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Subdued volumes amidst margin pressure

Quick Pointers:

* Tiles volume grew 1.8% in Q4FY25

* EBITDA margin contracted by ~300bps YoY with reduction in realization.

We have revised our FY26/27 earnings estimates downward by 7.4%/9.1% due to weak demand, the discontinuation of the Kajaria Plywood business, and margin contraction. We had downgraded our rating to ‘Accumulate’ from ‘BUY’, we value the stock at 30x FY27E EPS to arrive at revised TP of Rs878 (earlier Rs 966). The management has refrained from providing guidance due to prevailing low demand conditions but expects to outperform the industry in FY26.  KJC expects margins of ~14% in FY26, However, Q4FY25 margins were impacted due to losses in the bathware segment, product mix changes, and scaling down of UK operations. We have considered 7.7% CAGR in tiles volume over FY25-27E with cons. EBITDA margin of 14.0% in FY27. Management indicated gradual pick-up in FY26 volumes, revival in exports due to lower freight rates, and expected improvement in margins, as the company works on cost rationalization and exits the low-margin plywood business. KJC expects to outperform the sector in volume growth once again through 1) increase outsourcing volume, 2) increase in dealer penetration & showrooms, 3) expansion in product portfolio, 4) intensify focus on govt. projects, and 5) improve business efficiency. We expect Revenue/EBITDA/PAT CAGR of 9.2%/11.3%/16.6% over FY25-27E. Downgrade to Accumulate.

Revenues grew by 1.1% YoY, PAT declined by 37.3% YoY: Revenues grew by 1.1% YoY to Rs 12.2bn (PLe: Rs 12.5bn), mainly due to single digit growth in volume (1.8% YoY). Tiles segment revenue remains flat YoY at Rs 10.9bn (contributes 89%sales) and other segment revenues declined by 7.3% YoY. Bathware division (contributes. 10%rev.) grew by 8.1% YoY. Plywood segment declined by 85.5% YoY to Rs 47mn and Adhesives segment grew by 61.2% YoY to Rs 230mn. Gross margin expanded by ~170bps YoY to 55.8% YoY. EBITDA declines by 20.0% YoY to Rs1.4bn (PLe: Rs1.7bn). EBITDA margin contracted by ~300bps YoY to 11.3% (PLe: 13.4%). Fuel expenses % sales reported 17.5% in Q4FY25 from 19.5% in Q4FY24. PBT declined 23.8% YoY to Rs1.1bn (PLe: Rs1.3bn). PAT declined by 37.3% YoY to Rs 663mn (PLe: Rs 944mn).

Con call highlights: 1) KJC has refrained from providing guidance for FY26, given the soft demand expected in the near term, but remains confident of outperforming the industry. 2) Exports in the tiles industry declined 20% YoY to Rs 160bn, primarily due to rising ocean freight rates and geopolitical uncertainty in Gulf regions. However, for FY26, management expects exports to reach to Rs 200bn as freight costs ease. 3) The company entered into two joint ventures, one in the UAE and the other in the UK; however, it subsequently exited the UK operations due to the high expenses associated with maintaining showrooms. 4) Kajaria Plywood Pvt. Ltd., a wholly owned subsidiary of KJC, established the plywood division in 2017 with the expectation that GST would shift demand from unorganised to branded products. However, as this did not materialize, the company has decided to close the plywood division. 5) Fuel prices for North/South/West stood at Rs 38/39/37SCM. 6) Tier1/Tier2/Tier3/Tier4 cities contributed 15-18%/30%/30%/22-25% revenue in Q4FY25. 7) KJC has 1,850 dealers, with 1,450 exclusive dealers selling only KJC tiles. The target is to increase the number of dealers in the exclusive club. 8) Retail: Institution ratio stood at 70:30 in Q4FY25. 9) KJC plans to invest Rs 2000mn in Capex for FY26, including Rs 750mn for the corporate office, Rs 150-200mn for the Nepal plant, and Rs 1000mn for maintenance capex. 10) In FY25, government projects contributed 6% to KJC’s revenue, primarily from the northern region. For FY26, the company is expanding focus across other parts of India and expects to contribute 8-10%.

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