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Gas price rise risk remains…

About the stock: Kajaria Ceramics is the largest manufacturer of ceramic/vitrified tiles in India with current annual capacity of 70.4 mn. square metre.

* Apart from earlier announced capex of | 250 crore on tiles in FY22, it is adding 5 MSM greenfield GVT capacity in FY23 (revenue potential - | 400 crore) & | 80 crore capex in sanitaryware segment

Q3FY22 Results: Mixed Bag results with higher volume growth but lower margins.

* Topline was up 27.4% YoY at | 1068.2 crore with tiles revenues up 26.8% YoY at | 961.6 crore, led by volume growth of ~13.5% YoY at 25.6 MSM and pricing growth of 11.7% YoY

* EBITDA was at | 183.8 crore with margins at 17.2%, down 447 bps YoY, was lower, owing to high power & fuel costs

* PAT was at | 122 crore, up 2.6% YoY

What should investors do? Kajaria’s share price has grown at ~17% CAGR over the past five years (from ~| 585 in January, 2017 to ~| 1,267 levels in January, 2022).

* While we like Kajaria as a solid play on tiles, we await better entry price and maintain HOLD, with gas price rise being a key risk on margins ahead

Target Price and Valuation: We value Kajaria at | 1370/share, at 38x FY24 P/E.

Key triggers for future price performance:

* Kajaria has announced capex of | 250 crore (to be complied by Q4FY22, Q1FY23) and another 5 MSM greenfield GVT capacity in FY23 (revenue potential - | 400 crore) & | 80 crore capex (revenue potential | 160-170 crore) in sanitaryware segment, which will drive growth ahead

* We expect 16.4% CAGR in tiles volume and realisations CAGR of 4.1%, resulting in tiles revenues CAGR of 21.1% over FY21-24 to | 4500 crore

* The increased dividend payout (~40-50% vs. 20-25%, earlier) is likely to improve return ratios (RoCEs likely at 27%+ in FY24E vs ~20% currently)

* Directional movement of gas prices will be key determinant of overall margins trajectory

Alternate Stock Idea: Besides Kajaria, we like Phoenix Mills in real estate space.

* A play on leadership and post Covid recovery of malls segment

* BUY with a target price of | 1200

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