BUILDING MATERIALS: Building material companies like tiles, PVC pipes - Ashika Group
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SECTOR OUTLOOK
BUILDING MATERIALS:
GAINING STRENGTH
B
uilding material companies like tiles, PVC pipes as well as new real estate sales and market share gains
& plywood & laminates are in the limelight from unorganized players, especially in the tile and plastic
as the demand for real estate has rebound- pipes segment. The Indian Tiles and Ceramic industry has
ed strongly after a long period of lull. The undergone a challenging phase recently (FY16-19). None-
outbreak of COVID-19 in the beginning of 2020 which theless, it was also the period during which the inorganic
forced government to declare stringent lockdown across segment (~50% of the overall industry) was forced shifted
the country in order to break the chain has created the on a level playing platform with its organic counterparts
demand for real estate. Work from following the introduction of GST
home and online education has led and measures like banning the use of
the demand for big houses. Further, coal gasifiers. Further, the consoli-
decade low house building loan rates
Work from home dation in the inorganic segment has
and reduction in stamp duty in some and online education also aided the organized segment to
important real estate markets make has led the demand gain structural strength. PMAY-U is
the property more attractive both for for big houses. expected to build 10mn urban houses
residential and investment purpose. with an aim to provide ‘Housing for
Further, decade low
Affordability is up with mortgage all’ by 2022. This is one of the key
rates at a 15-year low (
is ~ 20% of the total demand bucket is also likely to gain Stamp duty reduction has driven the demand for
prominence after the current COVID 19 crisis recedes. residential property in Mumbai & adjacent areas
Tiles companies recovering rapidly
Large tiles companies recovered rapidly since the lock-
down lifted up mainly on the back of demand from tier 2
and below cities in the beginning and now from metros
and market share gains from unorganized Morbi based
players. Morbi region which accounts nearly 65% of total
domestic tiles production is focusing more on exports as
various countries looked for alternative to China. Exports
from Morbi region jumped from average Rs 700-800 Source: Industry report
crore to Rs 1000-1400 crore in past 4 months and indus-
try expects strong visibility of export in next 6-9 months. Robust Tiles export
1400 100%
China plus factor play an incremental demand trigger 80%
1200
for tiles players. Morbi has reduced focus on domestic 1000
60%
40%
segment, reflected in the form of tightened credit policy 800 20%
0%
by them (exports are more profitable and cash cycle 600 -20%
400 -40%
is significantly better), heavy discounts are no longer -60%
200 -80%
available and unpredictable supplies. These factors make 0 -100%
the dealers to shift to organized players given the range/
Jan-19
Feb-19
Mar-19
Apr-19
May-19
Jun-19
Jul-19
Aug-19
Sep-19
Oct-19
Nov-19
Dec-19
Jan-20
Feb-20
Mar-20
Apr-20
May-20
Jun-20
Jul-20
Aug-20
Sep-20
Oct-20
product availability and assured supply.Further traction
in real estate sector make the domestic demand recovery Tile Exports (Rs crs) YoY Growth % (RHS)
faster than anticipation. In order to meet the incremental Source: Industry report
demand, industry expects 60-70 large Greenfield plants to
come up in addition to restart of 50-60 old plants. Going Residential property market rebound
forward, Morbi region is expected to mainly focus on ex- strongly
port demand. Large tiles players like Kajaria ceramics and Work from home has led more people to focus on their
Somany ceramics are likely to gain market share at cost of homes and is driving upgrades to luxury segment. Factors
other small unorganized players. like increasing trend of work from home amid pandemic,
low home loan rates and freebies/discounts offered by
Residential Property new launches across PAN India
developers driving the demand for residential properties.
(Annual) (in nos)
Affordability is up with mortgage rates at a 15-year low
659
(
Unsold Inventory levels across top 7 cities PMAY-Urban progress (lakh units)
39
25
23
18 17
10 10
7 7 8 8 7 7 6
4
FY16
FY17
FY18
FY19
Apr'19-Dec'19
Source: Industry report
Houses sanctioned Houses grounded Houses completed
Source: Ministry of Housing and Urban Affairs
New launches vs Absorption across top 7 cities
Organized players in tiles sector gaining
market share
The implementation of GST in 2017 has benefited the or-
ganized tiles manufacturers. The informal market became
more compliant after the GST implementation, thereby
minimizing the gap of tax and duty paid by unorganized
players and by branded players. This made branded tiles
more affordable for the buyers. After the introduction of
the GST in July 2017, the rates were reduced to 18% from
28% in November 2017. Gas prices increased significantly
Source: Industry report
in FY17-18, which the tile sector was unable to bear due
to the already muted demand for tiles. This burdened the
Demand drivers for tiles companies margins of the unorganized players and small manufac-
PMAY-U (Pradhan Mantri Awas Yojana Urban) is ex- turers and they lost market share to organized players.
