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Margins to improve in H2 on softening of fuel prices

Kajaria Ceramics (KJC) reported in-line consolidated Q2FY23 revenue growth of 10.7% YoY led by 9.9% YoY increase in tile business realisation while volumes remained flat YoY, due to a high base (3-year CAGR of 8%). EBITDA margin declined 653bps YoY primarily due to higher power and fuel costs (+655bps YoY) resulting in EBITDA/APAT decline of 28.3%/37.6% YoY. Management stated demand conditions were subdued during Q2FY23 and the trend has continued in Oct’22 (due to festivities). It has maintained its guidance of 15% tile volume growth in FY23, but is cautious of nearterm demand. KJC has taken a price hike of 2% in Sep’22 which, along with softening of gas cost (~10% QoQ), will likely aid improvement of EBITDA margin in H2FY23E. Management has guided for >14% EBITDA margin for H2FY23. We cut our PAT estimates for FY23E/FY24E by ~7%/3% and maintain BUY with a rolled-over Sep’23E target price of Rs1,312 (earlier: Rs1,270)

Revenue growth led by higher realisations: KJC’s consolidated revenues grew 10.7% YoY (+6.9% QoQ) to Rs 10.8bn, due to tile realisation increase of 9.9% YoY (flat QoQ) as volumes remained flat YoY, due to high base (+6.8% QoQ; 3-year CAGR of 8%). Revenue growth for sanitaryware/faucet segment too was flat YoY (+4.3% QoQ) whereas plywood segment revenues grew 17% YoY. As per management, demand was subdued in Q2FY23 due to high inflation across building material products. While management has maintained its guidance for 15% YoY tile volume growth in FY23, it was cautious on near-term demand. Working capital days in Q2FY23 stood at 62 (+5 days QoQ) and the company remained net-debt free. KJC plans to invest ~Rs1.25bn in Nepal JV by setting up a plant of 8MSM to cater to the domestic demand there. The plant is expected to be commissioned by end-FY24 and will have higher margins as Nepal has import duties of 45% on tiles (hence local manufacturers are likely to benefit). Besides, KJC has announced brownfield capex of Rs805.8mn for expansion/modernisation at its Sikandrabad (U.P.) facility by increasing its GVT capacity by 3MSM to 11.4MSM.

EBITDA margin to improve in H2FY23E: KJC’s Q2FY23 EBITDA margin was at 12%, down 653bps YoY (-323bps QoQ), due to higher power and fuel costs (+655bps YoY), resulting in EBITDA/APAT decline of 28.3%/37.6% YoY. Company took a price hike of ~2% in Sep’22, which will likely aid margin improvement going forward. Management also indicated softening of gas cost in Q3 (~10% QoQ) due to partial use of LPG in some locations, which we expect to also ease pressure on margins going ahead. KJC management has guided for EBITDA margin of >14% for H2FY23. We model operating margins of 16.5%/16.7% in FY24E/FY25E (vs 10-year average EBIDTA margin of ~16.8%).

Valuations & view: KJC’s operational profitability in H1FY23 was lower than estimates due to higher gas costs, but is expected to improve going ahead due to softening of input prices. We continue to like KJC for its leadership in the India tile market and believe it has demand tailwinds in the offing due to pick-up in the residential housing market. Maintain BUY with a rolled-over Sep’23E target price of Rs1,312 set at unchanged 35x FY24E P/E (in line with 5-year average, 1-year forward P/E)

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