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Margins to improve in 2H23

Kajaria Ceramics Ltd manufactures glazed and unglazed ceramic tiles. The company sells its products in India and abroad.

* Net sales grew 10.7% YoY to Rs. 1,078cr in Q2FY23, owing to higher prices. Profit after tax stood at Rs. 74cr, down from Rs. 116cr in Q2FY22.

* EBITDA margin narrowed 650bps YoY to 12.0%, primarily due to a significant increase in gas costs.

* The company had a weak quarter due to higher gas costs and subdued demand. The management expects demand to recover after the festive season. Softening gas prices and the usage of alternative fuels are expected to drive margins up in 2H23. We reiterate our ACCUMULATE rating on the stock with a revised target price of Rs. 1,180 based on 33.5x FY24E adjusted EPS.

Margin contracts on higher power and fuel costs

Kajaria’s sales grew 10.7% YoY to Rs. 1,078cr in Q2FY23, led by an increase in realisation in the tiles business. However, sales volume remained flat at 24.91 MSM on YoY basis due to subdued demand and disruptions in natural gas supply. Revenue from the tiles business grew 11.5% YoY to Rs. 984cr, with own manufacturing contributing Rs. 597cr (+13.9% YoY), subsidiaries Rs. 135cr (-8.5% YoY) and outsourcing Rs. 242cr (+15.1% YoY). Sanitary business revenue was flat at Rs. 74cr and plywood business revenue grew 17.4% YoY to Rs. 19cr. EBITDA fell a significant 28.3% YoY to Rs. 129cr. EBITDA margin contracted 650bps YoY to 12.0%, primarily due to the substantial 70% YoY increase in gas costs to Rs. 62 per standard cubic metre (SCM) and a 40% YoY increase in advertisement costs. As a result, PAT fell 36.7% YoY to Rs. 74cr

Key concall highlights

* The company undertook a 2% price hike in May and September, each in the tiles segment; it did not hike prices in the bathware segment.

* It has started using LPG as an alternative fuel from November onwards at the Srikalahasti, Morbi and Jaipur plants. This is expected to help reduce fuel costs.

* Kajaria added 75 dealers in 1H23 to the existing 1,700-strong dealer network and is expected to add 125-140 more in 2H23.

Capacity expansion to support revenue growth

Kajaria plans to add 6 lakh pieces per annum capacity to the faucet plant at Gailpur, Rajasthan, which would take the plant’s total capacity to 16 lakh pieces per annum. The company has announced the expansion of bigger size glazed vitrified tiles capacity by 3MSM per annum at the Sikandrabad plant, which would increase the plant’s total capacity from 8.4MSM to 11.4MSM per annum. Kajaria Bathware Pvt Ltd, a subsidiary of Kajaria Ceramics Ltd, is expected to invest Rs. 70cr in Kerovit Global Pvt Ltd to set up a 6 lakh pieces per annum sanitaryware manufacturing facility in Gujarat. Kajaria is setting up a manufacturing facility in Nepal through a joint venture with an annual capacity of 8MSM per annum. The company is expected to account for 50% of the total Rs. 250cr investment in the plant.

Valuation

The tile industry is expected to witness gradual demand pickup post the festive season as the real estate sector continues to see traction, coupled with the government’s focus on infrastructure spending. Softening gas prices and the usage of alternative fuels are expected to improve margins in 2H23. Ongoing expansion projects should drive the company’s financial performance in the future. We, therefore, reiterate our ACCUMULATE rating on the stock with a revised target price of Rs. 1,180 based on 33.5x FY24E adjusted EPS

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