials – Tiles sector
India Equity Research | Sector Report
Sanitaryware and Bath fittings segment
Competition is likely to intensify in coming years
Parryware, Hindware and Cera are the top brands in sanitaryware segment. This segment is
more concentrated compared to tiles segment. However, many new brands are coming in this
segment and profit margins are also much high compared to tiles segment. Further, majority of
the new brands are focusing on premium segment and will target mid-segment products only for
projects.
Not much competition from Chinese products like in tiles segment
The sanitaryware segment does not face much competition from Chinese products as compared
to tiles. This is mainly because of quality issue and after sales services required in this segment.
Further, the share of unorganized players is higher at around 70% in case of sanitaryware
segment and price differential between branded and unbranded player is about 30-40%. The
higher price differential for sanitaryware and bath fittings segment is mainly because of:




No innovation by unorganized players (unorganized players just copy the designs)
No design development
No cost for R&D
Unorganized players do not pay central and state taxes
Tiles brands entering sanitaryware segment likely to be more successful
There are lot of players in building material segment, who have extended their product line from
tiles to sanitaryware and from sanitaryware to tiles segment. According to the dealer, players
from tiles industry venturing in sanitaryware and faucets segment are likely to be more
successful. While on the other hand, players in sanitaryware and faucets expanding in tiles will
not be that successful, mainly because of lower margin profile that will not let the company focus
much on tiles.
Further, Cera in sanitaryware segment is also likely to do well mainly because of presence in
high margin segment. Further, due to the low base and high potential for sanitaryware and bath
fittings segment, Kajaria ceramics is expected to do better in these segments. Although, the
segment will contribute less than 10% of revenues towards Kajaria Ceramics, it will make Kajaria
a very big player in this segment
Anyone can sell tiles, but not everyone can sell sanitaryware / bath fittings
According to the dealer, selling sanitaryware is not as easy as selling tiles. This is mainly because
of quality issues and after sales services involved with sanitaryware segment. Further, the price
range for sanitaryware and bath fittings also differs a lot and ranges between Rs 700 to Rs.
70,000.
Emkay Research | July 12, 2016
7
Building materials – Tiles sector
India Equity Research | Sector Report
Dealer’s profile
We recently got a chance to meet India’s largest retailer of tiles. The dealer mostly caters to the
Tamil Nadu market and is the largest dealer for companies like Kajaria and Somany Ceramics.
The dealer is mainly present in retail segment with minimum share of sales coming from projects
and sub-dealers segment. The dealer has been working with Kajaria Ceramics for the last 12
years and Kajaria continues to dominate its total sales, followed by Somany Ceramics. The
dealer is also present in sanitaryware and bath fittings segment with dealership of brands like
Cera.
Exhibit 4: Dealer’s sales mix
Sub Dealers, 10%
Project , 20%
Retail, 70%
Source: Industry, Emkay Research
Exhibit 5: Segment wise share for dealer
Sanitarywar
e and
Faucets,
12%
Exhibit 6: Brand wise share for dealer
Others, 8%
Cera, 6%
Kohler , 6%
Tiles , 88%
Source: Industry, Emkay Research
Emkay Research | July 12, 2016
Dealer's own
tile brand,
15%
Kajaria
Ceramics,
35%
Somany
Ceramics,
30%
Source: Industry, Emkay Research
8
Building materials – Tiles sector
India Equity Research | Sector Report
Emkay Rating Distribution
BUY
ACCUMULATE
HOLD
REDUCE
SELL
Expected total return (%) (Stock price appreciation and dividend yield) of over 25% within the next 12-18 months.
Expected total return (%) (Stock price appreciation and dividend yield) of over 10% within the next 12-18 months.
Expected total return (%) (Stock price appreciation and dividend yield) of upto 10% within the next 12-18 months.
Expected total return (%) (Stock price depreciation) of upto (-) 10% within the next 12-18 months.
The stock is believed to underperform the broad market indices or its related universe within the next 12-18 months.
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any manner whatsoever and any unauthorized reading, dissemination, distribution or copying of this communication is prohibited unless otherwise expressly authorized. Please ensure that you have read
“Risk Disclosure Document for Capital Market and Derivatives Segments” as prescribed by Securities and Exchange Board of India before investing in Indian Securities Market. In so far as this report
includes current or historic information, it is believed to be reliable, although its accuracy and completeness cannot be guaranteed.
Emkay Research | July 12, 2016
9
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