The Indian tile market has been recording a steady 13 per cent growth over the last five years and the fortunes of this sector appear set to improve with the government’s Swachh Bharat Abhiyan and the smart cities scheme.

Further, the increasing urbanisation and growing affordability of the middle class in the country should see the industry grow at double digits; given that the per capita consumption of tiles is still very low in India (0.54 square metre vs. China’s 3.07 square metre).

Investors can take an exposure to this sector by investing in Kajaria Ceramics, the largest tile maker in the organised sector. The company has reported strong numbers for the March quarter 2015. Profits have grown 23 per cent over the corresponding quarter in the previous year; resulting in full year 2014-15 growth of 41 per cent. In 2014-15, Kajaria reported a 19 per cent sales growth with volumes increasing 13 per cent to 58.67 msm.

Kajaria Ceramics, with a total capacity of 54.1 million square metres (msm), has been growing faster than peers due to expanding capacities and increasing market reach through aggressive marketing. Kajaria will be adding another 13 msm capacity and commence operations in its faucet-ware unit in 2015-16.

The company’s pricing power and healthy margins are the other positives.

It reported an operating margin of 16.3 per cent in 2014-15 (17.6 per cent or the March quarter), up more than 0.6 percentage points from the previous year. Better product mix with increase in contributions from high margin glazed and polished vitrified tiles and savings on fuel (natural gas) costs helped. There was a drop in expenses incurred on raw material, too. Raw material costs as a percentage of sales dropped to 38 per cent from 42.8 per cent in 2013-14. However, going ahead, there may not be a sharp improvement in profit margins as the company intends to increase advertising spends. At the current price of ₹770, the stock discounts its estimated 2015-16 earnings by 28 times. It has traded in the valuation band of 10-29 times in the last three years.

Related Topics