Buy Kajaria Ceramics Ltd For the Target Rs. 1,224 By PL Capital- Prabhudas Lilladher
Soft demand, margins contracted
Quick Pointers:
? Tiles volume grew 6.7% in Q3FY25.
? EBITDA margin contracted by ~275bps YoY with increased overhead expenses.
We downward revise our FY25/FY26/FY27 earnings estimates by 11.8%/9.4%/9.4% factoring in contraction in EBITDA margins and lower volume growth guidance of 8-9% in the tiles segment. Additionally, muted demand in the bathware segment, primarily driven by weak retail business performance, has also influenced our outlook. KJC is expected margin of 14-15% in FY26. However, in Q3FY25, margins were impacted by losses in the bathware segment, higher employee expenses, and lower realizations in the tiles segment. KJC is expecting a revival in demand, driven by an anticipated rate cut by the RBI and an expected increase in disposable income due to the restructured personal income tax regime in the FY26 Union Budget. KJC has increased its stake in the Nepal JV from 50% to 51%, with current capacity utilization at 70%, expected to rise to 80-85% and its number will be consolidated in FY26. We have considered ~8.8% CAGR in tiles volume over FY24-27 with cons. EBITDA margin of 15.2% in FY27. Management has indicated that volume growth will gradually pick up in FY26, driven by initiatives such as 1) increase in dealer penetration & showrooms, 2) enhanced brand building, 3) expansion in product portfolio, 4) intensify focus on projects business, and 6) improved business efficiency. We expect Revenue/EBITDA/PAT CAGR of 8.5%/8.2%/9.7% over FY24-27E. Maintain ‘BUY’ rating, as we value the stock at 35x FY27 (revised target multiple from 40x to 35x on soft guidance and weak demand scenario) EPS to arrive at revised TP of Rs1,224 (earlier Rs 1,545).
Revenues grew by 1.0% YoY, PAT declined by 24.6% YoY: Revenues grew by 1.0% YoY to Rs11.6bn (PLe: Rs11.8bn), on back of 6.7% YoY volume growth. Tiles segment revenues grew by 2.7% YoY (contributes 89%sales) and other segment revenues declined by 11.4% YoY. Bathware (cont. 8%rev.) grew by 2.5% YoY. Gross margin contracted by ~40bps YoY to 58.8% YoY. EBITDA declines by 16.8% YoY to Rs1.5bn (PLe: Rs1.7bn). EBITDA margin contracted by ~275bps YoY to 12.8% (PLe: 14.5%). Fuel expenses % sales reported 20.7% in Q3FY25 from 20.8% in Q3FY24. PBT declined 24.8% YoY to Rs1.1bn (PLe: Rs1.4bn). PAT declined by 24.6% YoY to Rs787mn (PLe: Rs1.0bn). Reported working capital of 59days vs 58days in Mar-24. Company is acquiring an additional 1% stake in Kajaria Ramesh Tiles Limited, Nepal, increasing its share from 50% to 51%. It has already invested Rs 1.1bn in the JVC and now plans to invest an additional Rs 606mn.
Con call highlights: 1) KJC has revised its volume growth guidance for FY25 from 9-10% to 8-9% in tiles due to low demand in retail segment, and Bathware segment from 15% to 10%. 2) KJC has maintained its 3 years guidance to reach Rs 6.5bn revenue by FY27, with a CAGR of 11%/23%/19%/44% in tiles/bathware/plywood/adhesives segments. 3) The company's EBITDA margin was impacted by lower realizations and losses in the bathware segment due to the new sanitaryware unit in Morbi, which typically takes 6-12 months to stabilize and is expected to grow in the future.4) Volume and Value contribution of Ceramic/PVT/GVT tiles were 42%/25%/33% and 37%/26%/37%, respectively. 5) KJC's realization was impacted due to a shift in the business mix, with lower demand in the retail segment and competitive pricing in the project segment. 6) Bathware/Plywood/Adhesives contributed 8%/1%/2% in topline. 7) Fuel prices for North/South/West stood at Rs 38/38/37 SCM. 8) Exports in the tiles industry declined 16% YoY to Rs 11.6bn, primarily due to rising ocean freight rates and geopolitical uncertainty in Gulf regions. 9) The company is acquiring an additional 1% stake in Kajaria Ramesh Tiles Limited, Nepal, increasing its share from 50% to 51%, making it a subsidiary. The plant, currently operating at 70% capacity within two months, is expected to reach 80-85% soon. 10) KJC is expecting a revival in demand, driven by an anticipated rate cut by the RBI and an expected increase in disposable income due to the restructured personal income tax regime in the FY26 Union Budget.
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