Subdued Quarter; Growth Momentum to Gather Pace
Kajaria Ceramics has reported a subdued performance in 3QFY18, despite a strong growth in volume. Reported net sales grew by 9% YoY to Rs6.6bn, while EBITDA remained largely flat at Rs1.1bn and net profit fell by 3.4% YoY to Rs531mn. Considering modest set of numbers, we have reduced Kajaria’s earnings estimates by 5% for FY19. With lower GST of 18% (reduced from 28%), Kajaria’s strong brand equity, improved distribution network, superior product-mix and increased share of organised players post GST roll-out, we expect the Company’s revenue and earnings to clock 13.2% and 17.6% CAGR, respectively through FY17-20E. We maintain our BUY recommendation on the stock with a revised Target Price of Rs838 (from Rs851 earlier).
Volume Growth Recovers on a Lower Base
Volume growth in Tiles business stood at 10% in 3QFY18 compared to 1% YoY and 5% YoY growth in 3QFY17 and 2QFY18, respectively. Owned tile sales increased by 15% YoY to Rs3.8bn, while revenues from JV tiles segment fell by 16% YoY to Rs1.5bn and outsourced tile sales increased by 40% YoY to Rs1bn. Revenues from Sanitary and Faucet ware segment grew by 15% to Rs348mn.
Higher Power & Fuel Cost Dents Margins
Gross margins fell by 140bps YoY to 61.3%. Employee cost remained largely flat at 11.9% of sales. Other expenses rose by 40bps YoY to 32.7%, mainly owing to 20% YoY rise in Power & Fuel cost to Rs1.2bn and sub-optimal capacity utilisation. Resultant EBITDA margins fell by 190bps YoY to 16.6%. Notably, Kajaria’s planned capacity additions continue to remain on track. A GVT plant with capacity of 5msm in AP is expected to be commissioned in 2HFY19. Similarly, PVT plant with capacity of 5.6msm is scheduled to be commissioned in Malutana (Rajasthan) in FY19.
Introduction of E-Way Bill to Accentuate Growth
Though GST was rolled out since July’17, we believe that trade disruptions post roll-out would lead to a muted performance in FY18. The Government has subsequently reduced GST on tiles from 28% to 18%, which augurs well for organised players in medium-term. However, lack of effective monitoring has resulted in increased non-compliance by the unorganised players. With introduction of E-Way bill, we expect increased compliance, which will make it difficult for the unorganised players to compete with large organised ones like Kajaria on price points.
Outlook & Valuation
Demonetisation, GST-led trade disruptions and subsequent reduction in GST rate created a tough operating environment for the tiles industry. However, volume growth of 10% in 3Q is encouraging, in our view. With introduction of E-Way bill, we expect increased compliance leading to higher share of organised players. Similarly lower GST rate will make it difficult for the unorganised players to compete with the established brands like Kajaria. Based on expected EPS of Rs25.8, the stock currently trades at attractive valuations of 23.8x FY20E earnings. We maintain our BUY recommendation on the stock with a revised Target Price of Rs838 (34x Dec’19 earnings).
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