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Mixed performance; positive future outlook; Maintain Buy

Steady revenue growth: Kajaria Ceramics posted steady revenue growth 9.4% YoY and 10.4% QoQ largely driven by strong demand and improvement in volumes. Its production volumes came in at 20.54 MSM which grew by 13% YoY and 0.2% QoQ while its sales volumes stood at 28.02 MSM and grew by 7.9% YoY and 10.1% QoQ. For FY23, its revenue too witnessed strong growth of 18.3% and sales and products volumes increase of 11% YoY and 16.6% YoY.

Mixed margin performance: The gross profit and EBITDA posted higher growth of 8.7% YoY and 6% YoY driven by better topline performance however during the same period its margins were impacted due to high raw material prices as well as increasing fuel and gas prices. But sequentially, the company’s cost optimization initiatives as well as decline in trend of raw material and gas prices aided EBITDA growth of 32.2% and EBITDA margin improvement of 241bps QoQ to 14.6%. PAT after exceptional grew by 13.8% and 50.3% QoQ to Rs 110.7cr with margin up by 36bps YoY and 244bps QoQ to 9.2%. For FY23, EBITDA de-grew by 3% YoY while margin was down by 297bps due to increase in gas and coal prices.

Key highlights: 1) Management plan is to achieve volume growth of 13-15%, revenue growth of 14-16% and EBITDA margins of 14-16%. 2) Further, the plan is to double its capacity in the next 5-6 years with a capex of 250cr+ every year. Additionally, they will add capacity in the south, north and east while the plan is to outsource in the west. 3) Price hike taken was 4-5% in FY23 but going ahead no plans to take price hikes. 4) Value added and product mix will drive the topline growth while easing in gas and coal prices will drive margin growth. 5) Exports will grow strong and the largest market is the USA followed by Saudi Arabia and UAE. 6) Spends on advertisements will be ~130-140cr every year. 7) Glazed Vitrified Tiles are in high demand for exports. 8) Non-tile business will grow healthily as compared to tile business. 9) Tile business has 1840 dealers. 10) Anti-dumping duty is imposed on China that has helped Indian players like Kajaria to gain market share in global markets and this scenario is expected to continue.

Outlook and Valuation: Overall we are optimistic on the growth prospects of the sectors related to infrastructure and housing space as that will continue to benefit due to increase in government focus and investment towards these sectors, improvement in demand and introduction of new products & categories. Further, Kajaria being a market leader would continue to benefit from industry tailwinds coupled with capacity expansion, new product launches as well as expansion into allied segments will drive growth for the company in the coming quarters. In addition, the plan is to continue with cost optimization measures as well as further easing of raw material and gas prices will bring in margin improvement. Financially, we expect its revenue/EBITDA/PAT to grow at 16%/23%/26.6% CAGR over FY23-25 and maintain our Buy rating with a target price of Rs 1,459.

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