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Our channel checks suggest that a weak demand scenario for tiles could drive softer volume growth for leading tile companies in 2QFY24, though volume will increase 5-6% QoQ. We believe tile volume growth will pick up from 3QFY24 as leading construction-related categories (wires, plumbing pipes, etc.) indicate reasonable strength in construction activity, and tile demand comes with a lag of 1-2 quarters. Gas prices, on the other hand, remain steady ((Asia LNG spot/ Gujarat Gas up 8% QoQ/ -3% QoQ and -37% YoY/-73% YoY respectively in 2QFY24), leading to stable/marginal increase in gas cost QoQ for Kajaria/ Somany, though it will decline substantially YoY (-41% YoY/-38% YoY respectively). While the tile pricing scenario remains competitive given weak demand, we have not seen any major change in prices. Exports have picked up substantially in Apr-Aug’23 (INR 88bn, +37% YoY), especially in Aug (estimated to be at a record INR 21.2bn, +57% YoY) on the back of increasing cost competitiveness as European exporters face cost inflation and gas availability issues. While the near-term remains challenging, we are still optimistic on demand recovery in 2HFY24. We marginally tweak our estimates but maintain BUY on Kajaria (KJC) and Somany Ceramics (SOMC) and maintain HOLD on Cera Sanitaryware.

* Weak demand in 2QFY24, optimistic on demand recovery in 2HFY24: A strong show in Jun’23 helped tile companies post reasonable tile volume performance (7-8% YoY; +6%/+7%, 4-year CAGR) in 1QFY24 as demand was weak during Apr-May’23. Our recent channel checks suggest that the demand scenario weakened again in Jul–Aug’23, though channel partners and companies are hopeful of demand recovering from Oct’23 given seasonality as well as healthy demand for plastic pipe/electric wire. Given the weak demand environment in 2QFY24, we trim our volume estimates by 1-2% for FY24 for our coverage companies.

* Fuel prices (constitute 25-35% of tile realisation) in favourable zone: Fuel prices are in a favourable zone as there wasn’t any significant movement in prices during 2QFY24. We estimate that RasGas/Guj Gas cost will decline 2%/3% QoQ to INR 45.6/scm and INR 40.4/scm respectively in 2Q24. Asia Spot LNG prices increased 8% QoQ to INR 39.8/scm (- 73% YoY). Further, leading tile manufacturers have switched their consumption partly to alternative fuels such as biofuel, LPG and propane, which are 10-20% cheaper than gas. As a result, we estimate Kajaria / Somany to post flat to 2-3% increase in gas cost QoQ (-40%/-36% YoY) respectively.

* Strong momentum in tile exports: Monthly tile exports remained robust with a monthly average of INR 17.6bn during Apr-Aug’23 (vs. INR 13bn during Apr-Aug’22). During FY24TD (Apr-Aug’23), exports has grown 37% YoY to INR 88bn. In Aug’23, tile exports registered another record of INR 21.2bn (+8% MoM; + 57%YoY). The industry expects tile exports to grow by 25% YoY in FY24 to a record INR 200bn-210bn. The leading exporting destinations from India are US, Russia and UK, overtaking the Middle East countries. Exports momentum remains robust on the back of increased competitiveness due to a) higher electricity cost and gas cost in other exporting countries – Italy, Spain and China – Morbi continues to be highly competitive in export markets, and b) lower ADD on Indian tile manufacturers (c.7% on India vs. 40% on Turkey) by Europe. Moreover, industry expects removal of ADD on Indian tiles manufacturers, which will further boost export momentum.

* Maintain BUY on Kajaria and Somany; HOLD on Cera: We tweak our FY24 estimates by 0-3% to reflect 2QFY24 weakness while broadly maintaining our FY25-26 estimates. We maintain BUY on KJC/ SOMC with a revised Sep’24 TP of INR 1,500/ INR 880 (valuing it at 35x / 22x Sept’25 EPS) respectively and maintain HOLD on Cera with a Sep’24 TP of INR 7,850 (valuing it at 30x Sept’25 EPS).

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