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Poised for a heathy Growth and margin expansion!

About the stock: Kajaria Ceramics is the largest manufacturer of ceramic/vitrified tiles in India with current annual capacity of 84.5 mn. sq. meters (MSM) as of FY23 • Apart from completed capex of | 250 crore on tiles, it is adding 2.4 MSM brownfield capex in Sikandrabad and setting up a plant of 5.1 MSM in Nepal in JV.

Key Investment Thesis:

• Healthy Tiles volume growth with supportive catalyst: The management has guided for ~13-15% YoY volume growth in the tiles segment during FY24 likely to be driven by a) expected rise in demand from Tier II and below cities, b) healthy capacity utilizations, c) expected increase in Kajaria’s capacity, d) enhanced distribution network and e) strong brand recall. Exports are likely to grow by ~25% in FY24, largely from Morbi players, which implies that domestic branded players will continue to benefit with lesser concern over supply. We expect ~11% CAGR in tiles volume with tiles revenues CAGR of ~13.2% over FY23-26 to | 5739 crore. Overall Revenues CAGR of 13.8% is expected over FY23-26 at | 6431 crore

• Lower Gas prices led Margins improvement and earnings growth: The gas prices have eased significantly over the last 2 quarters. The company expects net gains of | 130-140 crore in power and fuel costs on account of lower gas prices in FY24 and thus conservatively has guided for margins in the range of 14-16% in FY24. With respite in Gas prices, we expect EBITDA margins to reach ~16%/16.3%/17% in FY24/FY25/FY26, respectively from 13.5% in FY22. We expect ~27% earnings CAGR over FY23-26.

• Return ratios to inch up ahead: The strong earnings growth and healthy dividend payout is likely to improve return ratios (RoCEs likely at 25.6% in FY26E vs ~17.7% in FY23)

Rating and Target Price :

• Kajaria with a net cash balance sheet and superior brand, is a solid play on Tiles sector with expanding reach to tier 2/3 cities. With gas price decline, sharp margin recovery will be seen in FY24 driving strong earnings growth.

• We maintain our BUY rating

• We value Kajaria at | 1680 per share (based on 38x FY26 P/E)

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