The ongoing conflict in the Middle East will cause a decline in growth for the second consecutive year this fiscal for India's ₹53,000  crore ceramic industry due to a twin impact  - logistical and supply chain issues and curtailed fuel supply for production.

Export revenue may decline by 6-7% due to the Strait of Hormuz closure, which has disrupted deliveries and increased freight and insurance costs. This has not only halted exports to ME but also raised the cost of exports to other regions. Logistical challenges and supply-chain realignment have impacted exports to the Middle East.

Exports constitute 40% of the industry’s revenue, with the region accounting for 15% of ceramic exports, says an analysis by Crisil Ratings.

Further, the supply of liquefied natural gas (LNG) and propane—key raw materials that make up 35% of the cost of goods sold (COGS)—has been curtailed, forcing most ceramic plants to either shut down production or operate at significantly reduced levels. With production nearly grinding to a halt in March, domestic consumption growth is likely to slow down. The domestic market is now expected to grow just 4-5% this fiscal, slower than the earlier projection of 7-8%, says Crisil experts, analysing 40 manufacturers, accounting for about a fourth of the industry’s revenue.

“The availability of gas supplies, low-to-no demand from the ME region, and increased logistics costs for other overseas markets will directly impact production schedules. If the situation persists for a further 2-3 weeks, it may lead to longer shutdowns and substantial losses for companies, ultimately causing a 1-2% revenue decline this fiscal. Furthermore, if the situation prolongs, we may see a 7-8% monthly decline in revenue,” said Nitin Kansal, Director, Crisil Ratings.

Alongside revenue loss due to plant shutdowns and underutilisation, companies will face the burden of fixed costs (15-20% of the COGS) and higher logistics costs (3-5% of COGS) due to increase in freight cost by 45%-50% and insurance cost by 25-30% for shipments. This will lead to reduce operating profitability by 130-150 basis points (bps) to a five-year low of 9.3- 9.5% this fiscal and, if the situation persists in the first quarter of next fiscal, decline to 8.2 -8.5% in fiscal 2027.

The industry is also staring at credit issues. “Our rated companies have sufficient liquidity for 30-40 days to manage essential expenses and repayment of debt obligations despite operations remaining shut. However, if disruptions persist beyond 30-40 days, the finances of rated ceramic companies could come under strain, impacting their credit profiles,” says Says Nilesh Agarwal, Associate Director, Crisil Ratings.