Though dominated by the organised sector, the informal (unorganised) sector still accounts for more than 1/3rd of the Rs 30,000 crore Indian pipe industry. Over the years industry has moved from being a commodity to a branded product, a factor which is also contributing to the increased dominance of the organised sector in the industry. Industry experts are of the opinion that in recent years the pace of transition from informal to formal has increased, thanks to several administrative and other steps taken.
Some gain, some lose
That doesn’t mean that everyone in the formal sector has gained in terms of market share and in fact, some of the players in the formal segment have lost some ground in 2020. While the share of some of the smaller players has remained largely stagnant over FY15-19, regional organised players like Kisan Pipes, Jain Irrigation, Prince SWR, among others, have lost significant market share in FY20 itself. On the other hand, leading pipe manufacturers like Astral Poly, Ashirwad Pipes, Finolex, Prince Pipes and Supreme Industries have gained market share in the last five years. Smaller players are losing share primarily on account of poor profitability due to volatile raw material prices, balance sheet stress, liquidity issues (reluctance of banks to lend even for working capital), inability to manage large number of SKUs (stock keeping units), GST compliance and stringent BIS norms.
Trouble started before pandemic outbreak
Even before the outbreak of COVID-19, unorganised sector was facing many challenges and the pandemic and subsequent countrywide lockdown have further inflicted liquidity challenges for small regional players which may eventually accelerate shift towards large branded players. Further, large branded players’ sustained focus on marketing, expanding distribution network and launching innovative & branded products will result in expansion of market share at the expense of small regional players. Moreover, due to supply chain disruption and liquidity issues faced by small players during the pandemic, larger players have grabbed the opportunity and filled the gap.
Increasing compliance cost
Currently, the unorganised sector accounts for 1/3rd of the industry revenue but caters mainly to those segments where branding doesn’t play significant role and quality is ‘compromisable’, that is, agriculture and plumbing segments. Although the present tax rate of 18% under GST is same as pre-GST era, stringent surveillance and tracking system are acting as deterrents for evading taxes and is leading to increase in compliance cost for unorganised players, making it difficult for them to survive.
CPVC is the fastest growing segment
CPVC with a size of Rs 4,500 crore is the fastest growing segment in pipes industry which is used in plumbing and potable water distribution systems because of their superior quality and performance. The Government has imposed anti-dumping duty (ADD) on imports of CPVC resin/compound from China and Korea for five years starting from February 2020. Earlier, the ADD was imposed on provisional basis for six months since August 2019. As a result of change in the duty structure, the share of imports from China and South Korea declined by 6% during Sept-Dec’19 period, which benefitted the larger players with strong margin expansion owing to low cost inventory. Since a large number of smaller players were sourcing CPVC resins from China and Korea, the ADD made raw material cost dearer and made it difficult for unorganised players to survive.
Cash transactions restricted
Most of the raw materials required in the industry like polyethylene (PE), PPR, poly vinyl chloride (PVC) and CPVC resin are derivatives of crude oil and their price moves in tandem with that of crude oil prices. Further, these raw materials are sourced from petrochemical majors or imported. Thus, unlike raw materials for other building material industries (clay, coal, adhesives, etc) these are not available for cash, thus, indirectly benefiting the formal sector.
One of the major factors contributing to the growth of the leading players in the industry is their national brand presence due to widespread multi-location presence of manufacturing capabilities close to consumption hubs. This minimises logistics costs and ensures faster inventory replenishment for dealers. It has also assisted in market penetration, which is missing in case of smaller players. Further, sustained efforts by organised players to increase channel partners and widen their distribution networks (even during the pandemic) is providing them a competitive edge. Thus, larger brands have a better brand recall across India.
Thus, government regulations, market disruptions due to some unexpected events and the continued and sustained efforts by the organised sector players (through brand promotion and expansion of dealership network) pipes industry is moving towards formalisation at a faster pace than rest of the segments of the economy.