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Soft Performance despite Healthy Sales Volume
Kajaria Ceramics (KJC) has reported a dismal performance in4QFY19 despite higher-thanexpected volume and increased power and fuel cost. While revenue broadly came in-line with our estimate at Rs8.2bn (~9% YoY and ~8% QoQ), EBITDA grew by mere 2% YoY to Rs1.23bn vs. our estimate of Rs1.4bn and EBITDA margin contracted by 93bps YoY to 15.1%. Sales volume grew by a strong 11% YoY to 22.5msm, while average realisation declined by 2.5% YoY and 3% QoQ to Rs339/sm. Operating cost/tonne broadly stood flat sequentially (up 1.5% YoY) mainly led by rise in RM cost. Net profit stood at Rs669mn (-4% YoY and +1.5% QoQ) vs. our estimate of Rs820mn mainly due to dismal operating performance. Moderate improvement in working capital cycle during the quarter is heartening, in our view. However, factoring in soft subdued realisation, we cut our earnings estimates by ~10%/~3% for FY20E/FY21E despite factoring in higher volume. Further, we do not envisage any re-rating for the stock, as its return ratio is unlikely to revert to the previous peak. Hence, considering limited upside post recent sharp appreciation in the stock price, we downgrade our recommendation on the stock to HOLD from BUY with a revised Target Price of Rs591 (from Rs610 earlier).
Impressive Sales Volume – The Key Positive
KJC’s sales volume grew by a strong 11.2% YoY (+10.7% QoQ) to 22.5msm on the back of healthy traction in construction activities and sustained demand in Kerala. However, revenue grew by ~9% YoY and ~8% QoQ to Rs8.2bn. While revenue from JVs and outsourcing grew by ~13% and ~34% YoY to Rs2bn and Rs1.4bn, respectively, revenue from own manufacturing declined by mere ~2% YoY to Rs4.2bn. Notably, revenue from Sanitaryware and Faucets segments increased by 11% YoY (+8% QoQ) to Rs528mn.
Subdued Realisation Drags Profitability
While strong volume aided revenue, a significant decline in average realisation resulted in dismal operating performance, as EBITDA grew by just 2% YoY to Rs1.23bn (vs. our estimate of Rs1.4bn), while EBITDA margin declined by 93bps YoY and 85bps QoQ to 15.1%. Operating cost/sm declined by 1% YoY and 2% QoQ to Rs308 mainly due to reduction in gas prices. Going forward, we believe that pricing scenario is unlikely to recover significantly, as there is still meaningful price gap between the organised and unorganised segments. despite recent price hikes undertaken by the unorganised players. Further, cost inflation may continue to remain as a key challenge for KJC.
Outlook & Valuation
Consistent outperformance vis-à-vis the industry in terms of volume growth and superior margin profile bode well for KJC. However, considering current valuations at 30x of FY20 and 25x of FY21 earnings, we believe stock is fairly valued. We do not expect the stock to get rerated, as the current return ratio remains lower than earlier. Hence, as the stock offers limited upside from the current level, we downgrade our recommendation on the stock to HOLD from BUY with a revised Target Price of Rs591 (25x FY21 EPS).
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