Value Building in The Tiles Sector

Thesis:

Part 1:

• Three decades of steady economic growth in India has created the second-largest middle class in the World. This highly aspirational demographic is projected to grow steadily for decades.

• India will continue to see rapid urbanisation.

• Demand for living and work spaces will create one of the largest markets for building materials in the World.

Part 2:

• Tiles is an extraordinary product. It is both a building material as well as a lifestyle product.

• It is a product that can remarkably improve quality of life as well as aesthetics at a relatively low price – especially if amortised over its life.

• It is a product that is relevant to all markets. It is both a necessity and a luxury.

Part 3:

• The Indian tile industry has seen remarkable growth over the past decade.

• India has a relatively low tile usage per capita compared to other developing economies. Penetration Levels are set to rise quickly.

• There is growing international sentiment to replace China as the largest exporter of tiles in the world.

Part 4:

• Customers increasingly expect an omnichannel engagement over their purchase journey.

• The evolving consumer behaviour provides new players an opportunity to create market share rapidly.

Part 5:

• The Indian Tiles Industry is completely home-grown with limited access to international best practices.

• There is growing institutional investor interest in the sector. Several Tier 2 Companies have raised Capital to scale to Tier 1 Status. They are improving operations, adopting technology and addressing the evolving consumer behaviour.

Part VI:

• Listed SMEs have outperformed the wider indices (NIFTY 50, BSE 500) in the last few years. This has lead to significant retail and institutional interest in listed SMEs.

• A total of ~900 companies have been listed over the past 12 years; providing valuable lessons.

• Listing provides liquidity – and unlocks value at market multiples.

Part VII:

• Induction of informed capital and a well-executed business plan can position mid-size tile companies as “New Age” Businesses creating value for their promoters

• The listing will allow these companies to enjoy market multiples – and continued access to “economical” capital for growth.

The Trifecta of Favourable Trends – Evolving Consumer Behaviour; Investor Interest; and spectacular multiples has created a “once in a lifetime” Strategic Window for mid-sized Tile Companies.

Overview of the Tiles Industry:

Growth Drivers:

Economic & Per Capita Income Growth:

• Indian economy has been growing at 6 – 7% p.a. since the beginning of the 21st Century. The size of the economy is expected to reach USD 5 trillion by 2028 – 2030 from the current USD 3.3 trillion

• On a PPP per capita basis, the GDP was USD 8,350 in 2022, and is expected to reach USD 12,400 by 2028

Source: IMF, World Economic Outlook Database, Apr 2022

Growing Urbanisation:

• India’s urban population is expected to reach 40% or 600 million inhabitants by 2030. India will remain the largest contributor to the incremental urban population in the world until 2050.

• The number of cities with a population > 1 million is expected to cross 87 in 2030 from 53 in in 2011.

• To cater to this growth, India needs to build 6.5 – 8.6 billion square feet of urban space every year till 2030.

Source: OECD Economic Surveys: India 2019 / Source: Economic Survey 2018 - 19

Demographics:

• A significant proportion of the population will continue to be in the working age group for at least 3 decades.

• Increasing the nuclearisation of families will lead to higher demand for housing.

• Increasing disposable and double incomes are making homes more accessible – this is evidenced by the increase in Housing Credit.

• Younger, aspirational Indians are driving the real estate sector:

  • Prefer to buy rather than rent.

  • Higher Retail spending and Holidays create a demand for commercial/ hospitality spaces.

Source: RBI

Growing economy, urbanisation, higher disposable incomes and an aspiring population is leading to growth in demand for better quality work and living spaces.

Low Penetration:

• Despite being the second largest manufacturer in the world, the penetration of tiles in the country is amongst the lowest in the world.

• According to the 2011 Census, only 11% of Indian houses used mosaic and tile flooring. Penetration in rural India was far lower.

Source: Philip Capital, 2019

Improved Affordability of Tiles:

• Increase in disposable incomes.

• The inflation-adjusted price of tiles has fallen over the last few years due to increasing domestic capacity, technology-led efficiencies and competition.

