Polished performance

Kajaria Ceramics has managed to counter competition from the unorganised sector by moving up the value chain

Robotic machines zip up and down an uncomfortably hot and deserted factory floor, transporting finished tiles from one end to the other. The machines flip out 70,000 sq m of tiles every day and stack them with a precision no human can match. The location: Kajaria Ceramics’ tile manufacturing unit at Gailpur near Bhiwadi, Rajasthan. Around 900 of Kajaria’s 1,500-odd employees work full time in three shifts, operating machines and in maintenance, administration and accounts. Another 600 are contracted for work such as loading of finished goods, unloading of raw materials and other allied jobs.

Set up in 1998 with an investment of ₹442 crore, the Bhiwadi plant is Kajaria’s only facility that is fully automated. Kajaria Ceramics began operations in 1988 with a technical collaboration with Spain’s Todagres, the world’s second-largest tile maker. Those days, the first unit in Sikandrabad, Uttar Pradesh, could produce about 1 million sq m of floor tiles in a year. Today, the ₹1,300-crore company is India’s largest producer of ceramic and vitrified tiles with an annual installed capacity of 41 million sq m across five facilities — Sikandrabad (Uttar Pradesh); Gailpur (Rajasthan); Vijaywada (Andhra Pradesh); and two in Morbi (Gujarat). 

In a largely unorganised industry estimated at ₹17,000 crore and growing at a CAGR of 15%, Kajaria has managed to emerge as the second-largest player in the ₹8,500-crore organised tiles segment with a 16% share, after H&R Johnson (part of the Rajan Raheja Group, which owns Outlook Business). High demand for vitrified tiles over the past five years from major cities has helped Kajaria clock sales CAGR of 25%. Much of this has to do with the publicly-listed company’s calibrated approach to building its business.

Building blocks

Meet chief operating officer Rajveer Chaudhary, who has been with the company for 15 years. He believes the secret sauce in Kajaria’s success story is the attention it paid to evolving consumer preference from ceramic to vitrified tiles, and in penetrating tier 2 cities. Vitrified tiles — made by the addition of quartz and feldspar — are more durable than ceramic glazed tiles. They fetch more profits too. More importantly, vitrified tiles carry higher operating margins of 16-17% compared with 14-15% for ceramic tiles.

To begin with, Kajaria started importing vitrified tiles from China, Spain and Italy. This move was backed by massive brand building and an advertising blitzkrieg across TV channels beginning 2004 to create enough visibility in the market. As demand kicked in for its branded vitrified tales, the management undertook a capex programme in FY09 to increase manufacturing capacity. It set up an 8,000 sq m a day unit in UP and then a second plant in Rajasthan with a capacity of 18,000 sq m a day for glazed and polished vitrified tiles. Today, of its total capacity of 41 million sq m, vitrified tile capacity is 16.8 million sq m — an eight-fold increase in three years. But all of it was not organic. 

Seizing on the opportunity of working in a largely unorganised industry, the company acquired marginal players that lacked strong brand support or distribution network. Over the past couple of years, it picked up majority stakes in four small and mid-sized companies based in Gujarat and South India for ₹ 37.12 crore. It acquired a 51% stake for ₹ 11.61 crore in Morbi-based Cosa Ceramics, which manufactures double-charged vitrified tiles, with a capacity to produce 6,000 boxes (or 8,000 sq m) of vitrified tiles per day. Kajaria also bought 51% in Hyderabad-based Vennar Ceramics for ₹ 13.65 crore. Vennar is at an advanced stage of setting up a plant to manufacture 2.30 million sq m per annum of high-end ceramic wall tiles, the addition of which will take the total annual capacity of the company to 38.30 million sq m (including 10 million sq m capacity of its subsidiaries). Another 51% stake was acquired in Gujarat’s Jaxx Vitrified for ₹  6.26 crore. Jaxx comes with an annual capacity to produce 3.10 million sq m of polished vitrified tiles. The 51% stake in Soriso Ceramic for ₹ 5.60 crore fetches Kajaria a further capacity of 2.30 million sq m of rectified ceramic floor tiles a year. Rectified ceramic tiles are mechanically finished on all sides to achieve uniform size and optimum precision, and are typically larger tiles, used along with small tiles to create patterned designs. “In Gujarat, tile manufacturers are good at making products but they are not good at marketing,” Chaudhary explains. 

“Kajaria has been quite active in judging demand in the market and acting accordingly,” agrees Ishpreet Bindra, an analyst with Sushil Finance. “Instead of expanding its own capacity it started acquiring companies and besides importing a certain amount of high-end tiles, which it sells here.”

