Good times ahead: Ceramic hub prepares to come of age

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Ahead of the July 1 deadline for GST implementation, Financial Chronicle sent Arun Kejriwal, founder, Kejriwal Research and Investment Services, to Morbi, the capital of India’s ceramic industry to report on how it is preparing for the changeover. This is what he saw

Morbi is a small town located 60 km from Rajkot and about 200 km from Ahmedabad in Gujarat. The sea is about 35 km away and is well connected by national and state highways. What is interesting about this small town which has a population of about six lakh people is that it is the cluster town for ceramics and sanitary ware of the country.

Morbi has over 900 units manufacturing ceramic wall and floor tiles, quartz stone, ceramic vitrified tiles, parking vitrified tiles, sanitary ware and designer tiles. Different units make different products. This industry has a turnover in excess of Rs 30,000 crore and is roughly about 80-82 per cent of the industry whether organised or unorganised. In terms of number of units this is about 95 per cent of the total units in the country. With such a large domination to expect that this industry would not adjust to the need of the hour is just not imaginable.

Till today the majority of units in Morbi were doing business in an unorganised manner and their dealings were by and large in cash. They bought raw materials in cash and sold goods in cash.

With the introduction of GST things, there would be a drastic change in their way of doing business. In case, they resist change or fail to change, it is possible that their market presence will diminish.

The reason is simple. It would be easy to monitor the movement of trucks and see where they unload their goods. Secondly, there are a large number of chemicals which are manufactured by a mere handful of people. It becomes easy to monitor their end customers. These units will not be willing to become a part of the unorganised sector. Similarly, there are a large number of customers using ceramic products who would require proper invoices with GST paid to claim input credit on their end sales – for example, builders.

Compliance would therefore be a way of life going forward. There is an association of ceramic manufacturers in Morbi known as ‘Morbi Ceramic Association’. Their president is K.G. Kundariya. He gave some very useful insights into the industry and why going forward, it would be mandatory to become transparent and organised. He said that expenses on electricity, gas and municipal services have to be paid by cheque. Almost all units have taken loans, which have to be serviced with interest and repayment by cheque. Unless there is income by cheque, how will these loans be serviced?

He said that the association has contributed Rs 4.5 crore to put the entire city under CCTV surveillance with the money coming from it’s over 900 members.

The coming of age of the association was the exhibition held on the riverfront Ahmedabad in November 2016 called ‘Vibrant Ceramic’. It was a great success. The association is now represented in all international trade fairs and is becoming a point of recognition for quality and reliability. The current year would see a ceramic exhibition held over three days in mid-November in Gandhinagar.

Kundariya said that Morbi exports 400 containers of ceramic tiles of various types each day to a large number of countries. All exports are through letters of credit, that is through banks.

The imposition of anti dumping duty on China has made Morbi ceramics cost effective. India has been able to penetrate the markets where antidumping duty has been imposed on China by other countries. The Indian quality is easily acceptable and Morbi, with its state-of-the-art machinery, and significantly lower overheads is able to make deeper inroads.

About the prospects of Morbi going forward, Kundariya said, “The unique and abundant natural resources of Rajasthan coupled with the entrepreneurial skill sets of Morbi have helped in creating a great cluster of ceramics. This cluster has a capacity of 1,800 million sq m per annum which would in the coming 8-10 years increase to 5,000-6,000 million sq m and this should be no surprise to anyone. Such is the power of cluster development. In this industry growth worldwide has come through this strategy, whether it be Spain, Italy or China.”

It is a fact that at any one time there are 20-25 new units under construction and in every year there are more than 15-25 units that commence production. With such growth, their coming into the mainstream is imminent. Echoing these thoughts is Himanshu Shah, head of finance at Asian Granito, a listed player on the bourses. Shah said, “If they (Morbi players) change, it is for the good of the industry as they are too big to be ignored. The earlier they do so, the better will it be for the industry and its future growth.”

Players from Morbi are committed to change and be a part of the mainstream when GST is introduced. They do not want to be left out when the country is transforming and the triple objective of housing for all, Swacch Bharat and affordable housing play out under the present government. Are there any concerns? Yes. The rate of GST of 28 per cent is on the higher side and it is being taxed with luxury goods. Ceramics is not a luxury item but a necessity. This rate is worrisome and some who did not want to be named felt that some amount of evasion would happen because of this rate. The second concern is that the amount of time given to a transporter to complete a particular distance of say 500 km or 1,000 km is too long and unscrupulous dealers or manufacturers and transporters could complete multiple trips in that time. This would defeat the checks and balances in the system of detecting GST evasion. They want this time to be cut. They feel that for the scheme to be a success, the administration must ensure that corruption at their end does not take place.

What does all of this mean for the industry and the listed players in the market? The industry will continue to grow by leaps and bounds. With the so-called unorganised players coming into the mainstream, competition would increase. However, with the exports opportunity and the government initiatives on housing for all, Swacch Bharat and affordable housing, there is enough for all. The concept of JVs with Morbi players is likely to continue with revised terms in favour of Morbi players. The cost advantage that they enjoy and their risk taking abilities cannot be ignored.

The good times are about to begin and would be there for a long time to come.

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