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Gas price to increase; industry dynamics improving

Fuel price can rise 8% over 2QFY24E average

* Brent Crude and Spot LNG prices spiked 25-31% over the last 2-3 months, which we believe can raise fuel consumption costs of ceramics players and Kajaria Ceramics (KJC), in particular, in 2HFY24.

* Brent Crude jumped 25% in the last few months because of voluntary supply cuts by Saudi Arabia to maintain the demand-supply equilibrium. These supply cuts were first announced in Jul’23 and would continue until Dec’23 as of now since the timelines have been extended a few times.

* Spot LNG price too has been on a rising trend and increased 31% over Jul’23 average. Gujarat Gas too hiked gas price for Morbi players by ~10% in Sep’23 beginning. Based on recent pricing trends, we expect average fuel price for KJC to mount ~8% in 2HFY24 (after ~3% QoQ fall in 2QFY24).

* We note that even after this possible rise in fuel prices, the increased average consumption price for KJC will be still 20%+ lower than its average consumption price for FY23 (but, ~5% higher than its 1QFY24 consumption cost). Hence, this should lead to YoY margin improvement for the company. We expect KJC’s OPM to be at 15.8% in FY24 v/s 13.5% in FY23.

Exports continue to improve; domestic demand still sluggish

* Tiles exports from India continue to rise and monthly exports touched an all-time high of INR19.7b in Jul’23. During Apr-Jul’23, tiles exports from India jumped 31% YoY to INR66.9b (export volume too rose 31% YoY to 192m sq. mt. in this period). Exports of tiles are primarily carried out by Morbi-based players and rising exports would help domestic market prices to stabilize.

* Tiles exports from India are likely to grow 20% YoY to INR210b in FY24 fueled by improving demand in countries such as Mexico, US, UAE, UK etc. Last year, Morbi-based players had suspended their operations for one month (10th Aug-10th Sep’22) due to rising gas prices and higher ocean freight rates.

* Domestic demand for tiles still remains sluggish; however, we expect it to improve in 2HFY24 backed by better demand from the real estate sector. Continued strong traction in real estate should improve tiles demand over the next few years, in our view. In 2QFY24, we expect tiles demand to remain flat vs. last year; though KJC should report 7% YoY volume growth led by market share gains. 

Reduce our FY24 volume estimate due to lower growth in 1HFY24

* We have cut our volume growth estimate for FY24 to 9% from earlier assumption of 11% growth. We, however, maintain our 12% volume growth estimate for FY25 as we expect the industry to witness higher demand from real estate sector over the next few years.

* KJC’s volume reported a 9% CAGR over FY12-23 (despite Covid-related disruptions in FY20-21). We note that KJC’s volume posted a CAGR of 18% over FY10-15, as the company benefitted from the real estate upcycle (demand for tiles is generally witnessed at the end of the project cycle).

* KJC benefits from its superior distribution strength and higher AD spends, which also help it command a pricing premium over its competitors. The company has 1,840 operative dealers vs. 750 in FY12 (CAGR of 8.5% over FY12-23), which help it generate higher volumes. The company aims to increase the dealer count by 450-500 in the next three years (target to reach 2,000 dealers in FY24). 

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