The Quarter Both Tile Leaders Paid to Fix Their Own Channel - Kajaria and Somany's FY26 Destocking

The number is specific enough to warrant attention: 74 basis points. That is how much Kajaria Ceramics’ EBITDA margin fell sequentially in Q3 FY26, landing at 17.20%. Not a significant deterioration in absolute terms. But the reason the company gave for it was notable. Not gas prices. Not demand softness. Discounts given to clear excess SKUs and streamline an accumulated channel inventory problem.

In the same period, Somany Ceramics was doing the same thing with different language. Management described a focus on selling stock older than 180 days, reducing outsourced vendor inventory, and making a deliberate choice in March 2026 to move vendor stock ahead of price increases rather than push fresh material into the channel. Working capital improved. Receivable days fell from 51 to 40. Two hundred net dealer additions were made, taking the total to approximately 3,100. But full-year sales grew only 5%, and the Q4 growth of 6% was the consequence of a channel that had been deliberately reset rather than pushed.

In FY26, India’s two largest branded tile manufacturers both spent a quarter or more deliberately clearing accumulated channel inventory — and both said so publicly. Kajaria called it SKU liquidation and dealer unification. Somany called it selling 180-day stock. Different words, same exercise. The interesting question is not that they did it. The more instructive question is what caused the accumulation in the first place — and what the episode reveals about how tile channel structures are designed and measured.

What Kajaria Actually Said and Did

Kajaria announced its Q3 FY26 results on 30 January 2026, with the earnings call transcript filed with BSE three days later. The numbers told a story of operational efficiency alongside a quietly uncomfortable sequential margin compression. Consolidated revenue was flat at ₹1,168 crore year on year. EBITDA margin improved 442 basis points year on year to 17.20% — a genuine achievement given the prior year’s challenging comparable. But the sequential movement told the channel story: margin fell 74 basis points from the preceding quarter, and working capital days increased to 64.

The company’s own investor presentation is unambiguous about the cause. The sequential EBITDA decline is attributed to lower sales realisation resulting from discounts given during the quarter — the discounting required to move slow-moving and aged product out of the channel.

Chairman Ashok Kajaria’s language on the earnings call was unusually direct. Management described dealer churning during the unification process — tail-end dealers exiting the network, new dealers being onboarded — as a source of near-term disruption. SKU count had increased over the prior years to a level that was creating plant efficiency problems and dead inventory in dealer godowns. The rationalisation exercise involved giving discounts to move slow-moving and aged product, and that discounting is precisely what compressed the sequential margin.

The scope of the dealer unification effort was significant. As Arihant Capital’s initiating coverage report on Kajaria documents, the company was integrating separate ceramic and GVT dealer networks — historically managed as distinct channel relationships — into a unified structure that would enable cross-selling across product categories. This unification was 70 to 75% complete by Q3 FY26, with full completion expected within Q4. Pricing and discount structures were simultaneously unified across ceramic, GVT, and PVT segments, effective 1 January 2026. A ceramic manufacturing line at the Gailpur plant was converted to GVT production, aligning installed capacity with the product direction the unified channel would promote.

The Arihant Capital report also describes a broader “Kajaria 2.0” transformation initiative — a strategic realignment focused on simplifying the channel and improving the coherence of the dealer relationship. The SKU rationalisation and dealer unification are both expressions of that programme. They were the right decisions. They were also decisions that cost 74 basis points of sequential margin in the quarter they were executed.

The forward result validates the approach. Q1 FY27 consolidated revenue grew 20.43% to ₹1,328 crore, and EBITDA margin expanded to 19.60% from 16.72% a year earlier. Working capital improved by five days to 46 days as of 30 June 2026. The channel reset that cost margin in Q3 FY26 created the conditions for the acceleration that followed.

One number in that Q1 FY27 result deserves attention, because it complicates the celebration: volume growth was 6%. Revenue grew 20% on 6% volume. The balance came from price. This is consistent with the wider pattern documented across the Q1 FY27 tile results season — the organised sector’s recovery has been led by realisation rather than volume.

