PL Sector Report: Building Material - Tiles Sector - Morbi Visit Update – Export robust growth, domestic demand slow

Building Material - Praveen Sahay - Research Analyst, Prabhudas Lilladher Pvt. Ltd.

Tiles Sector - Morbi Visit Update – Export robust growth, domestic demand slow

We recently visited Morbi, Gujarat (the city is 2nd largest ceramic tile producing cluster in the world, next only to Foshan in China) to gauge demand, supply, price scenario along with gas pricing in Morbi. We met tiles players with turnover of Rs1bn-Rs15bn operating in public/private/ partnership. Our channel checks suggests 1) domestic demand scenario remains sluggish, due to slowdown in retail and delay in real estate construction activities, 2) exports grew at 46% until Oct-24, while Nov-23 witnessed slowdown (expected 25%-32% growth in FY24), 3) 40 new plants are upcoming in Morbi (mostly of GVT), 4) gas prices (GSPL & Propane) increased by ~12% during May-Nov’23, 5) most of the large Morbi plants have dual fuel options (propane/GGas) capacity, currently Morbi uses is 50:50 for GGas:Propane, and 6) premiumisation is the theme going on for mid-long term in tile industry. Under our coverage universe, we maintain our volumes (11.1% CAGR over FY23-26) and earnings estimates (24.3% CAGR over FY23-26) for Kajaria Tiles (KJC). Maintain ‘Accumulate’ with TP of Rs1,368 (35x Sep’25 EPS).

Key takeaways from Morbi visit:

§ The domestic demand for tiles has been sluggish at the retail level, but there's moderate institutional demand from real estate projects. During Diwali month (Nov-23), there was a double-digit YoY decline in volume, but an expected improvement is anticipated in the coming months due to an increase in footfalls and queries.

§ Morbi players have experienced substantial growth in exports, which surged by 46% YoY in H1FY24.This growth was predominantly driven by markets in the USA, Iraq, Russia, UK, UAE, and Israel, largely replacing the GCC countries. Notably, there was a rapid increase in the export of large slab tiles.

§ Around 40 new plants are scheduled for addition in Morbi, predominantly focusing on GVT.

§ Morbi hasn't revised its prices in the last six months, despite an 11-12% increase in gas prices, due to ongoing sluggish demand.

§ Morbi/tile sector is currently undergoing a shift towards premiumization. There's a notable rise in the production and consumption of slab tiles in India.

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