Improved Availability:

• Wider distribution reaches to smaller cities and towns.

Source: Census Data, 2011

With a growing real estate sector and a shift from natural materials, the demand of Tiles is set to increase exponentially.

Key Trends:

Larger Sizes

• Increase in demand for large tiles with sizes ranging from 1000X3000 mm to 1600X4800 mm and beyond and thickness of 3mm to 30mm.

• Larger sizes = Higher realisations.

• Introduction of new technology/ plants to address the demand.

Growth of Southern Markets

• The second highest consumer of ceramic tiles, Southern India is growing faster than the national growth rate.

• Transportation of tiles from the manufacturing hubs (largely in the west) is expensive, due to high transportation cost, breakage and handling.

• Several organised players have/ are adding capacity in the Andhra ceramic cluster.

Shift from Unorganised to Organised

• The industry is completely home-grown, with limited access to international best practices.

• However, institutional capital is transforming mid-sized players by mandating professional management, and acceptance and creation of best practices – in terms of market access, 360-degree customer engagement and operations.

Market Capitalisation & Valuation Metrics:

• Kajaria and Cera are way ahead of the peer group across metrics due to their:

  • Consistent revenue and profit growth.

  • Leadership positions in the industry.

• While Somany is the second largest tile company in India, it is falling behind the competition in terms of innovation and customer engagement – and this is reflected in its stock market performance.

• Asian Granito continues to be plagued with poor operating performance and poor market perception due to corporate governance issues.

• The “New Generation” Tile Companies, including Exxaro, Varmora & Simpolo are armed with large amounts of institutional/ public capital, have access to global best practices in terms of processes, market access, and a deep understanding of evolving consumer behaviour are being rewarded by investors & stock markets.

• A well-executed business plan, induction of the right partners, governance mechanisms, and investor communication & outreach can help mid-sized businesses to be viewed as “New Age” Companies, allowing concomitant valuations.

What is a “New Age” Company?

“New Age” Companies are characterised by their innovative use of technology, flexible organisational structures and a focus on disruption and adaptation. They typically exhibit the following characteristics:

• Data-driven decision-making and tools to optimise processes; understand customer preferences; offer Omni-channel engagement and personalised customer solutions

• Continuously seeking new ways to create value and to solve problems

• Ability to quickly pivot strategies, products and services in response to changing market conditions and/ or customer demands

• Lean organisational structures with fewer hierarchical layers; Decentralised decision-making, allowing for faster responses

• Focus on Governance, Sustainability & Social Responsibility

The Advent of the SME IPO Era:

Part 1

• India has a large pool of Small and Medium-sized Enterprises (SMEs).

• SMEs contribute to over 30% of its GDP, 45% of industrial production, 40% of exports and employ over 100 million people.

• In recognition of their significance, the Government has undertaken several initiatives to promote & support their growth.

• SEBI has eased listing requirements for SMEs, making it easier for them to access capital markets. The NSE & BSE have introduced SME platforms to facilitate capital raise.

• SMEs have collectively raised ~INR 13,500 Cr. through 900 IPOs over 12 years, with ~INR 4,700 Cr. in CY 2023 alone.

Part 2

• The share prices of a large number of SME IPOs doubled on debut in 2022 and 2023. This has led to high levels of oversubscription for their IPOs – as many as 10 of the 20 top SME IPOs in terms of oversubscription hit the markets in 2023.

• Domestic fund houses and institutional investors are increasingly investing in SME IPOs – this has further raised the confidence of retail investors to invest in these companies.

• The growing focus on SME IPOs has led to increased research coverage & media attention, enhancing visibility.

• The era of significant investor interest in SMEs has only just started – and if their fundamentals hold, this interest will expand.

Part 3

• The Tiles industry has recently attracted significant institutional investor interest.

• For a well-prepared company, an IPO sets the stage for robust long-term growth.

IPO can be a Gateway to Growth

Value Building in the Sector:

Key Elements:

Building Blocks:

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