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Stupendous performance; strong guidance!

Kajaria Ceramics performance was strong across topline & bottomline. The sales volumes were up 10.5% YoY at 22.6 MSM, as utilisation got back to full levels coupled with strong outsourced sales driven by robust rebound in demand. The topline was up 13.1% YoY at | 838.4 crore with stable realisations (up 0.3% YoY). Tiles Revenues were up 10.9% YoY at | 758.2 crore. Faucet and Sanitaryware revenues were up 36% YoY at | 67.4 crore. Plywood revenues were up 57.6% YoY at | 12.8 crore, on a low base. EBITDA at | 181.8 crore with margins at 21.7% were up 667 bps YoY driven by lower other expenses and operating leverage. The beat at operating level percolated to PAT wherein it reported a | 118.9 crore, up 93% YoY.

Morbi export traction to keep domestic tiles market robust

Kajaria attributed its performance to strong traction in tier 1/2/3 cities aiding capacity utlisation notwithstanding Metro cities demand still at 75% of precovid (~45% in Q2) coupled with improved profitability at subsidiaries levels. It reiterated that exports by Morbi players driven by the anti-dumping duty levied by USA on Chinese players as well as other countries’ is structural in nature, thereby absorbing the Morbi based unorganised volumes and improving the demand and pricing scenario for the organised player. It also outlined increased capex of ~|150-200 crore in FY22E to add ~10 MSM brownfield capacities at its existing plants to cater the demand.

20-25% volumes growth guidance in FY22E; margins at 20%+

The company raised its volume growth guidance for FY22E to 20-25% vs. 15%, earlier and expect 15% volumes growth for next couple of years thereafter. The operating margin is likely to remain at an elevated level at ~20%+ ahead to be aided largely by aided by benign gas prices, operating leverage and structural costs rationalisation. Overall, after sales volumes decline of ~7% YoY in FY21E, we expect sharp recovery in the form of 25% volume growth on a distressed base in FY22E followed by ~15% volume growth in FY23E. We build in step up margins of ~20% in FY22E/FY23E, given the operating leverage and structural costs rationalisation.

Valuation & Outlook

Continued export demands for Morbi players is likely to keep both the demand and pricing scenario robust for the organised players. The increased dividend payout (~40-50% vs. 20-25%, earlier) is likely to improve return ratios. Kajaria, with a net cash balance sheet and superior brand, is a quasi-play on improved scenario. We raise our earnings estimates by 26%/ 27%, for FY21E/ FY22E respectively, given the commentary. We maintain BUY and roll over our valuations to FY23E at 29x P/E (vs. 30x FY22E P/E, earlier) to ascribe revised target price of | 950/share.

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