Kajaria Ceramics Ltd
Ceramics / Marble / Granite / Sanitaryware
Stock Info
Shareholding Pattern
Price performance
Indexed Stock Performance
Laying a ‘premium’ foundation for business growth
Company Profile
Kajaria Ceramics Limited (KCL) was incorporated in 1985 as a manufacturer of floor and wall tiles by Mr. Ashok Kajaria in technical collaboration with Todagres SA, Spain. Kajaria Ceramics is India’s largest manufacturer of ceramic/vitrified tiles and the world’s eighth largest tile manufacturer. At present, it manufactures, outsources and trades ceramic and vitrified tiles under the brand name, Kajaria. In addition, KCL sells sanitaryware marketed under the Kerovit brand. The company has an annual capacity of 84.45 mn. sq. meters presently, distributed across eight plants - one at Secunderabad in Uttar Pradesh, one at Gailpur, one at Malootana in Rajasthan, two at Morbi in Gujarat, one at Vijayawada, one at Srikalahasti in Andhra Pradesh and one at Balanagar in Telangana.
Investment Arguments
Focus on increasing distribution network and geographical reach
KJC has 1,840 operative dealers (net addition of 140 dealers in FY23) v/s 750 dealers in FY12 (CAGR of 7.1% over FY12-23), which help it generate higher volumes. The company targets to increase the dealer count by 450 in the next three years (150 dealers every year). KJC has created 80 exclusive showrooms across the country (50 showrooms opened in one year) to improve visibility. It commands a pricing premium of 5-6% over peers, which is reflected in superior margins (OPM of 16.5% for KJC, 10.9% for SOMC, and 10.6% for H&R Johnson in FY22).
Sustained improvement in market share
KCL is the largest player in the domestic tiles industry with a track record of over three decades. In terms of geographies, North India is the biggest market for the company accounting for 40% of its revenues, followed by the South (30-35%), West (25-30%) and East (10%). Moreover, KCL has an established presence across both the retail and institutional segments, with retail constituting around 70-80% of the revenues. It has gained market share steadily underpinned by superior distribution network, improved geographical reach and premium/new tile launches.
Strong demand
Management mentioned that demand will primarily come from semi-urban towns; Morbi is likely to continue focusing on exports; mgmt expects >25% YoY growth in FY24. KJC also expects to keep expanding its value-added portfolio in the Tiles segment, and achieve stronger 30%+ growth in Non-tile segments.
Capacity expansions to augment future growth
KJC expanded its tiles manufacturing capacity by 16% to 81.55 msm during FY23 (ex-Vennar Ceramics). It is likely to increase capacity further to 88.5msm by FY25E. KJC diversified its presence in the Bathware segment (sanitaryware in FY16 and faucets in FY15) and it turned profitable from FY21. The company is increasing faucet capacity by 0.6m pieces (to 1.6m pieces) and sanitaryware capacity by 0.6m pieces (to 1.35m pieces), which will augment future growth.
Near-term margins could surprise positively
Margins for FY23 were at 13.5% (down 300bps YoY). For FY24, management has guided to 14-16% margins. On fuel costs, KJC is likely to save Rs1.5bn YoY in FY24 based on current prices. KJC’s profitability has got adversely impacted from 2QFY22 due to higher gas prices; however; gas prices cooled off from its peak in 2HFY23 and we expect a gradual recovery in OPM going forward.
Q4FY23 Financial Performance
Kajaria Ceramics Limited reported strong a beat on net earnings for Q4FY2023 led by higher than expected OPMs (driven by lower power & fuel costs). The Consolidated revenues grew by 9.4% y-o-y at Rs. 1205 crore (marginally higher than estimates) led by tile volume growth of 9.1% y-o-y and blended tile realization growth of 1% y-o-y. Bathware/Adhesives segment revenues grew by 9%/87% y-o-y. Consolidated OPM surprised at 14.6% (down 46 bps y-o-y), mainly led by lower gas prices. Consolidated EBITDA grew by 6.0% YoY to Rs.176 cr. Margins contracted by 50bps YoY to 14.6%, while improved 240bps QoQ. Consequently, consolidated net profit grew by 17.3% y-o-y aided by higher revenues.
Management has guided to 13-15% volume growth /14-16% revenue growth and 14-16% margins.
Key Risks & concerns
- Increase in crude oil prices followed by higher gas prices could materially impact company’s margins and profitability of the company.
- Pressure on pan-India residential housing market leading to overall lower volume offtake for the industry.
- Intense competition and cyclicality in real estate industry - Presence of a few large, organised players and numerous mid-to small-sized players, along with high pace of capacity addition, in the recent past, has intensified competition in the tiles industry. Moreover, the real estate industry remains the major end-user of tiles and hence, KCL’s revenues and cash flows remain vulnerable to the cyclicality in the end-user industry.
Outlook & Valuation
Kajaria is expected to benefit from healthy domestic demand and rising exports in 2-3 years. Further, decline in gas prices provide OPM expansion tailwind in the medium term. The company’s strong net cash surplus and healthy cash flow generation would aid in capacity expansions without stretching balance sheet. Further, we are optimistic on the company for long term given 1) largest player positioning in domestic ceramic and vitrified tiles market (~9.3% share in overall tiles market), 2) focus on brand building (advertising spends at 3% sales), 3) expanding distribution network (1,840 active dealers in FY23), 4) reduction in fuel expenses with gas price correction & alternate fuel uses, and 5) entry in Nepal market.
At CMP of Rs.1420, the stock is trading at 37x FY25E (EPS – Rs.38) which appears reasonable given favourable industry business dynamics.
Hence, we suggest to BUY the stock.