What Somany Did in Parallel

Somany’s Q4 FY26 earnings call, held on 15 May 2026, contained commentary that maps closely to what Kajaria had described three months earlier — though framed in operational rather than strategic terms.

When asked about the improvement in working capital and receivable days — receivables fell from 51 days to 40 days — CEO Abhishek Somany explained that the improvement was partly attributable to reduced stock from outsourced vendor relationships and a deliberate effort to sell stock older than 180 days. He described March 2026 specifically as a month focused on moving vendor stock ahead of anticipated price increases, which resulted in less fresh material being pushed into the channel in that period.

This is, by definition, an acknowledgement of aged channel inventory. Stock that is 180 days old did not appear there accidentally. It arrived through dispatches that outpaced secondary sales velocity at some point in the prior two quarters.

Somany also flagged dealer destocking as a forward risk for FY27. When a company’s management names dealer destocking as a risk to the next financial year’s volume growth, they are acknowledging that the channel is still working through inventory — that primary billing in FY27 may be suppressed not by demand weakness but by dealers managing down stock accumulated in FY26. Capacity utilisation moved from 80% to 79% for the full year, flat in a period when organised players would normally expect to expand utilisation on the back of steady real estate demand.

The full-year result — 5% revenue growth for FY26, Q4 at 6% — reflects a company that chose channel health over headline growth. The Somany Max unit, which had posted a loss of approximately ₹9 crore in the corresponding quarter a year earlier, achieved breakeven in Q4 FY26. Net 200 dealer additions, bringing the total to approximately 3,100, represent distribution investment made during a period of deliberate channel reset rather than volume push.

How the Inventory Accumulates

Understanding what caused the accumulation matters more than the fact of it, because the structural mechanics that created it are present in every organised tile manufacturer’s distribution architecture to some degree.

The first driver is SKU proliferation as a competitive response. The Morbi cluster — with somewhere between 800 and 1,800 manufacturing units depending on which industry estimate is used — can introduce new formats, finishes, and sizes with a speed that organised players cannot match through their own production alone. Design exclusivity, the window during which an organised brand’s new collection is genuinely differentiated from what a Morbi trader can replicate, has shortened as digital printing has commoditised surface patterns. The organised player’s response is to keep launching. Every new collection needs channel presence to sell. Presence means stock in dealer godowns. Over two to three launch cycles, the SKU count builds and inventory per dealer expands. Some SKUs sell through quickly. Others move slowly. The ones that move slowly become the aged inventory that eventually requires a discount to clear.

The second driver is the fundamental characteristic of tile as a product category: it does not force its own liquidation. In FMCG, a product approaching expiry creates urgency — the dealer has a commercial reason to move stock quickly. A dealer holding 180-day-old GVT faces no equivalent pressure. The tile sits in a box in the godown, taking up space and tying up working capital, but it does not expire, does not deteriorate visibly, and there is no contractual mechanism that forces its sale. The dealer’s rational response, when cash is needed, is to discount at the counter rather than reorder at full price. Margin compression happens at the retail level, largely invisible to the manufacturer, until the pattern surfaces in secondary sales data or is flagged by an RSM who notices a dealer’s unwillingness to take fresh stock.

The third driver is the measurement gap between primary and secondary sales. Primary sales — what the manufacturer dispatches to the dealer — is visible immediately in company financials. It generates an invoice, records a revenue line, and contributes to the RSM’s monthly dispatch target. Secondary sales — what the dealer actually sells through to contractors, homeowners, and sub-dealers — sits in dealer records and is far harder to monitor. As we have examined in our analysis of the gap between reported and actual sell-through, this is a persistent structural problem across the tile trade. When secondary sales are genuinely slow, that slowness often does not register at the manufacturer level until the dealer starts resisting new dispatches — by which point 60 to 90 days of accumulation has already happened.

