IGI Logo

Challenging times

Although the current market demand for tiles remains subdued due to sluggish exports and subdued retail demand, we expect it to improve in the medium to long term. Kajaria Ceramics’ (KJC IN) brand strength has enabled the company to outpace market growth in 9MFY25. We expect near-term demand challenges to persist; hence, we lower our TP to INR 1,040 based on 33x FY27E P/E. We reiterate Accumulate.

Soft domestic demand and weak exports drag Q3 growth:

Q3 consolidated net sales rose 1% YoY to INR 11.6bn, 3.1% below our estimates, as tiles revenue grew 2.7% in value and 6.7% in volume. Growth was subdued, due to: 1) sustained softness in domestic demand, and 2) weakness in exports. However, KJC outperformed the industry, which reported flat growth in Q3. The plywood segment saw a 76% decline YoY as the company scaled down production to avoid losses. Tiles realization declined 3.7% YoY due to higher mix from projects sales as retail demand remains sluggish. The bathware segment grew by 2.5% in Q3 while KJC revised its annual growth target from 15% to 10%. Management is optimistic about demand improvement in the near term, as it observes a better demand in January 2025, which will be further supported by Union Budget stimulus and an expected RBI rate cut. Tiles volume for 9MFY25 grew by 7.7% YoY and management expects to endF-Y25 with 8-9% tiles volume growth on the back of slight uptick witnessed in January 2025.

Exports decline; distribution expands:

Exports declined 16% in value terms for 8MFY25 to INR 116bn, due to uncertainty in the US market and a jump in ocean freight rates. A reduction in global freight rates is likely to bolster exports sales. Meanwhile, KJC continues to expand its distribution network, reaching 4,110 locations in India, including smaller towns. The company has 1,880 dealers, with 460 being KJC exclusive dealers. Additionally, the 5.1mn sqm floor and wall tiles plant in Nepal (commercialized in September 2024) and operates at a 70% capital utilization in Q3FY25, which is likely to ramp up to 80-85% by March 2025.

Price chart

Q3 margin declines on lower realization and new plant losses:

Q3 EBITDA margin contracted 275bp YoY to 12.8% vs our estimates of 13.9%, dragged by lower realization and losses in the newly commissioned sanitaryware plant. Power cost remains stable sequentially, with gas prices set to remain stable in Q4 as well. Employee cost rose 150bp YoY, but KJC aims to normalize this as a percentage of sales by FY26 through revenue growth and cost-cutting measures. Management expects margin to improve, aided by revival of retail segment sales and higher utilization in the sanitaryware plants.

Reiterate Accumulate with a lower TP of INR 1,040:

We cut our EPS by 23% for FY25E, 25% for FY26E and 29% for FY27E to factor in lower revenue and profitability. We reiterate Accumulate with a lower TP of INR 1,040 from INR 1,470 based on 33x (from 35x) FY27E P/E, due to near-term growth challenges.

Please refer disclaimer at Report
SEBI Registration number is INH000000933