Why one should not get into tile stocks

Posted: November 4, 2013 in Stocks
Tags: , , , , ,

It was around beginning of this year when I did some concrete work on tiles industry by having meetings/concalls with top management of Kajaria, Orient, Somany and even ex-CEO of Johnson, the largest unlisted tiles company in India. My work also included ground work where I interviewed some 25 dealers across Delhi to understand ground realities in this market.

My conclusion was pretty negative and I guess rightly so, as since then Orient Bell is down 55%, Nitco is down 60%, Somany is down 26%, Kajaria is flat against an YTD return of 10%  on Index.

So what makes me write this post now? Well, I am getting my house renovated and went with my family to buy tiles to Jagatpuri in East Delhi, which is apparently the biggest tiles market in Delhi/NCR.

Though I knew exactly which ones I had to buy (thanks to the research I did), my family didn’t. So we spent the entire day in the market visiting many stores from branded ones to local brands of Gujarat (Morbi).  The reason why I did not say anything in the process, and acted as a lay man with no knowledge about tiles, was to use this experience to reinforce my verdict on the industry.

9 out of 10 dealers tried to push local brands citing the similar quality and a huge price difference in the two. In most of the cases the price difference was as high as 100% (Vitrified Digital Tiles).

Margins are very low in selling branded stuff compared to local brands. On the other hand shops have different local brands so once you like a particular design (tiles and highlighters); bargaining power of customer goes down.

Though it’s a product where you cannot make out the difference in quality by touching or looking at the product, still there is no loyalty towards brands. It continues to be a commoditized business where only the price matters.

Adding to the problem is the large number of variables:

  • There are three kinds of raw materials- Porcelain (the worst) , Ceramic and Vitrified (the best)
  • Wall tiles and floor tiles are different both in terms of size and quality
  • The digital ones have random design which gives a marble like look compared to standard ones which are all replica of each other. Digital ones are way costlier.
  • There are so many sizes available with no standard pricing- 12’12’’ tiles are cheaper compared to 12’18’’, which are in turn cheaper w.r.t. 24’24’’ (2’2)
  • Then there are nano and double charge variants which are protective layers on tiles

Unless you zero-in on a branded product, you just can’t compare the quotes across dealers (hence dealers are motivated to sell only local ones)

Each dealer sells you a story (which is true to some extent and also sounds logical)
“70% of Indian tile production comes from a region in Gujarat called Morbi. The branded ones like Kajaria, Orient, Somany have tie ups with these small units for manufacturing. The quality for local ones is almost same and the price difference is only because of branding and taxes. If you need couple of extra tiles you would have to buy an entire box of branded ones but we will give you exact number of tiles you want(own/local brand), plus we will also take back the extra ones if you are left with some. If there are broken tiles in the box we will replace those as well”.

So, my conclusion holds the same: I don’t see the demand moving to organized players in a hurry. It continues to be largely a commoditized business; hence absence of any re-rating potential. Any branding activity by these companies is sheer waste of investor money. Current strategy of opening stand-alone company outlets is also a bad strategy. No wonder Nitco is in CDR.

Wondering which ones did we end up buying?
Floor tiles of some local brand called ‘Regent’ and wall tiles of another local brand called ‘Color’. Both vitrified digital nano tiles at prices almost half compared to the ‘brands’.

  1. Jatin Kalra says:

    Kajaria & Somany have outperformed Sensex significantly over last 3-5 yrs. What your take on that?
    Also, this dealer feedback will apply on other branded players like Cera, Symphony, Killer, Bata, Relaxo also. No?

  2. Jatin its not just the business, stocks can do well for various other reasons as well 🙂
    On a serious note, we dont drive car while looking only at rear mirror Right? So, what I gather from my research tells me it is still a long way for Tile companies before they become a brand play. Kajaria does lot of govt. business through its contacts (a major reason for good numbers). Still, may be we cannot generalize what I saw in a metro like Delhi and it could different in Tier II cities but overall I do not like the industry as such.
    Yes this is applicable to Cera but only to some extent. (We were wanting to buy some premium Cera fittings, dealer convinced us to go for Grohe which is a far better product and price difference wasn’t much)
    In case of Killer/Bata/Relaxo.. I think they are in a much better industry where branding yields good results and there is brand loyalty. I like KKC and Relaxo.
    (I don’t track Symphony so no comments on that counter)

  3. Rakesh says:

    Dear Jatin, what price did you finally land. Was it difficult to negotiate. Actually i am searching the net about cheap and good quality tiles in Delhi and luckily chanced upon your blog. I thank you for a nice writeup. It came as a cool relief. I don’t know anything about tiles so request you (but can understand once you guide) …so many thanks again.

  4. anil says:

    what do you think about CERA? i do not see any strong moat here either in the form of brands or any scale….also in relaxo if only branding and advertising and hiring celebrities could sell products then why dont other cos just copy it? it is just a temporary phenomenon or phase and soon it will fade…not really a moat company

  5. Krishnan says:

    Hi Jatin, The market over the last 1 to 2 months has re-rated all tile stocks!.. What do you think is the reason? (given that you have done good research in this space). Real estate revival + large market size is the rationale given by the market i guess

  6. clark says:

    tiles for sale sydney
    At Gaiastone we are working to reduce the effect we have on the environment by executing carbon emission reduction initiatives. Furthermore, a percentage of our annual profit is being actively donated to create sustainable livelihoods in third world countries. We will update this section once a year sharing the results that this project has.

  7. Maveric bull says:

    Dear Jatin,

    I do not fully agree to your comments about the tile business and branding exercise by these players as waste of money. Here are the reasons why, particularly the respect kajaria commands in the tiles market.
    1) A tile is bought more for aesthetic looks which depends upon the number of new design a company comes out with. Kajaria has been the first tile company to launch vitrified and glased vitrified tiles successfully in india. before that there was no market as no one manufactured it. kajaria took the risk and has been highly successful. it has very well capitalized on the first moved advantage.
    2) The distribution network, it has created is just incomparable to any other guy. The kajaria dealer would rarely face a delayed shortage.
    3) The company knows, how to keep its distributors and retailers happy with good margin and constant touch with them. ( asian granito has a bad name)
    4) When you constantly bombard with a brand name to customers it creates a big trust and leaves a good brand recall. ( Asian paints a biggest example )
    5) about its profitability, kajaria is the most profitable guy and no one else can match his profitability . rest are operating at below 7% ebitda.

  8. gfd says:

    HI jatin.
    I hope you shall correct this version since most of tile companies are expected to reward investors handsomely.

  9. khusbu says:

    Hello Jatin,
    Do you have any Idea what is the wholesalers and retailers margin in this tile business?

  10. ceramicduniya says:

    thanks for such information Jatin,
    You are doing great for our industry.


  11. […] Ceramic Tiles is one space which we have been tracking for many years now. In the past, we have misjudged the potential of branded players and missed some multi-baggers like Kajaria Ceramics and Somany. (blog post from 2013) […]

  12. […] Ceramic Tiles is one space which we have been tracking for many years now. In the past, we have misjudged the potential of branded players and missed some multi-baggers like Kajaria Ceramics and Somany. (blog post from 2013) […]

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