Published on 5/08/2020 10:19:15 AM | Source: ICICI Securities Ltd

Hold Kajaria Ceramics Ltd For Target Rs.385 - ICICI Securities

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Earnings quality surprises!

Kajaria Ceramics (KJC) reported better than expected EBITDA margin at 14.3% (ISec: 13%), down 80bps YoY and 70bps QoQ, despite witnessing a revenue decline of 20% YoY at Rs6.52bn (I-Sec: Rs6.64bn). EBITDA margins however surprised positively led by gross margin expansion of 280bps YoY and 80bps QoQ on the back of superior product mix. While we expect volume pressures to sustain through the current fiscal in wake of Covid pandemic, the company’s sustained focus on balance sheet discipline, cost-saving initiatives and product mix improvement going forward would enable it to effectively ride through these challenging times. Maintain HOLD.

* Valuation and risks: Factoring-in the Q4FY20 performance, while we cut our revenue estimates by 18.9% / 4.7%, we increase our EBITDA margin assumption by 100bps / 220bps for FY21E / FY22E respectively, leading to -21.8% / 10% revision in our PAT estimates. We maintain our HOLD rating on the stock with a revised target price of Rs385 (earlier: Rs350). We retain our P/E multiple of 22x considering single-digit revenue / EBITDA CAGR over FY20-FY22E and sustained pressure on RoCEs in the near to medium term.

* Covid-led lockdown impacts Q4FY20 consolidated revenues: KJC posted 20% YoY decline in revenues in Q4FY20 due to 19% volume decline in tiles. The muted volumes were largely on account of loss of sales due to the nationwide lockdown that started in the last week of Mar’20. Realisation too continued its downward trend with 1% decline YoY. Allied products too reported a decline of 22% YoY (with bathware sales down 22% and plywood sales down 21% YoY). While its manufacturing and outsourcing volumes reported decline of 17% and 15% YoY respectively in Q4, its outsourced volumes were down 29.4% YoY. Considering the muted demand environment, we model 1% / 0.3% volume / revenue CAGRs over FY20-FY22E respectively.

* Consolidated EBITDA margin surprised positively at 14.3% (I-Sec: 13%) despite significant decline in volumes: KJC’s EBITDA margin for the quarter surprised positively at 14.3% despite poor volumes and higher power and fuel costs, led by improvement in gross margin by 280bps / 80bps YoY / QoQ largely driven by product mix improvement. Power & fuel cost came in at 21.7% of sales, up 380bps YoY and 130bps QoQ. We increase our EBITDA margin assumption by 100bps / 220bps for FY21E / FY22E to 15.3% / 16.9% respectively, largely building-in significant cost saving initiatives in key costs like employee expenses, A&P spends and administrative costs. We expect KJC’s EBITDA to grow at 7.3% CAGR over FY20-FY22E.

* Consolidated PAT down 25% YoY at Rs496mn (I-Sec: Rs442mn): KJC reported a consolidated PBT of Rs670mn, down 35% YoY. Higher than expected ‘other income’ and strong operating performance led to beat in PAT at Rs496mn. We expect PAT to grow at 10.8% CAGR over FY20-FY22E. We also expect RoCEs to claw back to FY20 levels of 17% by FY22E.


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