West Asia war to dent ceramic industry revenue

The Indian ceramic tiles industry is expected to witness a 1-2 per cent decline in revenue this fiscal, marking the second consecutive year of fall, due to the war in West Asia, which is affecting production and exports amid supply constraints, Crisil Ratings said on Wednesday.

The ongoing developments in West Asia have a twin impact on the INR 53,000-crore Indian ceramic tiles industry, the agency said in a statement. “One, exports to the ME (Middle East) have been impacted by logistical challenges and supply-chain realignment. Notably, exports constitute 40 per cent of the industry’s revenue, with the ME accounting for 15 per cent of ceramic exports,” it said.

Export revenue may decline 6-7 per cent due to the closure of the Strait of Hormuz, which has disrupted deliveries and increased freight and insurance costs, the ratings agency noted.This has not only halted exports to ME but also raised the cost of exports to other regions, it added.

On the other hand, Crisil Ratings said, the supply of Liquefied Natural Gas (LNG) and propane — key raw materials that make up 35 per cent of the cost of goods sold (COGS) — has been curtailed, forcing most ceramic plants to either shut down production or operate at significantly reduced levels.

“With production nearly grinding to a halt in March, domestic consumption growth is likely to slow down. The domestic market is now expected to grow just 4-5 per cent this fiscal, slower than the earlier projection of 7-8 per cent,” it pointed out.

Commenting on the development, Crisil Ratings Director Nitin Kansal said, “The ceramic industry will face significant challenges due to the current ME conflict. Specifically, the availability of gas supplies, low-to-no demand from the ME region, and increased logistics costs for other overseas markets will directly impact production schedules”.  If the situation persists for a further two to three weeks, he said, “It may lead to longer shutdowns and substantial losses for companies, ultimately causing a 1-two per cent revenue decline this fiscal”.

“If the situation prolongs, we may see a 7-8 per cent monthly decline in revenue,” Kansal said. Alongside revenue loss due to plant shutdowns and underutilisation, Crisil Ratings said companies will face the burden of fixed costs (15-20 per cent of the COGS) and higher logistics costs (3-5 per cent of COGS) due to an increase in freight cost by 45-50 per cent and insurance cost by 25-30 per cent for shipments.

“The above factors are expected to drag down operating profitability by 130-150 basis points (bps) to a five-year low of 9.3-9.5 per cent this fiscal and, if the situation persists in the first quarter of the next fiscal, decline to 8.2-8.5 per cent in fiscal 2027,” it added.Crisil Ratings said the report analysed inputs of 40 manufacturers rated by it, accounting for about a fourth of the industry’s revenue.