MANAGEMENT DISCUSS

Economy review

India reported a decline in inflation, rising domestic demand, growing investments, a stabilising rupee and a declining oil bill. This reality was in contrast to the situation of the earlier years, marked by inflation, high fiscal deficit, dwindling domestic demand and external account imbalances.

The inflation decline in the initial months of the year 2014 was faster than anticipated. A decline in the price of crude oil and tradeable commodities helped moderate headline inflation. A tight monetary policy helped contain demand brssures, creating a buffer against external shocks and moderate rupee volatility vis-a-vis other currencies.

The latest estimates of national income indicate that growth revival, which had commenced in 2013-14, gained vigour in 2014-15. From a macroeconomic perspective, it is increasingly evident that the worst is over.

The result is that India was estimated to have grown by 7.3% in 2014-15 (6.9% in 2013-14) and by 7.5% in the January-March quarter of FY15, exceeding China's 7.35% growth during the same period. This makes India the fastest growing major economy in the world, having surpassed the $2.1-trillion mark on the back of a better performance from the manufacturing sector and rising public expenditure. The brvailing economic scenario could catapult India towards double-digit growth across the medium-term (Source: Economic Survey 2015).

Going ahead, the Indian economy is likely to clock an 8.1% growth in the current financial year, spurred by strong consumer spending amid low inflation and a flurry of reform-oriented measures.

Indian tile industry

During the last two years, the ceramic tiles industry has recorded phenomenal growth to meet the incremental industry demand emanating from every corner of the country. The industry has developed a positive outlook on the back of governmental reforms undertaken in order to attract more foreign investment in real estate.

The domestic market for ceramic tiles in India has undergone a sea change with vitrified tiles now constituting half of the total tiles market in the country. With the  introduction of modern technology in designing and manufacturing, the market new verticals have emerged such as 3D tiles, germ-free tiles and designer tiles. Although unorganised players make up 50% of the total ceramic tiles market of India, the organised sector is fast outpacing the former with breakthrough in innovation and strategic alliances. Moreover, India has among the lowest per capita consumption of ceramic tiles in the world with low penetration of tiles in urban markets and a virtually untapped rural market. All these factors, coupled with the declining manufacturing competitiveness of China, are set to drive the tremendous growth expected in the Indian ceramic tiles market.

India's stands third in world ceramic tile production (China and Brazil are the top two) growing at an annual rate of 15%, spurred largely by increasing urbanisation, a boom in the retail industry and optimism in India's economic outlook. The industry is estimated to be worth around C24,000 Crore (FY14). (Source: Tiles of India, January 2015). Ceramic production today makes a sizeable contribution to the country's GDP with a turnover of C 18,000 Crore.

Opportunities

Construction of new houses driven by rising income levels have increased tile usage in the residential construction and the commercial real estate verticals. In particular, tile intensity in rural areas is expected to increase due to a shift towards ceramic tiles from mosaic tiles. The geographic reach of domestic players through retail outlets is expected to be a major differentiator in the organised sector. Large companies are increasingly focusing on the retail front, which will enable them to earn higher margins.

Buyers are increasingly looking beyond the functionality of ease, hygiene and maintenance and vying for aesthetically appealing tiles in order to reflect their individualistic lifestyles.

Use of nanotechnology helps in increasing the shelf lives and strength of tiles by making them resistant to dirt and bacteria. These tiles are gaining popularity in areas where hygiene is important, such as hospitals, labs and food processing units, among others.

• Usage of eco-friendly tiles is expected to increase as consumers become more environment-conscious. Recycled eco-friendly tiles are usually made from natural and renewable substances.

Tiles are now seen as means of making a style statement and are used in bedroom and living room walls as well. 3D tiles are also being used in outdoor claddings, wall claddings and elevations, among others.

Vitrified tiles, comprising nearly 50% of the ceramic tiles market, have witnessed a robust growth in the last five years due to their high durability and easy maintenance.

The ceramic industry is directly related to the real estate industry. Owing to the expansion of the economy, real estate boom, construction growth and infrastructural developments and the impending surge in the retail sector growth does look promising.

The governmental emphasis on the Clean India initiative and the Swachh Bharat Abhiyan mission will definitely have a positive impact on ceramic tiles and sanitaryware.

Threats

• There are threats of the anti-dumping duty not being levied on cheap imports from China. If it is not imposed and the rupee apbrciates with respect to the USD, Chinese products coming into the Indian market will lose out on sales and margins.

