Tiles Sector Outlook: Nirmal Bang Favors Kajaria and Somany Ceramics

The tiles sector is poised for robust medium-term growth, driven by increasing export demand and favorable domestic market conditions, according to a report by Nirmal Bang Institutional Equities. The brokerage firm has initiated coverage on two prominent players in the sector, Kajaria Ceramics and Somany Ceramics, both receiving a “buy” recommendation.

Over the past year, Somany Ceramics’ share price has surged by approximately 24%, while Kajaria Ceramics’ share price has recorded a 13% increase.

Nirmal Bang emphasized the optimistic growth prospects for the sector in India, underpinned by substantial opportunities arising from the government’s efforts to boost domestic production and the inherent demand from related industries. Tiles account for 2-4% of construction costs in the housing sector.

India ranks as the world’s second-largest producer and consumer of tiles, trailing only China. In 2021, India’s annual tile consumption reached around 2,069 million square meters (msm), representing nearly 14% of global production and approximately 11% of global consumption. Despite these figures, India’s per capita tile consumption stands at just 0.6 sqm, compared to the global average of 1.4 sqm, indicating significant growth potential.

Nirmal Bang noted that the Indian ceramic tiles market is estimated to be ₹59,500 crores in 2023, projected to reach ₹70,700 crores by the end of 2025, with a compound annual growth rate (CAGR) of 13.6% during 2023-2025. A substantial portion, 30%, is exported, valued at about ₹17,900 crores, and this figure is expected to nearly double to approximately ₹30,400 crores by the end of 2025.

The tiles industry, though, remains dominated by the unorganized sector, which holds a 60% market share. However, 14 organized players (40%) have been gaining market share by offering high-quality products at competitive prices.

Factors Driving Growth in the Indian Tiles Industry

Nirmal Bang highlighted that the Indian tiles industry is projected to grow at a CAGR of 13.6% from FY23 to FY25E, surpassing the global tiles industry’s CAGR of 5-6%. Several factors will drive this growth, including:

  1. Demand for Housing: Driven by rising disposable income, rapid urbanization, and housing shortages.
  2. Government Initiatives: Policies and support for infrastructure expansion, particularly in metro cities.
  3. Services Sector: Demand stemming from real estate, warehousing, and commercial properties.
  4. Technological Efficiency: The industry’s ability to provide quality products at competitive rates through technological advancements and modernization.

Export Market Expected to Double in Two Years

India’s export market size reached ₹16,500 crores in FY23, constituting 30% of the overall market and growing at a CAGR of approximately 15% from FY19 to FY23. The export segment is projected to grow by over 40% CAGR from FY23 to FY25E, primarily due to the “China +1” factor.

Around 90% of tiles in India are manufactured in Morbi, Gujarat, and exported through the Mundra port. Of this, 80% is exported to the USA (60-70%), Saudi Arabia (20%), and the remaining 10% to the UAE.

The domestic market commands a higher realization of ₹323/MSM, while the export market operates at a lower realization of ₹263/MSM for Morbi manufacturers. This encourages companies like Kajaria Ceramics and Somany Ceramics to prioritize the domestic market, with Kajaria at 2% and Somany at 4% export focus.

Buy Recommendations for Kajaria Ceramics and Somany Ceramics

Nirmal Bang initiated coverage on Kajaria Ceramics with a “buy” rating and a target price of ₹1,885, valuing it at 40 times Sept’25E EPS. The company is favored for its extensive distribution network, industry tailwinds, profitable domestic product mix, and robust financials.

The brokerage firm also initiated coverage on Somany Ceramics with a “buy” rating and a target price of ₹1,072, valuing it at 22 times Sept’25E EPS. Somany is appreciated for its innovation, technical expertise, product mix (60% government and real estate, 40% housing), potential to benefit from export opportunities, and stable financials.

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