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MOSL: THE BIG LEAP (Volume 2.1) | Tiles-Huge opportunity, but challenges too-Lower GST rates - the key catalyst

​THE BIG LEAP (Volume 2.1) | Tiles: Huge opportunity, but challenges too; Lower GST rates - the key catalyst

India is set to see a major overhaul in the trade structure in favor of the organized sector (Refer our inaugural edition of "The Big Leap" series). Although the government's initiatives (demonetization, GST, etc.) are in the right direction, we continue believing that the shift will be prompt for some sectors, gradual for others and may remain challenging for a few.

In this edition, we will focus on the INR260b Indian tiles industry. We chose to look at the tiles industry from the trade shift perspective, given that it is highly fragmented and has presence of numerous unorganized players (accounting for 51% of value and 60% of volume of the industry). Our ground research and channel checks suggest that the changes in administrative procedures under the GST using technology platform are unlikely to accelerate the shift trade toward formal trade in the tiles sector over the medium term. However, a reduction in indirect taxes (from the current ~25-28% to 18%) could be a key catalyst to accelerate shift toward formal trade.

Organized market share rising…opportunity size still huge

• ​Tiles industry remains highly fragmented. Over the years, high indirect tax incidence, liberal tax administration/monitoring and a short B2C supply chain have led the industry to remain dominated by unorganized players, which account for 51% of value and 60% of volume for the industry.
  
• However, we note that rising per capita income, aspirational buying, brand awareness and product innovation have led to a gradual increase in value market share of organized players from 40% in FY08 to 49% now. Furthermore, the outsourcing model has helped organized players to ramp-up their businesses faster with minimal investments.