Domestic Real Estate Demand Boosts Indian Ceramic Tiles Sector: ICRA
Rating agency ICRA noted that India's ceramic tiles industry continues to benefit from steady demand in the domestic market, which generates around 64% of the industry's revenue. However, exports are facing headwinds. The slowdown in demand from the USA has become evident in the current fiscal year, following investigations by the USA Department of Commerce into Indian ceramic tile imports starting in May 2024. Additionally, increased freight costs due to the Red Sea crisis and sluggish residential markets in the USA and Europe have further dampened export momentum since Q4 FY2024.
An ICRA study projects that India’s ceramic tiles export revenue will likely decline in FY2025. This downturn is primarily due to the expected imposition of substantial anti-dumping duties (ADD) ranging from 328% to 489% by the US. In FY2024, the US accounted for 9% of India's tile exports.
Chintan Lakhani, Vice President and Sector Head – Corporate Ratings, ICRA said, “ICRA expects exports to contract by ~8-10% in FY2025, mainly due to the impact on India’s two major exports hubs — USA (owing to likely imposition of ADD) and Europe — given the continued sluggish residential markets. The decline could be even sharper if the Red Sea crisis persists for a prolonged period. India’s ceramic tiles export to Europe and the Americas has been impacted in recent quarters because of the increase in logistics cost, thus affecting competitiveness. While freight rates have eased sequentially, the logistics cost remains higher on a YoY basis and, hence, continues to impact the export demand.”
Demand from the domestic market remains resilient in the backdrop of a favourable outlook for the real estate sector. Consequently, the overall revenue growth of the sector is estimated at 7-9% for FY2025e, primarily supported by domestic demand, whereas exports are likely to remain a drag in the near term. The share of domestic revenues is relatively higher for larger entities compared to small/mid-sized ones, as large entities enjoy pricing flexibility owing to their strong market position.
Lakhani further adds: “Notwithstanding the expected contraction in exports, the revenue of ICRA’s sample entities is likely to grow by 7-9% on a YoY basis in FY2025e, aided by growth in the domestic residential estate sector. ICRA expects industry capex to moderate from 8-9% of operating income (FY2023 and FY2024) to below 7% in the current fiscal, as the tiles companies shift their focus towards improving operating efficiencies and capacity utilisation. The industry’s operating margins are expected to remain flattish at ~11-12% in FY2025, as operating leverage benefits and moderation in input costs are offset by intense competition and supply overhang pressure on realisations.”
ICRA highlighted that several large tile players have a relatively lean cash conversion cycle, low leverage, and comfortable credit metrics. However, small and mid-size players have limited pricing flexibility and relatively high exposure to exports; hence the headwinds in the export market could have a bearing on their cash conversion cycle and coverage metrics. Moreover, a slowdown in exports will result in a supply overhang in the domestic market, which will curtail pricing flexibility and constrain margins, in ICRA’s view.
