Revival of ceramics industry is getting delayed and those who hoped the revival is around the corner are likely to be disappointed. One need not be surprised if the revival doesn’t happen at all during the current financial year. Many leading tiles manufacturing companies have scaled down their growth projections for the year. Management of many companies have pointed at intense pricing pressure in tiles segment which they consider as the biggest challenge at hand.
Demand in the first quarter was affected by General Elections and labour shortage. General belief was that the situation will return to normalcy after the elections but that was not to be. And the slowdown continues to hamper the growth of the industry.
Poor demand in tier-2 &3 cities
Earlier softening in demand was restricted to major tier-1 cities. However, now the demand slowdown has spread to tier-2 & 3 cities as well which is very disturbing. Many ceramics tiles manufacturers after witnessing continued demand stagnation in major cities had expanded their distribution network to cover tier-2 & 3 cities and had reaped the benefits of that move initially. However, in the first quarter, even these markets have followed the tier-1 peers and have contributed to industry’s poor growth number.
Another contributing factor for the poor growth of the industry is the continued liquidity crisis seen in the market. Liquidity crunch post NBFC crisis in last October has continued to impact the market. Most of the realtors rely on NBFCs for funding and post IL&FS crisis NBFCs have almost stopped lending to real estate sector thus affecting realtors’ normal operations. With most of the realtors unable to lift the materials, building materials sector including tiles manufacturing saw their sales dwindling.
Liquidity crisis has also forced many tiles makers to become cautious who are strictly maintaining balance sheet discipline. Most of the manufacturers have become stringent while dealing with credit period and other terms to ensure that the credit period doesn’t become unmanageable.
NGT’s March order
Further, NGT’s March order asking the tiles manufacturers in Morbi area to shift from coal gasifiers to natural gas has also disrupted the industries normal activities for few months. Out of 450 coal gasifier plants in Morbi, 250 units have already started using gas till the fourth quarter of last year and mostly have refurbished plants as of now. According to industry sources in Morbi, only 50-60 units are facing pressure as of now mainly due to liquidity issues and the NGT order.
It doesn’t mean that there is no tomorrow for the industry at all. According to experts, it’s a temporary phase and industry is bound to come out of it successfully as there are many silver linings too among the dark clouds.
Gas price may soften
Most important being the natural gas prices. Average gas price rose marginally from Rs 30.4 / scm in the fourth quarter of previous financial year to Rs 31.5 / scm, in the first quarter of the current financial year. Gas prices declined by Rs2/scm in July 2019, including Morbi, which should essentially result in lower cost in the current quarter. However, rupee depreciation plays a spoilsport.
Solution in the offing for liquidity crisis
Liquidity crisis persists but the government has become conscious of the problem and is finding the way out to ease the situation. In the latest budget too, there were some provisions which were aimed at easing the situation. Though the steps taken and to be taken may not alter the situation overnight, in the medium-term, however, the situation is likely to improve.
Rural India may come to the rescue
Monsoon rains which played truant in the initial period has now strengthened and the government expects the farm sector to surprise this time by way of bumper crop. This, if happens, is likely to improve the rural demand which in turn may provide some cushion against poor urban demand.
Exports, the saviour
Despite the sluggishness in local demand, export markets are looking good for the industry. During the first quarter, exports have seen robust growth during the first quarter (around 20%) making up for part of loss in domestic demand.
Moving towards formalisation of the sector
It has been two years since GST was introduced in the country. Initially it was felt that the new indirect tax regime would spell death knell for unorganised sector but that has not happened. However, there are signs that it may start happening in the coming days thanks to increasing vigilance and surveillance by the government. Formalisation of the industry may help the existing brands to expand their market in the coming years.
Thus, year ahead seems to be a challenging one and eventually may lead to consolidation taking place in the industry. Formalisation of the industry may eventually help the industry to come out of the commodity tag and lay emphasis on branding.