Published on 25/09/2020 11:48:03 AM | Source: Emkay Global Financial Services Ltd

Hold Kajaria Ceramics Ltd For Target Rs.386 - Emkay Global

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A washout quarter as anticipated, but utilization improves in Jul/Aug

* Q1 results were impacted by nationwide lockdowns, leading to a 61% yoy volume decline (vs. the estimate of a 63% fall). KJC reported an EBITDA loss of Rs76mn vs. our estimate of a Rs25mn loss. Net loss was at Rs335mn vs. our estimate of Rs292mn.

* Margins fell sharply in Q1 due to the negative operating leverage despite cost-saving initiatives. Employee cost was down 31.1% yoy/29.9% qoq and is expected to remain at similar levels in Q2. Ad spends were almost nil in the quarter.

* Management indicated that capacity utilization has improved to 85% vs. the average of 26%/78% in Jun/Jul‘20. Benefits of low gas prices (down Rs3-4/scm) should be seen in Q2, though there will be some increase thereafter. Ad spends will be at 50% of normal levels in Q2 and at normal levels of Rs200-220mn from Q3 if volume recovery sustains.

* We reduce EPS estimates by 8.1% for FY21 on weak Q1. The balance sheet continues to improve with net cash at Rs1.8bn vs. Rs1.1bn at Mar’20. However, valuations at 25.3x FY22E EPS appear rich. We maintain the Hold rating and await better entry points.


A washout quarter as lockdown hits volumes: The nationwide lockdown and supply chain restrictions impacted the Q1 performance as sales volumes declined 61% yoy. Production was down by 90.3% yoy. Capacity utilization was at mere 26% in Jun’20, but improved to 78% in Jul’20. Realization improved 1.5% yoy/1.4% qoq despite a shift towards PVT/Ceramics tiles. Revenue of the Tiles segment was down 60.4% yoy. Revenue of Sanitaryware/plywood segment fell 57.6%/69.4% yoy. Variable cost/scm was up 19.9% yoy/20.9% qoq on higher share of trading segments (28% of revenues vs. 25% in Q1/Q4FY20). Gross margin was down 10.6pp yoy/11.3pp qoq. Reduction in salaries led to a 31.1% yoy/29.9% qoq decline in employee cost. Other expenses were down 66.7% led by savings on Ad spends (nil in Q1). Lower volumes led to an EBITDA loss of Rs76mn vs. a profit of Rs1.1bn/Rs934mn in Q1/Q4FY20.


Tweak estimates; maintain Hold: We now assume a sales volumes decline of 17% in FY21E vs. 15% earlier. We have also cut revenue estimates of Sanitaryware/plywood segments, considering lower revenues in Q1FY21. EPS estimates for FY21 are reduced by 8.1%. Gas prices have fallen by Rs3-4/scm (average price Rs31/scm in Q4); the benefits of which would be seen in Q2FY21. Management does not expect much pressure on Tile prices due to liquidity issues faced by Morbi players. After an increase in working capital at FY20-end, lower inventory and credit control led to Rs830mn reduction in working capital in Q1. The balance sheet continues to improve and net cash at Jun’20 stands at Rs1.8bn vs. Rs1.1bn in Mar’20. ROE is likely to be at 13.4%/14.2% in FY22/23E vs. 15.5% in FY20. Though near-term outlook remains challenging, we believe that it will continue to command premium multiples due to its leadership position and B/S strength (net cash should improve to Rs3.7bn/Rs5.9bn/Rs7.8bn in FY21/22/23E vs. Rs1.1bn in FY20). We maintain Hold, with a TP of Rs386 (22x mid-FY23E EPS). Key risks to our call include a steep recovery in tiles demand/prices.


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