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Muted quarter; guidance intact

Kajaria Ceramics (KJC) delivered muted earnings in 4QFY22 as tile volume grew 2% YoY (+ 1% QoQ, +5% 3-year CAGR), 3% below JMFe, and EBITDA margin contracted 500bps YoY (-200bps QoQ, 120bps below JMFe) on account of rising input costs and delay in price hikes. EBITDA/PAT were11%/22% below JMFe (12%/20% below BBRG consensus). The management continues with its bullish guidance of c.15-20% volume growth and 20-25% overall revenue growth on the back of market share gains and distribution expansion into tier 2, 3 cities. While the company’s ongoing capacity expansion plans are on track, it has withdrawn its plan to expand in Gujarat (planned capex of c. INR 2bn for large slab tiles) given the unavailability of gas and uncertainty in gas prices. KJC continues to be bullish from a medium-term perspective owing to strong construction activity, healthy renovation demand, government spending and absence of any significant supply from Morbi in the domestic market. We cut our FY23/FY24 estimates by 8% each to reflect gas price inflation. We maintain BUY with a revised Mar’23 TP of INR 1,200 (35x Mar’24 EPS; INR 1,300 earlier).

Muted tile volume growth (+2% YoY; +5% 3-year CAGR): Tile revenue came in at INR 10bn (+15% YoY, +10% 3-year CAGR and 3% below JMFe) as volume grew 2% YoY (+5% 3-year CAGR; 3% below JMFe) while realisation rose 13% YoY (+2% QoQ in line with JMFe). Volume was impacted during Jan-Feb on account of the 3 rd wave of Covid19. The management is very optimistic on the demand outlook going forward owing to strong construction activity across India. Tile export momentum from India, which had slowed during Q2-Q3, improved in Q4 on the back of higher electricity and gas costs in other exporting countries – Italy, Spain and China. The management believes that India will continue to be highly competitive in the export markets (Kajaria estimates export market size of c. INR 127bn in FY22 and expects it to reach INR 170-180bn in FY23); thus, larger domestic players will continue to enjoy reduced competitive intensity and better pricing power in the domestic market, leading to market share gains. The company guided for 15-20% in volume growth in FY23.

Rising gas costs continue to impact margins: Gross margin (post P&F costs) was 35.1%, down 570bps YoY (-190bps QoQ; 10bps below JMFe) on account of the sharp rise in gas prices (+ 70% YoY), packaging and freight charges. The company didn’t undertake any price hike during Q4; it last hiked prices in Nov’21, by c. 4-5%. It announced a price hike of c. 2% on 1st May’22 (average price hike in FY22 was c. 10%). Power and Fuel cost came in at INR 125/sqm (+4% QoQ; 6% below JMFe). EBITDA margin was 15.1% (- 500bps YoY, -210bps QoQ; 120bps below JMFe). Kajaria is at a significant advantage versus Morbi players as the gas cost in Morbi has increased by c.72% in the last one year (only c.20% of KJC’s gas cost is dependent on Gujarat Gas while c.40% is linked to Brent). EBITDA came in at INR 1.6bn (+11% 3-year CAGR; 11%/12% below JMFe/consensus respectively). Adj. PAT was INR 957mn (+13% 3-year CAGR; 22%/20% below JMFe/consensus respectively). The management didn’t guide on EBITDA margin given the uncertainty in gas prices.

 Withdraws plan for capacity expansion in large slab tiles: In Q3, the company had announced plans for a c.5msm greenfield GVT slabs plant in Gujarat at a capex of c.INR 2.1bn (which was expected to be commissioned by Mar’23). However, it has now withdrawn this capacity expansion as the uncertainty in availability of gas and rising gas prices render the project unviable; Kajaria plans to review the situation after 6-8 months. Till then, its plant in South India will feed the North and West markets

 Cut estimates; maintain BUY on rich valuation: We cut our FY23/FY24 estimates by 8% each to factor in the 4QFY22 performance and outlook. We maintain BUY with a Mar’23 TP of INR 1,200 (35x Mar’24 EPS). We continue to like KJC’s market leadership in tiles, robust cash flows, strong brand recall, high retail mix, and strong distribution network across India and healthy return ratios. Key risk to our call: Lower-than-expected volume growth.

Healthy performance by subsidiaries: Bathware segment revenue grew by 16% YoY to INR 827mn in 4QFY22 (+16% 3-year CAGR). The company hiked prices by c.15%/c.13% in sanitaryware/faucetware respectively in FY22 to pass on the sharp raw material cost inflation. The management guided for c. 30-35% YoY growth in the next 3 years. Kajaria now has product offerings in line with the market leaders. New capacity addition at the existing faucet plant is expected to be completed by Jul’22. Plywood revenue came in at INR 192mn in 4QFY22 (+25% YoY; +38% 3-year CAGR

Other highlights from 4QFY22 call: a) In FY22, Revenue/EBITDA/PAT grew by 8%/11%/18% respectively on 3-year CAGR basis, b) Commissioned 4.4msm PVT capacity in Apr’22, and 4.2msm of ceramic floor tiles at Gailpur and 3.8msm of value-added GVT at the Srikalahasti Plant in May’22, c) Working capital days was stable at 56 as of Mar’22 (55 days in Dec’22 and 57 days as of Mar’21), d) Net cash position reduced to INR 2.8bn in Mar’22 from INR 3.4bn as of Mar’21, e) tiles estimated domestic market size is c. INR 210-300bn and estimated exports market size is INR 127bn, which is expected to grow to INR 170-180bn

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