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You are here : IndiaNotes >> Research & Analysis >> Companies >> Kajaria Ceramics Ltd. >> Research

Kajaria Ceramics Q3FY18: Topline to grow at a CAGR of ~13% over FY17-20E; Buy

SKP Research | 10 Feb, 2018  | Follow Author | Add to my Favourites 
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Company Background

Kajaria Ceramics Limited (Kajaria), promoted by Mr. Ashok Kajaria in 1985, is the largest player in India’s Ceramic Tiles industry, with ~10% market share, under “KAJARIA” brand with a combined manufacturing capacity of 68.4 MSM which includes its own manufacturing facilities in Uttar Pradesh & Rajasthan and its JV manufacturing partners. It also sells tiles outsourced from Morbi, Gujarat. It also manufactures sanitaryware and faucets through JV partners, which provides it strategic product extension opportunities to leverage its channel.

Investment Rationale

Topline to grow at a CAGR of ~13% over FY17-20E

- During Q3FY18, Kajaria reported consolidated net sales of Rs 6,611.6 mn, registering moderate growth of ~9% y-o-y basis on account of good volume growth after GST rate reduction (from 28% to 18%). It witnessed ~10% volume growth to 17.55 MSM vis-a-vis last year and 7% growth during 9MFY18 to 51.71 MSM.

- The contribution from owned, JVs & outsourced tiles to the total consolidated revenues were 56%, 27% and 17% respectively, during the quarter. Contributions from sanitaryware & faucet segments were Rs 347.6 mn.

- Going forward, with Kajaria’s focus on value added products, increasing contribution from GVT and PVT segment, and positive implications of GST, we expect the company to grow at a CAGR of ~13% during FY17-FY20E.

EBIDTA Margins to expand:

- EBIDTA margins during Q3FY18, declined by 200 bps y-o-y to 16.6%, mainly on account of uptick in gas prices and operation of manufacturing capacities at sub optimal level. Power & fuel cost to sales ratio increased to 18.3% during the quarter vis-à-vis 16.6 corresponding quarter last year.

- We expect industry to pick-up from Q4FY18 onwards due to structural shift towards organised players post GST implementation. With Kajaria’s focus on superior, value-added products, going forward, we expect the product mix to result in increase of margins to ~19.3% by FY20E.

Expanding capacity of PVT tiles by 5.6 MSM:

- There is an increased demand for life style consumption products, especially from aspiring mass affluent. To meet the resultant demand of ceramic tiles, Kajaria is expanding the capacity of PVT tiles at existing location at Maluthana, Rajasthan, by 5.6 MSM with the capex of ~Rs 800 mn. Plant is expected to get commissioned by FY19E. With this expansion the total capacity of the company at Maluthana will increase to 12.1 MSM, from the current 6.5 MSM. It has also increased its existing tiles capacity at Gailpur by 3.5 MSM w.e.f. Sept 2017.

- Apart from the above capacity expansions through organic route, Kajaria is also in the process of acquiring 51% stake in Floera Ceramics Pvt Ltd (a JV), which has plans to setup 5 MSM (earlier 5.7 MSM) PVT tiles facility, at Andhra Pradesh, with an investment of ~Rs 1 bn. This capacity is expected to get on-stream by September 2018. Kajaria Bathware Pvt. Ltd., a subsidiary of Kajaria with 82% stake, also commenced commercial production of faucets, in July 2017, at its state-of-the-art manufacturing facility at Gailpur, Rajasthan, with the total capacity of 1 mn pieces.


- Better economic growth, leaving more disposable income for discretionary life style consumption, rapid urbanisation, changing customer preference towards quality branded products particularly amongst the growing mass affluent, increasing nuclear families and Governments’ thrust on “Housing for All” coupled with strong brand equity and recall and distribution network, augers well for the company. It has de-risked its growth strategy with an asset light business model, adopting a joint venture route.

- We have valued the stock on the basis of P/E - method of relative valuation - of 30x of FY20E earnings. In view of the sharp correction in the share price to Rs 615 now, after a stupendous rally to a life time high of Rs 788 recently, we recommend a BUY on the stock with a target price of Rs 750/- (~23% upside) in 18 months.

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Disclaimer: The author has taken due care and caution to compile and analyse the data. The opinions expressed above are only the views of the author, and not a recommendation to buy or sell. Neither the author nor accept any liability whatsoever arising from the use of any of the above contents.

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