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Volume growth remains strong, outlook bright

Kajaria Ceramics (KJC) has reported Q3FY22 revenue growth of 27.4% YoY led by tile volume growth of 13.5% YoY, in-line with estimates. EBITDA margin continued to remain healthy at 17.2% (-133bps QoQ, marginally lower than our estimates) despite higher power & fuel cost resulting in EBITDA/PAT growth of 1.1%/2.6% YoY, respectively. Management has maintained its guidance of tile volume CAGR of 15% and operating margin of ~18% over the next three years. The company has envisaged further capex of ~Rs3bn in FY23 to meet the growing demand. Upgrade the stock from ADD to BUY with an unchanged Mar’23 target price of Rs1,495 post the recent stock price correction.

* Strong tile-volume led revenue growth of 27.4% YoY: KJC posted 27.4% YoY growth in revenue in Q3FY22 to Rs10.7bn (I-Sec: Rs10.4bn) driven by tile volume growth of 13.5% YoY (2-year volume CAGR of 12%) and realisation increase of 11.7% YoY. Sanitaryware/faucetware segment witnessed revenue growth of 21.3% YoY whereas plywood grew 95.5% YoY (on a low base). As per the management, demand was broad-based across markets during the quarter with good traction in tier-1&2 cities and below markets. Management believes demand trend is likely to remain strong due to the pick up witnessed in housing segment and has maintained its guidance of tile volume CAGR of 15% over the next three years. Working capital days stood at 58 days (+2/3 days QoQ/YoY) in Q3FY22 and management believes these, too, are sustainable going ahead.

* EBITDA margin to remain healthy: KJC’s EBITDA margin for Q3FY22 stood at 17.2% (- 133bps QoQ/-447bps YoY), primarily due to increased power & fuel cost (+520bps/267bps YoY/QoQ) resulting in EBIDTA/PAT growth of 1.1%/2.6% YoY. KJC has taken further price increase of ~5-6% in tile segment during Q3FY22 to mitigate the adverse effect of higher input prices which will enable the company to maintain margins. The management has stated it intends to maintain margins at ~18% going ahead.

* Capacity expansion: The brownfield expansion in tiles segment of 11.4MSM at a capex of ~Rs 2.5bn is expected to be operational by March-April, 2022. KJC has announced a further capex of ~Rs2.1bn for setting up a greenfield tile capacity of 5MSM p.a by FY23-end and another ~Rs800mn for sanitaryware greenfield plant of 0.7mn pcs pa in Gujarat which will thus enable it to cater to the growing demand.

* Valuations: KJC’s result has been broadly in-line with estimates. It has demand tailwinds going ahead due to pick up in residential housing market. It trades at PER of 32.3x FY24E which is reasonable given PAT CAGR of 26.6% during FY21-24E with strong return ratios. Upgrade the stock from ADD to BUY post the recent correction in stock price with an unchanged Mar’23E target price of Rs1,495.

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