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Company Background

Kajaria Ceramics Limited (Kajaria), promoted by Mr. Ashok Kajaria in 1985, is the largest player in India’s Ceramic Tiles industry with ~12% market share, under “KAJARIA” brand. It has a combined manufacturing capacity of 82.8 MSM which includes its own manufacturing facilities in UP and Rajasthan and its JV manufacturing partners. It also sells tiles outsourced from Morbi, Gujarat and manufactures sanitaryware and bathware (faucets) through JV partners, which provides it strategic product extension opportunities to leverage its sales channel. It trades in plywood - another building product

Investment Rationale

Robust topline growth with rise in volumes due to positive consumer sentiments

* During Q4FY22, Kajaria’s consolidated net sales witnessed a growth of 15.7% y-o-y at Rs 11,017.5 mn due to good consumer sentiments inspite of geopolitical volatility and high commodity prices. In spite of lockdowns in several states in January and February 2022, Kajaria witnessed highest sales volume of 25.97 MSM during the quarter, a marginal growth of ~2% visà-vis corresponding period last year. Overall realisation also witnessed a jump of ~13% from Rs 341/MSM to ~Rs 385/MSM. The Company witnessed sales growth of ~33% at Rs 37,052 mn during FY22. Management said that demand scenario continues to be healthy given traction in real estate sector, rapid urbanisation, consumer preference shifts and increased application of tiles in replacement and renovation projects.

* During the quarter, Bathware and Plywood businesses grew by ~16% and ~25% y-o-y to Rs 826.6 mn and Rs 192.3 mn respectively.

* Gas price rise continued during Q4FY22 as well. The average gas price for Kajaria during the quarter, for all its plants including JVs, was Rs 49.8/SCM vis-à-vis Rs 46.5/SCM in Q3FY22 which has further gone up to Rs 50.3/SCM in Q1FY23 till date. The Company has taken a cumulative price increase of 10% in tiles, 12-13% in bathware and 15% in sanitaryware during FY22. Further price hike of 2% has been taken from May 1, 2022 onwards to mitigate rising input costs. The full effect of the above price increases is expected to be seen in FY23E.

EBIDTA margin to remain in the vicinity of ~19.5%

* During the quarter, EBITDA margins declined by 500 bps to 15.1% y-o-y mainly on the back of higher gas prices, reduction in gas supply as well as unprecedented all-round inflationary pressure on other raw materials. Rising gas cost becomes critical for Kajaria as it comprises 20- 25% of cost of production of tiles which is passed on to the end customers with a lag of 15-30 days. However, margins of the Company are protected due to the wide difference in gas cost of Morbi (Rs 62/SCM in Q4FY22) and Northern Region (Rs 45.5/SCM in Q4FY22).

* Going forward, we expect EBITDA margin to stabilize at ~18% by FY24E, on the back of a rise in contribution from in-house manufacturing and high margin value added products, price hikes taken by the Company, better cost control and structural shift towards organised domestic players, which is further expected to generate traction in the industry

Brownfield expansion in tiles worth Rs 2.5 bn commissioned in April 2022:

* Kajaria undertook brownfield expansion of Rs 2.5 bn during FY22E for the construction of 4.2 MSM, 3.8 MSM and 4.4 MSM of tiles capacity at Gailpur (owned plant), Morbi based JV – ‘Kajaria Vitrified Pvt Ltd (KVPL)’ and Andhra Pradesh based wholly owned subsidiary ‘Kajaria Tiles Pvt Ltd’ (KTPL), with a capex of Rs 600 mn, Rs 1.1 bn and Rs 800 mn respectively. All the above projects have been commissioned in April 2022. Incremental capacities are expected to facilitate revenue of ~Rs 5 bn at optimal capacity utilisation.

* Kajaria has also planned to set up a brownfield plant at Gailpur for Bathware segment with a capacity of 6 lakh pieces which will increase the total capacity to 1.6 mn pieces per annum, with an investment of Rs 50 mn. Incremental capacities are expected to facilitate revenue of ~Rs 500-600 mn at optimal capacity utilisation.

Withdrawal of proposed investment in Kajaria Ultima Pvt. Ltd (KUPL):

* Kajaria has withdrawn its proposal to invest upto Rs 2.1 bn in one or more tranches, through subscription/acquisition of equity shares of Gujarat based KUPL, to make it a wholly owned subsidiary and to set up a state-of-the-art 5 MSM greenfield slab plant, on the back of unviable business conditions due to high gas prices.

* The plant was expected to manufacture high end value added GVT slabs with high realisation and margins.

Greenfield expansion of Rs 800 mn:

* Kajaria has also planned to invest in Gujarat based ‘Kerovit Global Pvt Ltd’ through its wholly owned subsidiary ‘Kajaria Bathware Pvt Ltd’ and to set up a greenfield plant for Bathware segment having installed capacity of 7 lakh pieces per annum with the investment upto Rs 800 mn. The new capacity is expected to facilitate revenue of ~Rs 1.5-1.6 bn at optimal capacity utilisation.

VALUATION

Positive consumer sentiments and revival of the real estate sector have augured well for organised players like Kajaria. Though, of late, Morbi’s struggle to export due to gas supply disruption and global logistics issues might return their focus to the domestic market thereby, intensifying the competition for players like Kajaria. Concerns of high interest rates may disrupt demand in the real estate sector. However, we expect Kajaria to emerge as a strong player with asset light model in place, strong brand recall and a deleveraged balance sheet. We have valued Kajaria on the basis of P/E - method of relative valuation – of 32x of FY24E earnings of Rs 38.7/share, downgrading it from 35x due to concerns of a slowdown in consumer demand and recommend a buy on the stock with a target price of Rs 1,238 per share (upside of ~30%).

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