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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 70.4 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 Q3FY22, Kajaria’s consolidated net sales witnessed a growth of 27.4% y-o-y at Rs 10,682.3 mn due to good consumer sentiments inspite of the third wave of COVID-19. Kajaria witnessed volume growth of ~13.5% in tiles during the quarter at 25.64 MSM vis-à-vis 22.59 MSM in corresponding period last year. Overall realisation also witnessed a jump of ~12% from Rs 336/MSM to ~Rs 375/MSM. Kajaria’s plants have operated at an average capacity utilisation of 105% (including JVs) during the quarter which is expected to be maintained going forward with the expectations of normalcy across all parts of India.

* During the quarter, Bathware and Plywood businesses grew by ~21% and ~96% y-o-y to Rs 816.7 mn and Rs 249.3 mn respectively.

* Gas price rise continued during Q3FY22 as well. The average gas price for Kajaria during the quarter, for all its plants including JVs, was Rs 46.5/SCM vis-à-vis Rs 36/SCM in Q2FY22. Management said that gas prices have stabilised and are expected to cool down in next 6-9 months. The Company has taken a price increase of 5-6% during the quarter in tiles segment. The Company has also taken price hikes of 15% and 8% in sanitaryware and plywood segment during 9 months of FY22. The full effect of this price increase is expected to be seen in Q4FY22E and FY23E.

* Exports of tiles from Morbi have dwindled significantly in Q3FY22 to Rs 5.0-5.5 bn from average exports of Rs 11-12 bn in July and August on the back of high container freight cost and unavailability of containers.

EBIDTA margin to remain in the vicinity of ~19.5%

* During the quarter, EBITDA margins declined by 450 bps to 17.2% y-o-y mainly on the back of a spurt in gas cost. 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 and Northern region.

* Going forward, we expect EBITDA margin to stabilize at ~19.5% by FY24E, on the back of a rise in contribution from in-house manufacturing and high margin value added products, price hike 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 of Rs 3 bn:

* Kajaria has planned brownfield expansion of Rs 2.5 bn during FY22E for construction of 4.2 MSM, 3.8 MSM and 4.4 MSM of tiles capacity at Gailpur (owned plant), Morbi based JV – ‘Jaxx Vitrified Pvt Ltd (Jaxx)’ and Andhra 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. Incremental capacity at Jaxx is expected to get commissioned by March 2022 whereas Gailpur and KTPL are delayed by a month to April 2022. Capex will be funded through internal accruals, as the Company generates adequate free cash flow. 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 the investment of Rs 50 mn. Incremental capacities are expected to facilitate revenue of ~Rs 500-600 mn at optimal capacity utilisation.

Greenfield expansion of Rs 2.9 bn:

* Kajaria has planned to invest upto Rs 2.1 bn in one or more tranches, through subscription/acquisition of equity shares of Gujarat based Kajaria Ultima Pvt. Ltd (KUPL) to make it a wholly owned subsidiary and is setting up a state-of-the-art 5 MSM greenfield slab plant. The plant will manufacture high end value added GVT slabs which will fetch high realisation and margins. The new capacity is expected to facilitate revenue of ~Rs 4 bn at full capacity utilisation and is expected to get commissioned by March 2023.

* 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 focus of Morbi players towards export market augurs well for organised players like Kajaria in gaining market share which is sustainable going forward. Further, signs of green shoots visible in the residential real estate sector bode well for organised players and we expect Kajaria to emerge as a strong player with asset light model in place, strong brand recall and highly deleveraged balance sheet.

* We have currently valued the stock on the basis of P/E of 35x of FY24E earnings of Rs 41.5/share and recommend to buy the stock with a target price of Rs 1,454 (upside ~20%).

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