The fourth driver is the field incentive structure. Targets in the tile industry are typically measured on dispatch — on primary billing. The RSM who hits their monthly dispatch target has fulfilled their measured objective, regardless of whether the dealer receiving that dispatch has the secondary sales velocity to absorb it. When the RSM’s target and the dealer’s capital capacity diverge, the outcome is a scheme that temporarily overcomes the dealer’s resistance and adds to an accumulation problem that surfaces two quarters later as aged inventory. The early signals of dealer disengagement often begin here — with a dealer who has stopped being able to absorb what the territory plan assumes he can.

What Both Companies Chose to Do About It

The constructive frame for this episode is not that Kajaria and Somany accumulated channel inventory — that is a common industry dynamic, not a company-specific failure. The frame that matters is what both companies chose to do when they identified it.

Kajaria’s response was structural. Cut the SKU count aggressively to eliminate slow-moving and dead inventory from the active range. Unify the ceramic and GVT dealer networks to enable cross-selling and reduce the number of separate dealer relationships to manage. Standardise pricing and discount structures across all three product segments so the dealer’s commercial relationship with the company is simpler and more transparent. These are not tactical fixes. They are operating model changes that, once made, reduce the probability of the same accumulation recurring.

Somany’s response was operational. Deliberately sell down 180-day stock rather than allowing it to continue ageing. Reduce the outsourced vendor inventory that had been building through JV and contract manufacturing relationships. Exercise discipline in March 2026 by holding back dispatch rather than pushing material into a channel managing a price increase transition. These are choices that prioritise channel health over monthly billing — the kind of decision that looks suboptimal in the quarter it happens and creates the conditions for better performance in the quarters that follow.

Both took a visible margin or volume hit in the period of the correction. Both were subsequently vindicated. Kajaria’s Q1 FY27 delivered 20% revenue growth at a 19.60% EBITDA margin. Somany’s Q1 FY27 delivered 24% value growth with EBITDA margin expanding from 8.0% to 11.6%, supported by capacity utilisation rising from 72% to 83%.

But the Somany number carries the same caveat as Kajaria’s: volume grew approximately 3% while value grew 24%. Both companies recovered on realisation, not on volume. The channel reset removed a constraint. It did not, on its own, generate demand.

What This Means for RSMs and Dealers Now

The FY26 episode at India’s two largest tile manufacturers is a case study in channel dynamics that applies at every level of the distribution chain.

For RSMs, the lesson is about sequence. A dealer who is resisting the next scheme, who seems less engaged than usual, who is taking longer to place fresh orders, may not be difficult or disloyal. They may be sitting on stock from two schemes ago that has not moved. The diagnostic question before pitching any new scheme is: what is the ageing profile of this dealer’s current inventory? A scheme sold into an overstocked dealer does not generate secondary sales. It generates counter discounting within 60 days, which compresses the dealer’s margin on product already in his godown and deepens the accumulation the scheme was meant to solve. This belongs in the standard dealer review conversation, not as an afterthought when resistance appears.

For dealers, inventory ageing is a number worth tracking formally — not as a gut feel but as a specific metric. Both Kajaria and Somany now measure channel inventory and working capital with the discipline of listed companies managing investor expectations. A dealer who can demonstrate clean 90-day inventory turns has a negotiating position that a dealer with 180-day stock does not. The dealer who knows which SKUs move in 15 days, which sit at 45, and which have crossed 90 without moving can have a substantively different conversation about stocking depth, scheme structure, and dispatch timing.

For sales leadership, the episode is a case study in why dispatch targets alone are an incomplete measure of channel health. Both market leaders have now restructured around cleaner channel visibility — unified dealer networks, rationalised SKUs, and working capital metrics that hold management accountable for channel absorption rather than primary billing alone. The question for every other manufacturer is whether they can see their own secondary movement clearly enough to catch the next accumulation before it requires a margin-negative quarter to resolve.

Kajaria gave away 74 basis points to fix a problem building quietly inside its own channel. Somany sold stock that was six months old rather than pretend it was not there. Both were right to do it, and both are performing better for having done it. The lesson is not that accumulation is inevitable. It is that the manufacturers who build the measurement infrastructure to see it early are the ones who avoid paying for the same lesson twice.

The Quarter Both Tile Leaders Paid to Fix Their Own Channel – Kajaria and Somany’s FY26 Destocking