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Decent quarter amid challenges

Kajaria Ceramics (KJC) delivered better-than-expected earnings in 1QFY23 as Revenue/EBITDA/PAT was 4%/15%/13% above JMFe respectively (2%/10%/ 9% above BBRG consensus). Tile revenue grew 12% (on 3-year CAGR basis) led by volume /realisation (+6% each) while bathware (+20%) and Plywood (+36%) continued to perform well. EBITDA margin at 15.2% was up 20bps QoQ as higher gas cost inflation was more than offset by modest hike in realisation (+2% QoQ) and lower A&P cost (-100bps QoQ to 1.9%). The management maintains its volume growth of guidance of c.15-20% in FY23 and 15%+ in FY24 on the back of market share gains and distribution expansion into tier 2/3 cities coupled with industry tailwinds of owing to healthy construction activity, government spending and absence of any significant supply from Morbi in the domestic market. Given the uncertainty in gas prices, the management refrained from guiding on operating margin. We introduce FY25E and value KJC at 35x Sept 24 EPS to arrive at a Sept’23 TP of INR 1310 (Mar’23TP of INR 1200 earlier, basis 35xFY24EPS); maintain BUY. Key risk - Delay in pass-through of gas price inflation.

Moderate tile volume growth (+6% 3-year CAGR)

Tile revenue came in at INR 10.1bn (+13% 3-year CAGR and 4% above JMFe) as volume grew 6% on 3-year CAGR basis to 23.3msm (3% above JMFe) and realisation rose 6% on 3-year CAGR (in line with JMFe). The management is very optimistic on the demand outlook, going forward, owing to healthy traction in the real estate sector. The management expects exports from India to grow 25% YoY to INR 160bn in FY23 on the back of better competitiveness (significant spike in electricity and gas costs in other exporting countries – Italy, Spain and China). The management maintains its volume growth guidance for 15-20% in FY23 and 15%+ in FY24 on the back of market share gains, distribution expansion into tier 2, 3 cities and reduced competitive intensity from Morbi (as they focus on exports).

Rising gas costs continue to hurt:

Gross margin (post P&F costs) was 36.3%, down 570bps YoY (+120bps QoQ) on account of the sharp rise in gas prices (+72% YoY/+10% QoQ). Power and Fuel cost rose 590bps QoQ to 26.6% of revenue on account of increase in Ras gas (+14% QoQ to INR52/scm), spot gas (+20%) and Morbi (+6% QoQ). EBITDA margin was 15.2% (+20bps QoQ; 140bps above JMFe) on account of lower A&P spend. The company took price hike of c. 2% on 1st May’22; (it didn’t take any price hike in Q4FY22, average price hike in FY22 was c. 10%). EBITDA came in at INR 1.5bn (+13% 3- year CAGR; 15%/10% above JMFe/consensus respectively). Adj. PAT was INR 923mn (+22% 3-year CAGR; 13%/9% above JMFe/consensus respectively). The management didn’t guide on EBITDA margin given the uncertainty in gas prices.

JVs to not participate in 1-month shutdown in Morbi:

The management clarified that Kajaria’s JVs will not participate in the recently announced 1-month manufacturing shutdown (starting 10th Aug’22 to 10th Sept’22) and will continue supplying them. Moreover, significant members of its outsourcing partners (c. 70%) may also not participate in the shutdown. The management believes this move by Morbi association will benefit the industry at large as this will help bridge the demand-supply gap.

Acquisition to strengthen base in south India:

KJC’s board approved acquisition of 51% stake in South Asian Ceramics Tiles Pvt. Ltd., a tile manufacturer based in Telangana with an annual manufacturing capacity of 4.79msm of ceramic tiles (mainly of size 60x60cms and 60x120cms), at a consideration up to INR 285mn (implying EV of INR1.2, including INR600mn of debt). The management believes this acquisition will strengthen the company’s presence in south India as it enables it to make more dealers and even cater to small size dealers.

Maintain BUY:

We broadly maintain our FY23-24Eand now introduce FY25E. We roll forward with a Sept’23 TP of INR 1,310 (35x Sept’24 EPS) and maintain 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.

Other highlights from 1QFY23 call:

A.) Bathware segment revenue grew 20% on 3-year CAGR to INR 714mn in 1QFY23 (+17% above estimates),

b) Commissioned 4.2msm ceramic floor tiles capacity in Gailpur in May’22, 3.8msm of value-added GVT at the Srikalahasti Plant in May’22 and 4.4msm PVT capacity in Morbi, Gujarat,

c) Working capital days rose 5 days QoQ to 57 as of June’22 (52 days in Mar’22 and 50 days as of Mar’21) on account of inventory at new plants,

e) tiles estimated domestic market size is c. INR 210bn, which is expected to grow by 6-8% (along with GDP growth rate) and estimated exports market size is INR 160bn vs. INR 127bn in FY22.

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