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  • Stock Recommendation: Kajaria Ceramics Ltd – BUY – TP Rs.551

    Publish Date: 25th July, 2018

    Result Update:

    Kajaria Ceramics revenues were in line with our estimates but lower than expected margins led to net profits coming below our estimates. Results were impacted by higher gas prices resulting in higher power and fuel cost along with pressure on realizations. Volumes are likely to pick up and we believe that further cost pressures are likely to ease out going forward. Loss making JVs are expected to make profits going forward. Company has also decided to offload its stake in its subsidiary Soriso Ceramics for Rs 110 mn.

    Key Highlights

    Revenue growth of 4.7% YoY was led largely by volume growth as realizations remained largely under pressure. Operating margins stood at 14.7% vs 16.5% same period last year due to higher gas prices. Net profit performance on YoY basis was impacted by fall in margins and stood below our estimates.

    Valuation & outlook

    • Stock is currently trading at valuations of 26x and 22x on FY19 and FY20 estimates respectively. We revise our estimates to factor in slightly lower realizations and higher costs while keeping the volume growth intact. We reduce our forward valuation multiples downwards to 28x vs 30x earlier to factor in delays in percolation of GST and e-way bill implementation benefits for the organized players. The competition has increased in the value added products too which is impacting realizations of these players. We expect the sector to witness these challenges further for 1-2 quarters more and once complete compliance begins towards e-way bill, then organized players will start witnessing increased volumes and improved realizations.
    • We arrive at a revised price target of Rs 551 based on 28x FY20 estimated earnings (Rs 648 earlier). We believe that organized players like Kajaria Ceramics are likely to benefit from demand improvement with market leading position and wide offering of products. We remain positive on the company and maintain BUY.

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