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The ongoing rise in crude oil price does not bode well for tile manufacturers. Brent crude is trading at $78 per barrel, with prices having jumped around 10% in just one month. The jump of 50% in spot gas prices in one month could also compound the cost inflation problems of tile companies.

Analysts note that Singapore spot gas prices have more than doubled in the past three months and this has translated into higher gas procurement charges for tile companies. Not just Singapore, but also the Henry Hub (US) gas prices have also seen more than 50% jump in the past three months. In simple terms, if global crude and gas prices remain at elevated levels, domestic gas prices will increase further, necessitating more price hikes by the entire tile industry.

“Somany Ceramics sources around 7% of their gas requirement from spot while the mix for Kajaria Ceramics is volatile (nearly 40% of total gas requirement is sourced from spot or Henry Hub). Our calculations indicate tile players would have to take a blended price hike of around 8-10% in FY22 to sustain margins, out of which nearly 2-3% has already been taken," JM Financial Institutional Securities analysts said in a report on 30 September.

Feeling the heat
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Feeling the heat

In the post June-quarter earnings conference call, the management of Kajaria Ceramics had said that since gas prices have gone through the roof, the company has taken a small price hike of around 3%. The management refrained from giving an indication of annual margins then and had said that it will be shared at the end of Q2. On the other hand, peer Somany’s management said that it maintains 12-13% margin guidance for FY22 and from FY23 it aims to achieve 14-15% margin growth.

Tile demand is gradually improving, giving producers some confidence to raise prices, but the impact on margins remains to be seen, analysts said.

Meanwhile, shares of tile companies have given mouth-watering returns in the past one year. The stock prices of Kajaria and Cera Sanitaryware Ltd have jumped around 110% each.

Somany is leading the pack with massive returns of around 300% in the past one year.

Listed companies are said to have gained market share from smaller and regional companies, especially after the second covid wave, as the pace of consolidation has accelerated. This has got them a lot of investor attention, leading to this rally. Also, the upbeat sentiment towards midcap stocks has benefited these companies, analysts said.

Their valuations have seen a re-rating in the recent past with some of these stocks trading at an expensive one-year forward price-to-earnings multiples of around 45-50 times.

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