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Kajaria Ceramics’ (KJC) 4QFY23 tiles volume performance was in line with JMFe, whereas EBITDA /PAT was 6%/10% above JMFe (5%/9% above BBRG consensus)). Tile revenue grew 8% YoY/ 10% QoQ (+9% 4-year CAGR), largely led by growth in volume (+8% YoY/10% QoQ; +6% 4-year CAGR) on account of demand improvement during Jan-Feb’23 after a weak Oct-Nov’22 . Realisation was flat YoY /QoQ (+4%, 4-year CAGR; in line with JMFe). Softening in gas prices coupled with change in fuel mix (use of biofuel and propane) led to 30bps YoY/ 160bps QoQ expansion in gross margin to 35.4% (post P&F cost). EBITDA grew 6% YoY / QoQ to INR 1.8bn. Given the 4QFY23 print, improving demand scenario and fuel costs savings, we raise our FY24/FY25 EPS estimates by 5%/3% respectively and arrive at a Mar’24TP of INR 1,300 (earlier TP of INR 1,250), basis 35x Mar 25 EPS. Retain BUY. Key risk – Delayed recovery in macro and any material rise in fuel cost.

* Steady tiles volume growth (+8% YoY/ +10% QoQ): Tile revenue came in at INR 12bn, up 9% YoY/10% QoQ (+10% 4-year CAGR, 1% above JMFe) led by volume growth of 8% YoY/10%QoQ (6% 4-year CAGR, 1% above JMFe) while realisation was flat YoY / QoQ (4% 4-year CAGR, 1% above JMFe). Demand was steady during the quarter as construction activity improved during Jan-Feb’23 after a weak Oct-Nov’22 (festive season). Tiles volume growth during the quarter endorses the management’s earlier guidance of 13-15% growth in tile volume for FY24 largely on the back of distribution expansion efforts.

* Softening in fuel prices led to QoQ margin expansion: Gross margin (post P&F cost) stood at 35.4% in 4QFY23, expanding 30bps YoY (+160bps QoQ, 70bps above JMFe). Power and fuel cost shrank 550bps QoQ to 20.0% of revenue (-70bps YoY), mostly on account of reduction in gas prices (both Ras Gas and Gujarat Gas) coupled with improved mix of cheaper alternatives (biofuel 30% and LPG 5%). EBITDA margin was 14.6% (-50bps YoY/+240bps QoQ ; 60bps above JMFe). EBITDA came in at INR 1.8bn (+6% YoY/32% QoQ, 9% 4-year CAGR; 6% above JMFe respectively). Adj. PAT was INR 1.1bn (16% YoY, 14% 4-year CAGR; 10% above JMFe).

* FY23 performance: Revenue grew 18% YoY (+10% 4-year CAGR) to INR 43.8bn. Tiles segment revenue grew 18% YoY to INR 39.5bn, led by tiles volume growth of 11% YoY (+6% 4-year CAGR) and realisation growth of 7% YoY (+3% 4-year CAGR). EBITDA declined 3% YoY (+7% 4-year CAGR). EBITDA margin contracted 300bps YoY to 13.5%, largely on account of high fuel cost (+360bps YoY). Adj. PAT declined 7% YoY to INR 3.5bn (+11% 4-year CAGR). Net working capital days increased to 59 (vs. 52 in FY22) and OCF and FCF prints were INR 3bn and INR 639mn respectively in FY23.

* Modest upgrade in estimates, maintain BUY: We raise our FY24/FY25 estimates by 5%/3% respectively to arrive at a Mar’24 TP of INR 1,300 (35x Mar’25 EPS) and maintain a BUY rating. 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: Delay in pass-through of gas price inflation.

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