pected to build 10 million urban houses with an aim Indian tile industry had a total consumption of 750msm in
to provide ‘Housing for all’ by 2022. This scheme has FY19 (organised + unorganized) of which Kajaria Ceramics
started execution from FY15 and will continue till FY22 is the largest tile producer in India with an overall market
with budgetary allocation from the Central government share of 11% followed by Prism Johnson and Somany
along with assistance from the state government/Union Ceramics among the organised players. The extended
territories. PMAY-U is one of the major drivers for tile lockdown due to outbreak of COVID-19 has destroyed
demand, especially the flooring, which uses ceramic tiles. the unorganized segment due to lack of capital to stay
The completion of all the grounded houses up to 2022 will afloat, thereby resulting in higher market share grab in
require nearly 1,000 msm of additional tile supply. The long term. Also the fragmented Morbi players focused
rate of house completion has witnessed a setback due to on export market because of strong demand and vacated
COVID-19 pandemic. However, the situation has turned domestic market.
around rapidly on the back of inherent strength in Indian
Market share in terms of volume (%)
economy. Further, all the major states witnessed robust
Kajaria
growth in residential launches which bode well for the Ceramics,
tiles consumption. In tiles sector around 18-20% of its 11%
Somany
annual sales come from replacement sales. Historically Ceramics,
it has been noticed that in economic downturn, demand 7%
for big house purchase remained weak and customers Prism
Johnson, 5%
focus shifts towards renovations/renewals, aiding higher
demand from the replacement segment. This is likely to
be prominent during the recovery phase after the current
COVID 19 crisis situation and can provide a boost for the
Others, 77%
tiles and sanitaryware sector. All these factors will drive
the demand for tiles consumption in India, resulting in
robust volume growth for domestic tiles manufacturers. Source: Company reports
29 INSIGHT March 2021
Market share in terms of value (%) opportunity to improve capacity utilizations. In addition,
Kajaria Indian governmentis actively considering imposing tight-
Ceramics, er restrictions on imports of several items, including fur-
9% Somany
niture. (India imports readymade furniture worth around
Ceramics,
6% Rs 28 billion annually, of which 40-50% comes from
Prism China) and possible Anti Dumping Duty (ADD)/Counter
Johnson, 6% Veiling Duty (CVD) on MDF (15-23% of India consumption).
Additionally, it has identified readymade furniture as one
of the 20 sectors to make India a hub for global exports.
All these steps from government will bode well for MDF
manufacturers in India as it improves volume visibility
Others, 79%
with up gradation in future earnings growth.
Source: Company reports Wood furniture imports in India (Rs crs)
2,820
Demand for Wood Panel- MDF segment
2,570
2,340
2,180
has been strong
2,110
2,070
2,020
2,000
1,840
Wood panel companies reported better than expect-
1,330
ed numbers in past two quarters on account of higher
960
950
volume growth. Ply/Laminates volume remain weak in
1HFY21, though players hope to report positive growth in
2HFY21. MDF, on the other hand, recovered smartly and
are expected to remain strong given robust demand from
OEMs. In MDF segment, the demand from smaller cities/
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY19
FY20
towns has been strong on account of work from home
Source: Ministry of Commerce
culture, restrictions on import of MDF/furniture and cost
consciousness of consumers. Industry expect MDF prices
to remain firm as no major capacity additions are ex- Sharp recovery witnessed in plastic pipes
pected over next two years resulting in favorable demand segment
supply scenario. Industry expect ply/laminate segment to The market size of India’s plastic pipes industry is around
come back on growth path on the back of demand uptick Rs 300 billion and it has grown at a CAGR of 10% in last
from metro cities given healthy real estate sales and 5 years which is the highest growth rate in the building
positive momentum in laminate exports. Further, effi- material space. The industry’s products are made from
cient inventory liquidation and healthy collections from resins such as PVC, CPVC, PPE and HDPE, with avariety
debtors have helped wood-panel companies release funds of end-user applications across agriculture, plumbing
from working capital, leading to robust cash flow genera- and infrastructure sectors and this helped the sector to
tion in 1HFY21. Thus, wood panel companies are utilizing achieve superior growth in comparison to other build-
incremental cash flows to deleverage ing material sub-sectors. During Q3FY21, large plastic
its balance sheet and improving net pipe players have witnessed sharp
debt position. In a positive develop- recovery in their volumes mainly
ment DGTR (Directorate General of on the back of a sharp recovery in
Trade Remedies) has recommended The market size of demand for plumbing and SWR (Soil
Waste & Rain) pipes from Housing
the Central Government and no-
India’s plastic pipes segment in tier 2 and below cities and
tified in the Official Gazette dated
8th Jan, 2021 that the anti-dumping industry is around healthy rural demand and market
duty which was levied on thick MDF Rs 300 billion and it share gains. The 2HFY21 is expected
to witness further improvement led
(thickness of 6mm or more) from has grown at a CAGR
Thailand, Malaysia and Sri Lanka in by demand up-tick from metro cities,
August 2015 for a period of 5 years
of 10% in last 5 years improving demand from real estate
should be extended for another which is the highest sector and strong outlook for upcom-
ing Rabi season should support rural
period of 5 years. This is a positive growth rate in the
for the domestic MDF players as the demand. The COVID-19 led slowdown
competition from thick MDF imports
building material has intensified pace of consolidation
will continue to be minimal for next 5 space. as smaller/regional pipe players face
years (pricing difference will continue major balance sheet constraints amid
to be around 5-8%), which will give an PVC price volatility, this is helping
March 2021 INSIGHT 30larger players with strong balance sheets to gain market building material companies. COVID-19 led slowdown in
share. The plastic pipes sector has shown resilience by economy put the organized players more on front foot by
recovering from the Covid-19 led slowdown. Increasingly, gaining market share as weak balance sheet and lack of
distributors also prefer to move from smaller players to capital forced small players to shut down their business.
