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Kajaria Ceramics (KJC) has reported fraud in its step-down subsidiary Kerovit Global (Kerovit) following investigations; the Rs200mn fraud is substantial, considering that it is 13% of Kerovit’s total assets as of FY25. The embezzlement, spanning the last two years, reflects the company’s weak practices earlier. While the event has negative implications for the overall governance and controls, the management has handled it effectively; we do not see this event impacting valuations. Further, the fraud was detected during the exercise of strengthening the company’s IT/internal systems, including the vendor onboarding process. KJC has taken necessary action, involving termination of the CFO of the subsidiary and filing a police complaint. Internal controls have been made more stringent, with implementation of more such measures lined up, to avoid a repeat of such instances of fraud. The status on full recovery of the fund amount is unclear currently, and would be taken as an ‘exceptional loss’ in FY26. We maintain our estimates for FY27/28 and retain BUY on the stock along with TP of Rs1,550.

Internal process upgradations lead to fraud detection in a step-down subsidiary KJC recently notified about a fraud amounting to Rs200mn by Dilip Kumar Maliwal, CFO of Kajaria Bathware (KBPL; its subsidiary) in Kerovit Global—a wholly-owned subsidiary (WoS) of KBPL. Further, it highlighted that the fraud detection was an outcome of internal process upgradation/MIS audit processes that KJC had put in place in the last 1-2Y. The misappropriation of funds happened at the capex stage through forgery of signature of the senior management and creation of a fake vendor entity, wherein Maliwal was the beneficiary. The fraud amount was substantial (~13% of Kerovit’s total assets in FY25). The MIS audit for vendor onboarding detected discrepancies, bringing the fraud to light. So far, Rs6mn has been recovered, though the company does not expect full recovery. Net loss (ie Rs200mn less the money recovered) due to the fraud would be taken as an ‘exceptional item’ in H2FY26.

Making internal processes stronger In the last 1-2Y, measures taken by the company on upgrading its IT system/MIS have made the process of vendor onboarding largely automated; this mostly eliminates manual intervention. The process has been completed for Kajaria Ceramics (parent company); all subsidiaries coming on board this platform are likely to take another 3-4 months. KJC aims to implement more such measures, which would ensure that stringent checks are in place, and avoid a repeat of such instances of fraud in the future.

Remain vigilant on future events; maintain BUY Further to this fraud, we assume exceptional loss of Rs194mn for FY26E (ex Rs6mn already recovered; this amount could be less, depending on the extent of recovery in the current year). We maintain our estimates for FY27/28. Also, while we retain our target multiple for Kajaria, a repeat of such events in future could pose a risk and lead to derating. We maintain BUY on Kajaria and our TP of Rs1,550 (at 42x; 10Y average PER).

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