IGI Logo

Subdued growth; lower fuel cost offers respite Volumes and margins in 2H likely to be similar to 1H

We hosted the management of Kajaria Ceramics (KJC) in our 10th India Ideation Conference. The management highlighted that KJC gained market share in 1HFY25, aided by strong distribution network and brand positioning. Industry demand remained subdued, with minor improvement seen after the festive season. Management expects margin in 2HFY25 to be similar to 1HFY25. The company is focusing on government projects and targeting to increase the share of those projects in its total revenue to ~15% in the next two years from ~10% in FY24.

Tiles demand muted, though KJC gaining market share

* There has not been much change in the industry dynamics, though demand has improved marginally after the festive season. KJC has gained market share in 1HFY25 thanks to its focus on strengthening its distribution network. KJC reported ~8% YoY volume growth in 1HFY25, whereas the industry is likely to have posted flat volume growth.

* In 2HFY25, volume is expected to grow ~7-8% YoY. In FY26, volume growth is estimated to be ~11-12% YoY, led by improvement in real estate demand. KJC, being the largest player in the industry, should benefit when industry demand recovers.

* KJC generates ~30% of its revenues from the project business, with ~7- 10% coming from government-related works, ~10-13% from small projects, and ~7-8% from large builders. The company is building a panIndia sales team, which will focus on getting government orders, as it aims to increase the revenue contribution from those projects to ~15% of total revenue in the next two years.

Lower exports leading to higher competitive intensity

* Tile exports have slowed in the past few months, with 1HFY25 exports (available data so far) falling ~17% YoY to INR87.7b (export volume fell ~18% YoY to 250msm during this period). The monthly average tile export at ~INR14.6b in 1HFY25 was ~13% lower than FY24 monthly average. ? Management highlighted that exports have been impacted by rising freight rates and the Red Sea conflicts. As a result, Morbi-based unorganized players are pushing volume in the domestic markets. Morbi players have become aggressive in the project business, as they do not have a better distribution network for retail sales. However, realization is under pressure due to higher competitive intensity.

Fuel cost under control despite recent price increase by Gujarat Gas

* Recently, Gujarat Gas hiked prices for ceramic players in the Morbi region by ~5% to INR47.0/scm from mid-Dec’24. However, we estimate the average fuel cost for KJC to decline 1.4% QoQ in 3QFY25 (down 0.7% on spot basis over 3QFY25 average) based on fuel mix optimization by KJC.

* Management expects margin in 2HFY25 to be similar to 1HFY25 (OPM at ~14%). Margin in FY26 should be around 15-17%, led by 1) better volume growth which would drive positive operating leverage and improve realization, and 2) improvement in the bathware segment’s margin (~10-11% post plant ramp-up).

* We reduce our FY26/FY27 EBITDA estimates by ~3%/4%, leading to a ~4% cut in EPS estimates for FY26/FY27 each, factoring in lower volumes.

Valuation and view:

Slow recovery priced in; reiterate BUY

* We estimate KJC to deliver a CAGR of 12%/18%/21% in revenue/EBITDA/PAT over FY25-27. We estimate EBITDA margin at ~15%/16% in FY26/FY27 vs. ~15%/14% in FY24/FY25E (historical average at ~16% over last 10 years). We estimate its ROE/ROCE to improve to 19%/22% by FY27 vs. 15%/18% in FY25E. KJC has been generating FCF since FY16, which is likely to continue going forward as well. We expect net cash to increase to INR5.4b/INR6.4b in FY26/FY27 from INR4.1b in FY25E, despite high capex (INR10.0b over FY25-27).

* In the last three months, the stock has corrected more than 25% due to lower demand, increased supply from Morbi-based players (limiting realization growth), and margin pressure. The stock is currently trading at 36x/29x FY26E/FY27E EPS (vs. 10-year average of 38x). We reiterate our BUY rating on KJC with a TP of INR1,450, based on 40x Dec’26E EPS.

For More Motilal Oswal Securities Ltd Disclaimer http://www.motilaloswal.com/MOSLdisclaimer/disclaimer.html

SEBI Registration number is INH000000412