larger players. In addition, different end user applications Plastic pipes segment to do better than other building
value-added products, shift from metal to plastic pipes, materials because of government more impetus on rural
ongoing consolidation and infrastructure demand will and infrastructure space as these two sectors account
help the large plastic pipe players post healthy double maximum demand for plastic pipes. Ceramic and tiles
digit volume growth in coming years. It is believed that players will see healthy demand from real estate sector
large organized players with pan-India facilities will take and increasing opportunity from export markets. In MDF/
advantage of this opportunity to increase market shares laminate segment, the demand from smaller cities/ towns
over the coming years. has been strong on account of work from home culture,
restrictions on import of MDF/furniture and cost con-
Strong rebound in residential real estate space has made
sciousness of consumers. Thus, it is expected that build-
the building material sector more viable for investment.
ing material companies to deliver healthy growth in next
The rapid demand recovery in residential property
couple of years mainly on the back of sustained demand
triggers the demand for tiles, laminates/MDF and plastic
from tier 2 and below cities coupled with uptick in metro
pipes. Moreover, government renewed focus on infra-
cities now and market share gains from unorganized play-
structure and rural will also act as a positive catalysts for
ers, especially in the tile and plastic pipes segment.
Peer Set
Company Name Mcap Revenue EBITDA PAT EBITDA PAT ROE ROCE D/E 1 Yr 1 Yr 1 Yr
(Rs crs) (Rs crs) (Rs crs) (Rs crs) Margin Margin (%) (%) (x) Forward Forward Forward
(%) (%) P/E (x) P/BVPS EV/EBITDA
(x) (x)
Kajaria Ceramics
Ltd. 15,349.7 2,808.0 415.9 253.5 14.8% 9.0% 15.5 18.8 0.1 40.7 7.5 24.9
Cera Sanitaryware
Ltd. 5,191.0 1,223.7 165.5 110.5 13.5% 9.0% 15.0 17.5 0.1 35.1 5.2 22.5
Somany Ceramics
Ltd. 1,778.7 1,600.2 131.4 19.5 8.2% 1.2% 3.2 5.2 0.8 21.8 2.5 10.3
Century Plyboards
(India) Ltd. 7,029.6 2,317.0 279.7 125.3 12.1% 5.4% 12.1 15.1 0.3 27.5 4.9 17.1
Greenply
Industries Ltd. 2,122.1 1,420.4 155.6 47.7 11.0% 3.4% 13.4 13.3 0.7 18.3 3.9 11.9
Greenlam
Industries Ltd. 2,228.6 1,320.6 178.3 86.7 13.5% 6.6% 18.7 17.4 0.6 21.1 3.5 11.8
Greenpanel
Industries Ltd. 2,174.2 876.6 137.8 14.5 15.7% 1.6% 2.2 4.9 0.9 N/A N/A N/A
Astral Poly Technik
Ltd. 31,197.7 2,577.9 424.6 251.2 16.5% 9.7% 18.6 21.4 0.1 72.2 14.6 45.6
Supreme Industries
Ltd. 24,749.3 5,511.5 834.6 436.2 15.1% 7.9% 19.8 25.7 0.2 36.3 8.2 22.9
Finolex Industries
Ltd. 8,284.0 2,986.0 448.1 307.1 15.0% 10.3% 13.5 16.4 0.1 17.9 3.4 12.4
Prince Pipes &
Fittings Ltd. 4,551.8 1,635.7 228.8 112.5 14.0% 6.9% 18.3 20.5 0.3 24.6 N/A 14.3
Source: ACE Equity & Bloomberg; Note: NA means not available
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