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Sustained margin improvement intact

Kajaria Ceramics Limited manufactures glazed and unglazed ceramic tiles. It sells its products in India and also exports to other countries.

• In Q1FY24, its revenue grew 5.6% YoY to Rs. 1,064cr, led by higher sales volume (+7.2% YoY).

• EBITDA grew 10.2% YoY to Rs. 169cr, and margin expanded 70 bps YoY to 15.9%. A reduction in fuel and power costs supported EBITDA growth and margin expansion.

• Demand growth from September onwards, owing to a recovery in construction activities, as well as demand from home renovations, will support topline growth. An easing in gas prices, and operational efficiency would support EBITDA margin expansion. Moreover, the stock is trading at 38x P/E of FY25. This is lower than 3 years average P/E of 41x. Hence, we maintained our ACCUMULATE rating on the stock, with a rolled forward target price of Rs. 1,610 based on 42x FY25E adjusted earnings per share (EPS).

Volume growth supported topline

In Q1FY24, consolidated revenue rose 5.6% YoY to Rs. 1,064cr owning to 5.4% YoY growth in the Tiles segment, taking it to Rs. 966cr. Volume growth of 7.2% YoY in Tile segment supported overall growth, which, however, was limited, due to subdued demand, primarily in May and June

Lower power and fuel costs helped margin expansion

EBITDA grew 10.2% YoY to Rs. 169cr, and margin expanded to 15.9% in Q1FY24, compared with 15.2% in Q1FY23, primarily due to a 27.9% YoY reduction in power and fuel costs, which led gas prices to soften. Profit after tax (PAT) grew 17.4% YoY to Rs.109cr, supported further by lower income tax and depreciation expenses.

Key highlights

• Management expects EBITDA margin to be in the range of 14% and 16% in FY24.

• It expects cost saving of between Rs.150cr and Rs. 175cr, led by the easing of gas prices.

• The expansion of the Sikandrabad (Uttar Pradesh) plant’s capacity to 11 MSM p.a. (million square meters) from 8.4 MSM p.a. earlier has been completed, and the plant is expected to commence production in early August. Moreover, the modernisation of the Gailpur (Rajasthan) facility is targeted to be completed by August 2023. The new plants are expected to produce larger tiles and save on fuel consumption.

• The board of directors have agreed to develop a production facility of 5.1 MSM in Nepal, with a project cost of Rs. 181cr.

Valuation

Demand for the Tiles segment is expected to improve, supported by a recovery in construction activity and anticipated home renovations ahead of the festive season. Moreover, the commissioning of new capacity would also contribute to overall volume growth and therefore, the topline. The softening of gas prices could further aid margin expansion. Moreover, the stock is trading at 38x P/E of FY25. This is lower than 3 years average P/E of 41x. Hence, we maintained our ACCUMULATE rating on the stock, with a rolled forward target price of Rs. 1,610, based on 42x FY25E adjusted earnings per share (EPS).

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