Gujarat’s Morbi ceramic cluster, India's largest tile manufacturing hub, will be closed for a month starting August following a demand slowdown, Morbi Association has said.

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Demand has dropped domestically as well as in export markets. However, sources have told CNBC-TV18 that the shutdown is also likely because of high gas prices and inadequate working capital.

Shares of Gujarat Gas were in focus on Wednesday as the natural gas distribution company’s sales are likely to be affected next month due to the shutdown of the Morbi cluster, which accounts for 50 percent of Gujarat Gas’ PNG demand.

Prices of spot LNG, which contribute to around 30 percent of total sourcing for Gujarat Gas, are also up to around $35 per MMBtu, which compares to the average prices in the calendar year 2022 at around $19 per barrel.

Gujarat Gas, is facing a double whammy as its volumes are going down and at the same time gas prices are going up.

Gujarat Gas' stock has declined around 27 percent in 2022 (year-to-date).

Earlier this month, Nirmal Bang in a note pointed out for every 5 percent rise in gas costs impacts the gas company’s earnings by around 32.4 percent. “For the ceramic industry, while we do expect growth in volume to continue in 1QFY23, we expect the sharp increase in natural gas and other RM prices to lead to pressure on operating margins,” it said on July 7.

The brokerage had given a buy rating to tiles firm Kajaria Ceramics with a target price of Rs 1,129.

It expects the company's EBITDA margin, a key measure of profitability determining a company's profit as a percentage of its sales before the implications of components such as taxes, to decline to 14.2 percent in the April to June 2022 period. This compares to the EBITDA margin of 14.3 the corresponding quarter of the previous fiscal and 15.1 percent in the last quarter.

According to Nirmal Bang, the decline in EBITDA margins is due to a sharp increase in gas prices (from Rs36.1/scm in 4QFY22 to Rs40.06/scm in 1QFY23), freight costs and zirconium cost.

Net profit is expected to increase by 132 percent on a year-on-year basis but it will decline by a little more than a percent to Rs 962 million when compared with the previous quarter, the brokerage said.

It, however, added that consolidation of unorganised players in Morbi and expansion by Kajaria in tier 2/3 cities should help it to increase market share gradually (from the current level of 10%) in the medium term.

Meanwhile, in June, domestic brokerage firm PhillipCapital organised a tiles industry visit to Ahmedabad and Morbi, following which it said prices would soften or remain static in the near term, as weakness in exports is leading to volumes shifting to the domestic market.

Meanwhile, the domestic market industry is seeing softness in retail volumes and in Morbi, there is an increase in working capital due to pushing of inventory (to 90-120 days from 75 days), it said.

PhillipCapital added that Morbi players will shift to LPG/propane from natural gas, mainly because of price arbitrage. They (tile companies in Morbi) have not added much new capacity as their return ratios have narrowed and payback periods have increased (major capacity addition in premium tiles). Smaller players are seeing cost pressure, resulting in shutdowns, the brokerage said.