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Sustained improvement in market share: Kajaria Ceramics (KJC) is a leading tiles manufacturer in India with ~6% revenue share in the domestic market. It has gained market share steadily underpinned by superior distribution network (7% CAGR over FY12-23), improved geographical reach and premium/new tile launches (~750 SKUs in FY23)

* leads to higher volume and revenue share: KJC’s industry volume share to rise to 4.5% in CY22E from 4.2% in CY17; whereas, its revenue share within the listed organized players improved to 34% in FY22 (36% in 9MFY23) from 20% in FY10.

* Production capacities on the rise across businesses: KJC’s production capacity increased by 16% in FY23 (ex-Vennar Ceramics) and it will further increase by 8.5% by FY25E. It is also raising capacities of faucet/sanitaryware segments by 0.6m pieces each. We forecast ~11% revenue CAGR during FY23-25.

* Remains cash positive despite significant capex: KJC enjoys industry leading margins driven by premium pricing (5-6% higher than branded competitors) and higher share of retail sales (70% v/s industry average of 50%). KJC turned net cash in FY19 and we expect it to maintain the same in FY25 despite incurring a capex of INR6.7b over FY24-25.

* Strong growth levers in place; Initiate with a BUY: We initiate coverage on the stock with a BUY rating and a TP of INR1,490 premised on 40x FY25E EPS (v/s 35x last five-year average one-year forward P/E). We believe that: a) 30% earnings CAGR over FY23-25E, b) strong return ratios (RoE of 22%, ROCE of 26% and RoIC of 31% in FY25E), and c) healthy balance sheet will help KJC maintain premium multiples.

Key downside risks: a) rise in gas and commodity prices, b) demand slowdown and c) competition from unorganized players.

Largest player in the Indian ceramics industry with ~6% revenue share

* The Indian ceramics industry is valued at INR599b as of FY23 (share of organized players at 40%) with total production of more than 2,700msm by CY22. Morbi, Gujarat accounts for over 70% of the total production in India and houses over 700 production units, of which many are export-oriented units.

* Export of tiles from India has clocked a CAGR of 23% over FY18-23 with ~17% of domestic production being exported into different countries. KJC is primarily focused on domestic markets with a mere ~2% of its total revenue being generated from outside India.

* KJC has 2.2% share in total production (excluding outsourced volumes) of tiles in India; however, its market share in sales volume stands at 4.5% (v/s 4.2% in CY17). We believe KJC enjoys 6% revenue share in total domestic tiles currently.

Superior growth profile in a fragmented industry

* KJC has delivered stronger growth than its competitors and continued to gain market share in a fragmented industry. The company reported a 14.4% revenue CAGR over FY10-22 v/s 7.5% for the other listed players.

* KJC’s revenue share within the organized listed players increased to 34% in FY22 (36% in 9MFY23) from 10% in FY20. Its sales volume clocked an 11% CAGR over FY10-23, which helped to improve its industry volume share.

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