Nirmal Bang anticipates 12–13% growth, hence the best tiles sector stock picks are Kajaria and Somany

 Nirmal Bang anticipates 12–13% growth, hence the best tiles sector stock picks are Kajaria and Somany

According to a report from stockbroker Nirmal Bang Institutional Equities, the tiles industry may experience good growth in the medium term, helped by increased export demand as well as favorable domestic market conditions. The brokerage company has launched coverage with a buy call on the two sectoral players, Kajaria Ceramics and Somany Ceramics.

In the past year, the share prices of Somany Ceramics and Kajaria Ceramics have each increased by around 24% and 13%, respectively. 

The brokerage business emphasized that India has strong growth potential for this industry. It thinks that the government's push to increase domestic production and innate demand from related sectors will propel India's ceramic tile market to continuous growth over the medium term (growth opportunities that are two times the rate of the global industry). Tiles account for 2% to 4% of building costs in the housing sector.

With an estimated annual consumption quantum of 2,069 msm as of the calendar year 2021, it was underlined that India is the second-largest manufacturer and consumer of tiles in the world after China, accounting for close to 14% of the global production and close to 11% of the global consumption.

Despite this, Nirmal Bang noted, "it has the lowest per capita consumption of tiles at almost 0.6sqm compared to the global average of 1.4sqm, indicating significant room for growth going forward."

The market for ceramic tiles in India is projected to be worth 59,500 crore in 2023 and 70,700 crore by the end of 2025, representing a CAGR of 13.6% over that period. Nirmal Bang noted that of this, 30% is exported for a total of around 17,900 crore, which is anticipated to nearly treble by 2025's end to 30,400 crore.

Furthermore, the unorganized sector dominates the tiles business with a 60% market share, despite the fact that 14 organized firms (or 40%) have increased their market share by providing high-quality goods at affordable prices, according to the brokerage firm.

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Supporting elements for the Indian tile industry

The brokerage business emphasized that, compared to the global tiles market, the domestic tile market is anticipated to increase at a CAGR of 13.6% over the period of FY23–FY25E.

Nirmal Bang noted that several causes, including the following, would be responsible for this.

(1) Housing demand, driven by increased disposable income, rapid urbanization, a lack of available housing, etc.

(2) The government's continued emphasis on the ecosystem's support and the policy framework, such as the growth of metropolises.

(3) The need for residential, commercial, and storage space coming from the services industry.

(4) Capacity to offer premium goods at affordable prices as a result of technology advancements, facility modernization, and low-cost labor promoting exports.

In two years, the export market will increase.

Nirmal Bang highlighted As of FY23, the size of the Indian export market was anticipated to be 16,500 crore (30% of the total market), increasing at a CAGR of almost 15% from FY19 to FY23.

Over the period of FY23–FY25E, the export category is anticipated to expand at a CAGR of over 40%, driven mostly by the "China + 1" factor.

According to Nirmal Bang, up to 90% of the tiles produced in India are produced at Morbi, Gujarat, and shipped via the Mundra port, with 80% of those shipments going to the USA (60–70%), Saudi Arabia (20%), and the UAE (the remaining 10%).

"The export market commands larger volume at a lesser realisation of 263/MSM for Morbi producers, in contrast to the home market, which offers a higher realisation of 323/MSM. Players like Kajaria Ceramics and Somany Ceramics are encouraged by this to prioritize the home market while retaining their presence in exports, with Kajaria accounting for 2% and Somany for 4%, respectively, according to Nirmal Bang.

Kajaria Ceramics and Somany Ceramics are buy calls.

"We begin coverage of Kajaria with a buy rating and a target price of $1,885, pricing the company at 40 times projected earnings per share for the third quarter of 25. We like the company primarily because of its wide distribution network, positive industry trends, domestic product mix into areas that increase margins, and sound financial position," stated Nirmal Bang.

"We begin coverage of Somany with a buy rating and a target price of $1,072, valuing it at 22 times projected earnings for the third quarter of 25. We like the company for its technical expertise, product mix (government and real estate together make up roughly 60% of sales, and housing makes up about 40%), capacity to take advantage of expanding export opportunities, and stable financials, according to Nirmal Bang.