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Expect 10% volume CAGR; assign BUY!

Result Synopsis

Amidst the tepid demand scenario, Kajaria Ceramics Ltd (KJC) reported decent volume growth of 8.5%YoY, which was better than our estimate of 7%YoY growth. Own/JV/Outsourced mix for the quarter stood at 54%/19%/27% during the quarter. Notably, ASP which has been contracting for past 9-quarters remained steady at Rs367/sqm (Vs our est of Rs365/sqm). Consequently, tiles revenue grew by 5.4%YoY and 6.5%QoQ to Rs10.54Bn. Sanitaryware segment’s revenue grew by 5.7%YoY while plywood revenue declined substantially by 25.6%YoY. Operating margins contracted to 13.5% in Q2FY25 Vs 16%/15% in Q2FY24/Q1FY25 respectively owing to muted margins in bathware division which dented margins by ~90-100bps coupled with additional overheads in tiles division due to commencement of Keronite unit commenced during the quarter. Working capital days stood at 59-days Vs 58-days as on March’24.

Guidance

Management reiterated their FY25 volume guidance of 9-10% while EBITDA margins should come in at ~15% which is the lower end of company’s 3-year margin guidance of 15-17%. Company is confident that H2 will be better than H1 which will enable them to achieve the annual growth guidance and margins should normalize from coming quarter. For bathware, management expects to grow by 15%+ for FY25.

Our View

We reckon KJC will deliver volume growth of 10%CAGR over FY24-FY27E wherein ASP growth will be flattish, hence overall tiles revenue should grow by 10% over similar period, largely on account of healthy industry tailwinds. Bathware biz should also ramp-up over coming fiscals with growing brand acceptance. With higher volumes and better product-mix, operating margins should improve gradually to 16%/16.5% over FY26E/FY27E respectively. Hence, we expect EBITDA growth of 14% over FY24-FY27E. Similarly, net profit should grow by 15%CAGR over similar period. We continue to value the company at P/E(x) of 40x on FY27E EPS of Rs41.5, arriving at a target price of Rs1,661. Hence, we assign a BUY rating to the stock.

Result Highlights

* Revenue for the quarter stood at Rs11.79Bn (4% above est), a growth of 5%YoY & 6%QoQ.

* EBITDA margins came in at 13.5% (Vs est of 14.5%) as compared to 16%/15% in Q2FY24/Q1FY25 respectively, Absolute EBITDA declined by 12%YoY & 5%QoQ to Rs1.59Bn.

* Net profit stood at Rs855Mn, a decline of 23%YoY & 7%QoQ

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