Strong brand recall & wide distribution network helps in maintaining leadership position:
KCL probably enjoys the best brand recall in the industry which can be characterized as highly price sensitive industry. This is built over the years through consistent investments in branding, marketing, & supply chain which helps the company in maintaining its dominant market share in the industry. The company has made significant investments in advertisements in print media as well as television commercials. KCL has successfully been able to create strong visibility through massive advertising on airports, social media, newspapers & magazines as well. With such strong brand visibility, KCL would be a key beneficiary once the growth resumes in the industry
Migration from unorganized sector to organized to benefit the leaders:
KCL is the market leader with highest market share in both - the organized segment with ~25% and ~10% of the total market which says that there is a huge unorganized market of tiles in the country. Over the last couple of years, the regulatory actions like complete ban by National Green Tribunal on all industrial units that run on coal gasifiers in Morbi and Wankaner in Gujarat and stricter implementation of GST/e-way bill are likely to increase the compliance costs for unorganized players and would in turn provide a boost to the organized players.
Robust fundamentals & superior financial position as against peers make a good base to growth, going forward:
Apart from leading market share, KCL also enjoys superior profitability than its peers; is net debt free with a gross debt-equity ratio of 0.09x; Furthermore, KCL has witnessed strong cash generation over the years resulting into strong balance sheet. Lower debtequity & healthy profits have resulted in comfortable interest coverage and robust return ratios.
Outlook and Valuation
KCL enjoys the highest market share in the Indian tiles industry & also occupies a prominent position in the world. This leadership has been maintained over the years with consistent investments in branding & marketing and establishing a robust distribution network. In light of anticipated switch from unorganized to organized industry, we expect KCL to be the key beneficiary. In addition, KCL is well placed as compared to its peers in terms of fundamentals. The company not only enjoys highest market share but highest profitability as well. The net debt-free company has been reporting stable return ratios, strong cash generation & has been paying dividends consistently for years. Going forward, we expect company to deliver an EPS of Rs.17.4 in FY22; assigning a target multiple of 31x (which is below its median P/E of last 3 years) we arrive at a target price of Rs.540 showcasing an upside potential of 22% from current levels with an investment horizon of 18-24 months.
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