Import substitution boosts profitability for Royal Ceramics

New players expected to enter the lucrative industry with more than Rs. 15 billion worth investments

by Sanath Nanayakkare

According to a valuation note released by First Capital Research, Royal Ceramics (RCL group), the dominant local player in tile and sanitaryware products has turned out be a key beneficiary following the import restrictions employed by the government, which resulted in a complete import ban on all tile and sanitaryware products.

As a result, RCL’s pre-Covid 52% market share had surged across all segments to 75% in floor tiles and 82% in wall tiles.

RCL earnings growth had surged over 100% to reach Rs. 2 bn for the third quarter of financial year 2021 (3QFY21), compared to the Rs. 1 bn in 3QFY20 with 9MFY21 earnings expanding by 72% to Rs. 3.3bn.

Profitability was mainly supported by the surge in gross profit margins, reduction in finance cost and increased contribution from Group\s associate profits, FC Research stated.

“RCL’s gross profit margins for the quarter was enlarged by 236bpsYoY to 39% amidst strong growth in volume and economies of scale supported by higher capacity utilization nearing 100%.”

“Meanwhile, RCL’s EBIT (operating earnings over operating sales margin). and net profit margins jumped 424bps and 691bps respectively”.

“RCL plans to increase tile and bath ware capacity by 10% expansion in the existing plants while also building a new plant in order to further expand overall capacity by 20% during FY22E. New tile manufacturing plant is expected to target more price sensitive segment of the market,” the note added.

“The ceramic industry is expecting more than Rs. 15 bn in new investments, expanding industry production capacity with potential new players likely to enter the lucrative industry increasing competition over the next few years,”

“We expect RCL to maintain profitability of Rs. 4.5bn-5.0 bn in the next few years,” FC Research said.