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  • Stock Recommendation | KAJARIA CERAMICS LTD – BUY – Target Price : 500

    Publish date: OCTOBER 26, 2018

    Kajaria Ceramics results were in line with our estimates led by healthy volume growth and sequential improvement in average realization. Margins decline on YoY basis was expected due to sharp hike in gas prices. Going ahead, we expect volumes to start witnessing traction on improved demand. High gas prices may continue to impact margins but benefits to margins will come from improvement in JV performance. Company had offloaded its stake in its subsidiary Soriso Ceramics for Rs 110 mn and has booked an exceptional loss of Rs 34 mn during the quarter.


    Revenue growth of 8.1% YoY was led largely by 12.2% YoY volume growth. Realizations from owned plants and outsourced facilities have declined only marginally which indicates that prices have largely bottomed out. However, JV plant realizations have declined sharply. Operating margins stood at 15% vs 18.2% same period last year due to higher gas prices. Net profit performance on YoY basis was impacted by fall in margins but stood in line with our estimates.


    Stock is currently trading at valuations of 24x and 20.2x P/E on FY19 and FY20 estimates respectively. We maintain our estimates and target price of Rs 500 on FY20 estimates. We believe that though the shift from unorganized to organized players post GST and e-way bill implementation has not happened to a large extent so far, but with improved compliance towards e-way bill implementation post elections, organized players like Kajaria Ceramics are likely to benefit with market leading position and wide offering of products. We remain positive on the company and maintain BUY.

    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. Key risks to our estimates and recommendation would come from further hike in gas prices.


    Revenue growth of 8.1% YoY was led largely by 12.2% YoY volume growth. Company sells nearly 12% of its volumes in Kerala and hence the impact of floods is also reflected in the performance. Volume growth is likely to be better in coming quarters.

    Sequentially, realizations have started improving. Realizations from owned plants and outsourced facilities have declined only marginally YoY which indicates that prices have largely bottomed out. However, JV plant realizations have declined sharply. Average realization for Q2FY19 stood at Rs 371 per sq m, down by 3.7% YoY but up by 1.2% QoQ. We believe that sequential improvement in prices also corroborates the fact that prices have also largely bottomed out with most players operating at break-even level in the GVT category.

    Volume details - Volumes were up by 12.2% YoY largely led by volume improvement from owned plants and JV plants. Sequentially, volumes were up by 9% with improvement being witnessed across all plants.

    Revenues from own production improved by 12% YoY and was led by volume gains of 14% YoY.

    Revenues from JVs improved by 1% YoY as volume gains were offset by pricing decline. Utilization levels are improving from the JV plants now.

    Revenues from outsourced segment has gone down by 4% YoY due to lower volumes as compared to own plants.

    Sanitaryware and faucets division has reported 32% YoY improvement in revenues. Volumes are likely to improve going forward with improved demand. Kajaria Sanitaryware has also increased its capacity at its existing location from 5.4 lacs pieces per annum to 6 lacs pieces per annum with ability to produce more value added products.


    The expansion plan of 5mn sq m in AP is progressing on time and is expected to commission by Q1FY20. Kajaria ceramics plans to reach 100 mn sq m by 2021 through incremental additions and outsourcing. It can be through brown field or green field expansion in North while in south and western region, they can have a JV. It expects a capex of Rs 1.5 bn in FY19 and a branding spend Rs 1.1-1.15 bn in FY19.

    We maintain our estimates and expect volumes to grow at a CAGR of 11.2% and revenues to grow at a CAGR of 10.6% between FY18-20.


    Operating margins for the quarter stood at 15% vs 18.2% for Q2FY18. Margins were impacted due to higher gas prices as well as pressure on realizations. We maintain our estimates and expect margins of 15%/16% for FY19/20 respectively. Improved product mix and improvement in JV performance is likely to aid margins going forward despite higher gas prices.


    Net profit performance on YoY basis was impacted by fall in margins but boosted by lower interest expense. Company has turned net cash positive during the quarter. Loss making JVs have aided the operating profits during Q2FY19 and company expects to make profits in these JV’s going forward. We maintain our estimates and expect net profits to grow at a CAGR of 10.1% between FY18-20.


    Stock is currently trading at valuations of 24x and 20.2x P/E on FY19 and FY20 estimates respectively. We maintain our estimates and target price of Rs 500 based on 28x FY20 estimates. We believe that though the shift from unorganized to organized players post GST and e-way bill implementation has not happened to a large extent so far, but with improved compliance towards e-way bill implementation post elections, organized players like Kajaria Ceramics are likely to benefit with market leading position and wide offering of products. We remain positive on the company and maintain BUY.

    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. Key risks to our estimates and recommendation would come from further hike in gas prices.


    Kajaria Ceramics is the largest manufacturer of ceramic/vitrified tiles in India and the 9th largest in the world. It has an annual capacity of 68 mn. sq. meters presently, distributed across eight plants - one in Sikandrabad (UP), one in Gailpur (Rajasthan), one in Malutana (Rajasthan), four in Morbi (Gujarat) and one in Vijaywada (AP).


    BUY - We expect the stock to deliver more than 12% returns over the next 12 months
    ACCUMULATE - We expect the stock to deliver 5% - 12% returns over the next 12 months
    REDUCE - We expect the stock to deliver 0% - 5% returns over the next 12 months
    SELL - We expect the stock to deliver negative returns over the next 12 months
    NR - Not Rated. Kotak Securities is not assigning any rating or price target to the stock. The report has been prepared for information purposes only.
    SUBSCRIBE - We advise investor to subscribe to the IPO.
    RS - Rating Suspended. Kotak Securities has suspended the investment rating and price target for this stock, either because there is not a Sufficient fundamental basis for determining, or there are legal, regulatory or policy constraints around publishing, an investment rating or target. The previous investment rating and price target, if any, are no longer in effect for this stock and should not be relied upon.
    NA - Not Available or Not Applicable. The information is not available for display or is not applicable
    NM - Not Meaningful. The information is not meaningful and is therefore excluded.
    NOTE - Our target prices are with a 12-month perspective. Returns stated in the rating scale are our internal benchmark.


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