Recent labour troubles dogging Regency Ceramics have brought to light the divergence in performance between listed tile companies. Kajaria Ceramics, with a 58 per cent gain in its stock price in one year, is among the top performing stocks in the listed space. But Regency Ceramics has lost 37 per cent to languish at Rs 4.2. Why the difference?
Their underlying financials provide some explanation. Kajaria Ceramics has delivered a 34 per cent increase in its net profits in the nine months ended December 2011, while recording an operating profit margin of 15.4 per cent, on sales that were up 40 per cent. Regency Ceramics continued making net losses in the first six months of this fiscal, with operating profit margins at 2.5 per cent.
So, what has contributed to the big difference in fortunes for tile makers?
Ceramic vs vitrified
A primary factor has been the player's sales mix — whether it consists of ceramic or vitrified tiles. While growth in ceramic tiles has been lacklustre, vitrified tiles have recorded a strong growth in demand as well as realisations.
Of the major categories in flooring options for buildings — vitrified, ceramic and marble — vitrified tiles is the category that witnessed the highest demand growth in the last five years. Demand here has grown at a compound rate of 16 per cent annually. Higher durability and easier maintenance compared to both cheaper options such as ceramic tiles and dearer ones such as marble have helped this category cash in on the steady demand for construction material. The cheaper ceramic tiles have seen demand grow at only 8 per cent annually in the last five years.
Better demand, price
Players who entered vitrified tile manufacturing or expanded their presence in this space through expansions or acquisitions over the last three years have benefitted the most from this trend. Kajaria Ceramics (10 million square metre since 2010), Asian Granito (addition of 5.11 million square metre since 2007) and Somany Ceramics (2.45 million square metre in 2010-11) are the instances. These players have grown their sales at 20-30 per cent annually in the period, much higher than the industry average. Smaller manufacturers such as Bell Ceramics and Regency Ceramics who grappled with capacity constraints and were unable to add vitrified tile capacity, lost out on growth opportunities.
Presence in the vitrified tiles segment supported sales growth through increased realisations too. Nitco Tiles, a key player in the vitrified tiles market, has seen its realisation in this segment jump by 28 per cent in 2010-11. In ceramic tiles, the realisation increase was only 2 per cent; while marble tiles saw a realisation drop of 14 per cent.
Trading trims margins
A second big differentiator which decided profit margins of players was the proportion of own manufacture to trading.
Of the number of players who sell vitrified tiles in the Indian market, only a few own manufacturing facilities; others import products from China and simply market them. Apart from the import price, traders cough up customs duty at 10 per cent and anti-dumping duty at Rs 137/square metre. A weak rupee obviously adds to costs.
Sample this: Both Nitco Tiles and Kajaria Ceramics sell vitrified tiles. However, while Nitco relies, to a significant extent, on imports from China, Kajaria Ceramics manufactures a significant portion in-house. The operating level profit margin of Nitco Tiles is 8 per cent while that of Kajaria Ceramics' is 13 per cent.
Operating profit margins vary between 4 per cent and 18 per cent between players in the industry. While proportion of trading income in sales is a key determinant of profit margins, other inputs used in manufacture — domestic or imported and the fuel used (propane or natural gas) — alters margins. Kajaria Ceramics replaced high-cost fuel propane with natural gas at its Galipur unit in Rajasthan in May 2010 and has since seen a jump in profitability.
Regency Ceramics, on the other hand, has been facing cost pressures on two counts — the higher cost of imported vitrified tiles and the increasing cost of fuel in its manufacturing operations.