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Result in line; sequential margin expansion likely Low double-digit volume growth in FY25E

* Kajaria Ceramics (KJC)’s consol. revenue grew 5% YoY to INR11.1b (in line). EBITDA dipped 1% YoY to INR1.7b (est. INR1.6b). Tiles volume grew 8% YoY (+2% vs. est.), while realization dropped 3.6% YoY (+1% vs. est.) in 1QFY25. OPM contracted 90bp YoY to ~15% (in line). PAT fell 16% YoY to INR0.9b (in line).

* Management was positive on the demand outlook for the tile industry. With the recent budget announcements, it expects an increase in demand from Bihar, Andhra Pradesh, and urban housing. It projects 5-6% industry volume growth, while KJC’s volume would outperform with 11-12% growth. KJC expects the tile price to have stabilized as it largely remained flat in 1QFY25 vs. 2HFY24. It guided EBITDA margin in the range of 15-17% for FY25.

* We cut our EPS estimates by ~6% for FY25 due to moderate volume growth guidance and gradual margin improvement sequentially. However, we maintain our FY26E EPS and introduce FY27E. We reiterate our BUY rating on the stock with a TP of INR1,670 (premised on 43x Jun’26E EPS). EBITDA margin contracts 90bp YoY to 15% (in line)

* KJC’s consol. revenue/EBITDA/PAT stood at INR11.1b/INR1.7b/INR0.9b (+5%/-1%/-16% YoY and +1%/+3%/-4%% vs. our est.). Tile sales volume rose 8% YoY to 27.0MSM, while realization dipped 3.6% YoY to INR372/sqm.

* Gross margin improved 1pp YoY to 38.5%, led by lower raw material costs. Employee costs increased 23% YoY (12.5% of revenue vs. 10.7% in 1QFY24). Other expenses rose 6% YoY (11.0% of revenue vs. 10.9% in 1QFY24). OPM was down 90bp YoY to 15.0% in 1Q.

* Depreciation increased 38% YoY, while finance costs declined 11% YoY. Other income grew 10% YoY during the quarter.

Highlights from the management commentary

* Despite the softness in domestic demand due to elections, the company’s tile volumes grew ~8% YoY in 1QFY25 vs. 3-4% for the industry.

* Gas prices remained unchanged in 1QFY25 and were similar to the last quarter, with the average price being around INR37/scm. However, average fuel cost declined to INR37/scm from INR39/scm in 4QFY24.

* The Nepal project has been delayed due to heavy rains. It is now expected to start by Sep’24, with a GVT and ceramic production capacity of 5.1MSM.

View and valuation

* We estimate KJC’s revenue/EBITDA/PAT CAGR at 11%/16%/18% over FY24-27. We estimate the tile volume to clock ~11% CAGR over FY24-27. We expect its RoE/RoCE to improve to 20%/24% by FY27 from 17%/20% in FY24.

* The stock is currently trading at 38x FY26E EPS. KJC is estimated to maintain its premium valuation multiple given the healthy earning CAGR, leadership position in the industry, and strong balance sheet as well as return ratios. We reiterate our BUY rating on the stock with a TP of INR1,670 (premised on 43x Jun’26E EPS)

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