Good Morning Toasters!

In today’s issue of the Morning Toast, we discuss:

• Commodity Inflationary pressures affecting Tiles & Ceramics players
• End in sight for Zee (finally)
• News around the world
• An educational concept to keep you learning every day 🙂

Market Watch

Nifty: 17,153.00 | -69.75 (-0.40%)
FII Net Sold: INR 1,507.37 crore

Sensex: 57,362.20 | -233.48 (-0.41%)
DII Net Bought: INR 1,373.02 crore

Deep Dive 🤿

Commodity Inflationary pressures affecting Tiles & Ceramics players; what’s up and what do you need to know?

Industry Introduction

• India Tile Industry is roughly pegged at ~INR 400 Bn in size, split across Ceramic Tiles (INR 160-70 Bn), Vitrified Tiles (INR 150 Bn), Double Charge Tile (INR 60-70 Bn), and Soluble Salt Tiles (INR 10-20 Bn)
• At an export level, India contributes a massive ~16% of the world’s tile demand (INR 110-120 Bn) with key reasons being –
  • High cost competitiveness
  • Preference for Ceramic Tiles in the Middle East market plays well with Indian preference to produce CTs; Saudi Arabia accounts for ~20% of tiles exports from India
  • Anti-China sentiment post Covid-19
  • Increasing focus on US / Europe Market, pursuing value-added products
• Morbi Town in Gujarat is the unofficial hub for the Ceramic & Tile Industry of India, housing ~800 units, with companies providing services across the value chain (white-label, exports & ready-to-sell)

Okay, thanks for the MBA class; What’s the point of all this?

• The Tiles & Ceramics Industry has been a recipient of the high commodity inflation currently underway world over, and most significantly from crude & related products
• Gas, Fuel and Kiln are major raw material requirements in production, with manufacturers having to either absorb OR pass on via price hikes (more on this below) to manage costs
• Freight costs (a huge by-product) have also significantly impacted local & national players alike, severely affecting margins in the interim

Any actions are undertaken to manage the situation? (Great qqq)

• Tile Manufacturers have undertaken price hikes of ~10% since Oct’21, however, with various product engineering challenges, the net price hike stands at ~7-8%, with the difference also being rolled back to due to elasticity of demand
• Companies have indicated a growing need to continue taking price hikes in the future to manage the situation (unless Oil takes a breather), with ~4-5% in hikes expected in the coming months (buy your tiles ASAP 🙄)
• As a rough back of the envelope calculation, every INR 20-25/cbm increase in oil prices results in a 4-5% price hike
• At a manufacturing level, companies have –
  • Increasing use of fuel include Propane, which is 10% cheaper than gas; consumption has increased from nil to 1.2 Mn CBM recently
  • Tile widths have been thinned in a manner to reduce utilisation of gas, without compromising quality via efficient product engineering (sure 🧐)
  • Inventory management, with order-led production, initiated instead of inventory, led demand predicted models being followed
  • Higher focus on value-added products, with higher ticket sizes and fatter margins helping in maintaining the sanctity

Interesting! Any player specific analysis?

• First to mind are the large national players like Kajaria and Somany Ceramics that are the undisputed leaders, who have developed a wide product variety to manage the situation and keep margin impacts limited (and in a range)
• Nonetheless, margin pressures with demand environment remaining under pressure due to price hikes are bound to impact the industry until crude relaxes for a bit, with Q4 and beyond numbers, the key to track

Around the World 🌎

• Uber kills two birds with one stone – Uber has agreed to list all New York City taxis on its app achieving two key objectives – it has eased its driver shortage (which will also likely temper high fares) and made peace with their biggest competitor. Their first city wide US partnership (similar models already exist overseas) will see an addition of ~ 14000 taxis. It is expected that passengers will pay the same fare but the taxi drivers may earn more or less (depending on the nature of the trip) than their earlier role. Competitor Lyft said it isn’t looking at taxi deals giving Uber a major first-mover advantage. Shares rose 5% in response
• Inflation pressures don’t evade Musk – SpaceX has admitted to coming under inflationary pressures which have led them to increase prices for their two major offerings – internet services and rocket launches. The company’s Starlink unit will now provide their kits at $549 (from the earlier $499) with an increase in the monthly charge to $110 from $99. Even Tesla was “seeing significant recent inflation pressure in raw materials & logistics.” according to a tweet from the Founder. The price of the Falcon Heavy rocket has also been increased to $97 million from $90 million

Corporate Developments

End in sight for Zee (finally)

• Invesco Developing Markets Fund, Z IN’s largest shareholder has decided to not pursue an extraordinary general meeting (EGM) to add six independent directors & replace the current MD & CEO
• According to Invesco, Zee’s merger with Sony Entertainment is likely going to achieve the fund’s objectives of strengthening board oversight (nice!!), reconstituting a large % of the current structure and providing long term value for shareholders
• Invesco’s pullback is contingent on the merger with Sony Pictures going through on the currently decided terms
• Shareholders were especially enthused, with the stock up ~16% during market hours, and is likely going to remain in strength (we believe)

Some background pls

• In September 2021, Invesco initiated court proceedings against Z IN, asking for a host of corporate governance changes, on the back of consistent underperformance
• Soon after this announcement, Z IN announced a merger with Sony Entertainment Pictures, creating the largest Entertainment company in the country, owning 75+ channels, 2 Video Streaming Services (Zee5 + Sony Liv), two film studios and a digital content studio

Airtel continues early repayment of deferred spectrum liabilities

• Staying true to its word, to deleverage its balance sheet as much as possible, Bharti Airtel has intimated to the exchanges early repayment of INR 88.15 Bn in spectrum related dues
• These waves were purchased in 2015, with instalments due in FY27 and FY28; however, indicative of the healthy financial position (relatively), the company has decided to continue its spree and retire this debt early
• Shareholders & the market were buoyant with the announcement, with the stock up 0.9% during market hours as well

Nice! Anything else?

• The company via its release maintained its objective of ‘financial flexibility via its capital structure’ and has in the last 4 months now repaid ~243.34 Bn of its deferred spectrum liabilities, including INR 155.2 Bn of debt in Dec’21
• These liabilities in total carried a higher interest rate of 10% and are expected to further reduce interests costs for the company going forward
• Debt repayment, subscriber growth, consistent tariff hikes and delayed 5G Capex rollout are significantly positive themes for the company (we believe)

What else caught our eye? 👀

Ola making some big ventures

• ANI Technologies Pvt Ltd (Parent to Ola Cabs) has acquired Avail Finance – a neobanking platform that provides financial services to the blue collared workforce
• While the deal is still subject to shareholder approval it is allegedly a share-swap transaction, worth $50 million
• Ola has been looking to tap into the ‘credit underserved segments’ that also includes its driver workforce and build a mobility focused financial services business

India doesn’t want to share

• India is strongly considering restricting the export of sugar by 8 million tonnes for the first time in six years with the aim of controlling domestic prices
• Being the world’s second largest exporter, the move could have a multiplier effect on global sugar prices which are already hit by low output from Brazil and high crude prices
• Indian mills have not let the opportunity go and have already contracted to export 7 million tonnes so far in 2021/22 marketing year ending on Sept. 3Edu

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Educational Topic of the day

Relative Vigor Index (RVI)

Relative Vigor Index (RVI) is a technical indicator used to establish the level of energy, or vigour within the current market.

It s an oscillator based on the concept that prices tend to close higher than they open in uptrends and close lower than they open in downtrends.