The tile industry's prospects are dependent on the overall economy in general and the real estate industry in particular. Slowdown in real estate has led to low sales volumes even in the bigger centres in recent times. There has been a lack of adequate funds and buyer interest which has led to many residential projects being delayed by developers. This sustained slowdown can hamper future prospects.

• Due to the ban imposed by the Gujarat High Court on coal-based gasifiers, all the unorganised players in Morbi (50% share in the total tiles produced in India) have shifted to natural gas, increasing cost of production and reducing  cost-competitiveness. This is the biggest challenge for the sector which depends on the availability of skilled manpower. Irrespective of the type of flooring, there is a dearth of certified installers, technically-sound contractors and other workers. Thus, despite producing world-class products, the final product does not always emulate the global qualitative benchmarks.

This has led to a situation of excess capacity for tile manufacturers in Gujarat's Morbi district. In the past year, the cumulative production capacity has increased by about 30% while actual demand has declined by nearly 40%.

Rising fuel costs have significantly impacted profitability in the past few years. Average EBITDA margins for organised players have declined by 300 bps during the past three years due to increase in power and fuel costs. As a percentage of manufacturing costs, this expenditure has increased from 17% in FY10 to 33% currently. This is higher than the 10-12% increase in the sanitaryware industry.

Outlook

With increasing construction activities, the tile market in the country is set to flourish. The demand from institutional customers is outpacing the retail demand in many regions of the country. The overall Indian tiles market is expected to witness an 18% CAGR over the next two years. However, the demand for vitrified tiles during the same period is expected to grow at a 21% CAGR due to increasing institutional sales.

The operating margins of organised players in the ceramic tiles industry are likely to improve over the next two years on back of a decline in LNG prices. A shift in the product mix towards high-margin vitrified and digital tiles will offset the decline in margins due to increase in trading. Margins of the unorganised segment are expected to stabilise with time.

The Swachh Bharat campaign is expected to have a positive impact on the Indian ceramic industry as the initiative is likely to generate demand for tiles and sanitaryware. The sentiments are positive, as the newly instated Central Government is focusing on the infrastructure sector, which will boost construction and eventually help the ceramic sector.

Financial performance, 2014-15

The Company's gross revenues increased by 7.87% to Rs. 907.84 crore from  Rs.841.63 crore.

The Company's EBIDTA decreased by 5.72% to Rs. 61.37 crore from Rs.65.09 crore.

The Company's net profit increased by 2.33% to Rs.14.47 crore from Rs. 14.14 crore.

The Company's profit before tax increased 10.99% to Rs.20.02 crore from Rs. 22.49 crore.

Tiles

Gross revenues stood at Rs.791 crore in 2014-15 compared to Rs.703 crore in 2013­14, accounting for 87% of the total revenues during the year.

Marble

Gross revenues stood at Rs.112 crore in 2014-15 as compared to Rs.126 crore in 2013-14, accounting for 12% the total revenues during the year.

Internal control system

The Company has a separate internal audit department with experienced staff placed under the supervision and control of the GM (Finance) and CFO. The organisational setup and the system control have been functioning efficiently with most of the branches electronically connected with the Head Office. The internal controls are constantly upgraded based on internal audit recommendations. Every quarter, significant audit findings, recommended corrective steps and their implementation status are brsented to the Board of Directors.

Human resource development and industrial relations

The Company believes that human resources comprise the most important asset of the organisation. During the year under review, the Company has concentrated on enhancing individual and organisational capabilities for being future-ready, driving greater employee engagement and strengthening employee relations further.

The Company has been investing in progressive employee relations practices to ensure that it invests in capability building at the grassroots level. The Company recognises people as the primary source of its competitiveness and continues to focus on people development by leveraging technology and developing a continuously learning human resource base to unleash their potential and fulfill their aspirations.

The Company employed 400 professionals during the year and the Company's employee base stood at 2,338 as at March 31, 2015.

Cautionary statement

Statements made in this report describing the Company's objectives, projections, estimates and expectations may be 'forward-looking statements' within the meaning of applicable securities laws and regulations. Actual results could differ materially from those exbrssed or implied. Important factors that could make a difference to the Company's operations include economic conditions affecting demand/supply and price conditions in the domestic and overseas markets in which the Company operates, changes in the Government regulations, tax laws and other statutes and incidental factors.