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Migrating toward a higher margin trajectory

We maintain BUY on Kajaria while raising our TP by ~7% to Rs1,550 (from Rs1,450). The company has delivered superior profitability with EBITDA margins significantly expanding by 450bps YoY/110bps QoQ in Q2FY26. The margin profile of 17-18% in H1FY26 is notably higher than the normative range of 14-16% seen earlier. On the back of several cost-saving initiatives, profitability is expected to sustain within this range going ahead. Accordingly, we increase EBITDA margin by 160-190bps for FY26-28E. On the other hand, while we expect the company to gain market share (increase in market penetration), we remain cognizant of the sluggish demand scenario and, hence, now build in sales volume CAGR of 6.1% over FY25-28E (vs 8.7% earlier). The balance sheet is sturdy (net cash) and return ratios likely to improve.

Sales volume muted, albeit expected to revive from H2FY26

Kajaria’s sales volume was broadly flattish YoY at 28.9msm in Q2FY26 (in line with Emkay estimate) due to soft demand (intense monsoons) and management focus on internal revamp. With the internal rejig largely in place, the increase in focus on tier 2/3 cities vis-à-vis recent initiatives like unification of the tiles division, targeting architects, interior designers and influencers would enable better market penetration in the coming quarters. The company expects to clock growth from Q3FY26. However, given the flattish H1 performance and muted demand scenario, we cut our volume estimate by 2-7% and now build in volume CAGR of 6.1% to 137msm during FY25-28E (vs 8.7% earlier).

Margin profile significantly improves; expected to sustain at higher levels

EBITDA grew 34% YoY to Rs2.1bn, led by 450bps YoY expansion (up by 110bps QoQ) in EBITDA margin to 18.0% (Emkay est: 16.5%). Kajaria is reaping the benefits of continued focus on cost reduction which includes measures like unification of the tiles division, human resource optimization, reduction in packaging costs, etc. Consequently, EBITDA margin has moved to the 17-18% range in H1FY26 which is much higher than the normative 14-16% earlier. Continuity of such cost-reduction measures, lowering procurement costs, and focus on making the sanitaryware division profitable in FY26 would lead to profitability sustaining at higher levels. We upgrade EBITDA margin by 160- 190bps for FY26E/27E/28E to 16.9%/17.2%/17.5%, respectively.

We maintain BUY; raise target price by ~7% to Rs1,550

Kajaria’s balance sheet remains sturdy, with net cash of Rs5.9bn (vs Rs5.2bn in Q1FY26). Net D/E stands at -0.2x, as of Q2FY26. Kajaria remains the market leader in the tiles industry, with strong brand recall. Volume growth is expected to pick up in coming quarters, with revamp in strategy, better penetration in tier-2/3 towns, increase in B2B demand, and likely gradual revival of B2C demand from H2FY26. As we bake in higher profitability as well as roll over to Sep-27E, our target price is raised to Rs1,550 (earlier Rs1,450) at 42x PER (unchanged); we maintain BUY on the stock.

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