Manufacturing prowess was then backed by an expansive distribution network. Over the past decade, Kajaria doubled its network to 660 dealers and 5,000 smaller sub-dealers. Today, it has a strong presence in the north, which contributes 42% to revenues; the south contributes 29% and the balance comes from the west and east zones. According to analysts, the strategy of adding dealers in a relatively slow manner since 2002, compared with peers, has had a positive impact. “The network is distributed in such a way that it leads to lower cannibalisation, thus limiting undercutting and does not lead to the dilution of the Kajaria brand,” state Dolat Capital’s  analysts Nehal Shah and Mahvash Ariyanfar in a report.

Continuous product innovation has helped too. “Kajaria focuses on innovation in designs and concepts. We believe they introduce new designs and variants almost every day and at any given point in time, have more variety than any other player, making it a unique selling point,” states the report. “We introduce about 100 designs in wall and floor tiles every year. At present we have 650 designs in wall and 300 in floor tiles,” points out Chaudhary. 

 Besides, the company also placed emphasis on customer experience. Kajaria World and Galaxy showrooms display tile samples, and mock bathrooms and kitchens in various combinations. So far, 52 such showrooms of 2,500-4,000 sq ft size have opened in metros and smaller towns, of which 20 are company owned and the rest are franchisees. “Kajaria World showrooms are on franchise and Galaxy showrooms are owned by dealers and they contribute a higher share to our revenue than normal dealers. Besides our own 22 showrooms display a wide range of our  products,” adds Chaudhary. This presence is significant since retail accounts for 80% of sales volumes, with the balance coming from real estate developers. 

Treading smartly

Over the past three years (FY09-FY12), Kajaria has seen revenue and operating CAGR of 25% and 30%, respectively, with equal share of revenue contribution coming from ceramic and vitrified tiles. More impressively, profits have grown at a CAGR of 109%, largely backed by strong working capital management, rising cash flows and consequent reduction in debt. Still, some challenges remain. 

Rising fuel prices are a lingering concern for tiles manufacturers, and Kajaria is no exception. Natural gas, the largest cost component for Kajaria, accounted for 19% of overall expenses in FY12. Despite holding out to cost pressures in the past, in Q3FY13, the company’s operating profit margin declined by two percentage points to 14.61% because of higher fuel costs. “The price of natural gas in India has doubled in the last two years from ₹ 15 to ₹ 30 per standard cubic metre. In China, most factories use coal gas, which is much cheaper than natural gas,” says Chaudhary.

But despite cost increases, consolidated revenues grew 24% to ₹ 1,162 crore and profits 28% to ₹ 74 crore for the nine months ended December 2012. This was due to savings made on interest costs, after repaying outstanding debt. Currently, the company has manageable debt of ₹  225 crore on its books. A large part of Kajaria’s financial performance has been driven by its move to scale up the value chain and reduce dependence on imports of vitrified tiles, high-end tiles and sanitary ware. For instance, trading sales — the sale of imported tiles, in trade parlance — bring lower margins of 10% against 20% in own manufactured products. The company is adopting a similar strategy in high-margin value-added products such as sanitary wares. Currently, it imports wares from Vitra in Turkey. In FY13, the brand contributed ₹ 20 crore in revenues and but now the company is setting up a manufacturing plant in Gujarat through a joint venture to produce sanitary wares.

By moving up the value chain, Kajaria has managed to counter competition from the unorganised sector. Morbi, the largest ceramic tile hub in the country, along with Kadi and Himmat Nagar in Gujarat, is the ceramic tiles hub of India with 450 units. Chaudhary explains that it is hard to compete with these units because they operate at lower cost and, hence, sell at lower prices. Instead, Kajaria is banking on its strong distribution network and premium products that account for more than 70% of its revenues to spur growth. Volumes are expected to rise as Kajaria seeks greener pastures (read: new markets). “Our overall margins will not come down as we keep penetrating newer semi-urban and smaller cities,” points out Chaudhary. Currently, tier 2 and 3 cities contribute 25-30% to the company’s topline.

The bogey of Chinese imports is gone after anti-dumping duty was introduced by India. That’s another positive factor in Kajaria’s favour. While the cyclical nature of real estate business continues to be an important determinant of sales, Chaudhary maintains there’s no slowdown in demand, at least for now. “There is always some kind of home renovation going on and our proportion of sales to developers is still nascent [20%], so we are not too worried.”

For now, Kajaria wants to consolidate its operations and build on its existing strengths. There are no capacity addition plans afoot even as the company looks to wrap up the acquisition of Oozy Vitrified in Gujarat, which has an annual capacity of 7,000 sq m. The company decided to scrap its plan to set up a unit in Bengaluru since it did not want to burden its supply chain. “We want to use our existing resources 100% before we expand. There’s no point in senseless expansion,” says Chaudhary.

That Kajaria Ceramics is playing it safe is evident in the target that it has set for FY14 — revenues of ₹ 2,000 crore. For a company that will soon complete 25 years in the ceramics industry, that’s quite a polished act.