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Galloping ahead

We initiate coverage on Kajaria Ceramics (KJC) with a BUY rating and target price of Rs 1,010/sh. Continued focus on premium tiles launches and expanding distribution have helped the company (market leader) double its market share to 10% in the last 10 years. These factors have also boosted KJC’s pricing power, driving its industry-leading margin. KJC has been generating FCF continuously since FY16. We expect it to deliver 13% revenue CAGR during FY20-23E, riding on demand rebound since mid-2QFY21, and strong ramp-up in its bathware and plywood segments. Better pricing power and lower operating costs should lead to 25/22% EBITDA/APAT CAGRs. In FY21, KJC doubled its dividend payout ratio to ~40%, owing to a net cash balance and surge in FCF. We value it at 19x its Mar’23E consolidated EBITDA.

* Continued market share gains: KJC’s market share doubled over the past 10 years to 10% currently, as its volume grew at a solid 12% CAGR, outpacing industry’s 5% CAGR. KJC’s large and premium product portfolio and expanding pan-India distribution helped it achieve this and establish itself as a premium brand in the domestic market. We expect these factors to drive KJC’s 10% volume CAGR during FY20-23E, accelerating its market share gains. KJC’s aggressive expansion in bathware and plywood segments should further boost its consolidated revenues CAGR of 13%.

* Stronger outlook for KJC’s industry-leading margins: KJC has been continuously delivering industry-leading EBITDAM. During FY21E, we expect its EBITDAM to rebound to 19% on lower channel discounts (demand recovery 2QFY21 onwards), lower long-term gas prices (linked to subdued crude prices), fixed cost controls and improvement in bathware profitability. KJC’s continued market share gain and cost controls should further boost its EBITDAM to 20% by FY23E, in our view.

* FCF generation to accelerate: KJC has been consistently generating FCF since FY16, owing to healthy margin, working capital control, and low capex. We expect strong revenue growth and margin expansion to bolster KJC’s cumulative FCF during FY21-23E to Rs 9.2bn, much ahead of Rs 7bn it generated during FY11-20! As KJC is already a net cash company, it has doubled its dividend payout ratio to ~40% in FY21E.

* Valuation and outlook: We value KJC at 19x (5-year mean multiple) its Mar’23E consolidated EBITDA, leading to a target price of Rs 1,010/sh. Thus, we initiate coverage on KJC with a BUY rating. Robust growth and margin outlook, along with its solid balance sheet should sustain this valuation.

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