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Expect 10% volume CAGR; maintain NEUTRAL!

Result Synopsis

Sluggish domestic demand and higher competition from Morbi impacted Kajaria Ceramics Ltd (KJC) performance in Q4FY24. Tiles revenue remained flat YoY & grew by 8%QoQ owing to tepid volume growth of 6%YoY & 9%QoQ, Blended realizations declined for 4th straight quarter to Rs369/sqm. Though topline growth was largely inline with expectations, operating margins came in at 14% which was steeply below our estimates of 16% and as against 15%/16% in Q4FY23/Q3FY24 respectively. The contraction in EBITDA margins was on account of reduction in realizations coupled with increase in COGS driven by higher inventory (COGS as %sales came in at 47% Vs 45%/41% in Q4FY23/Q3FY24, respectively). The contribution of Own Manufacturing/JVs/Outsourced to total volumes stood at 54%/21%/25% Vs 56%/20%/24% in previous quarter. As a % of tiles revenue the mix of Own Manufacturing/JVs/Outsourced came in at 56%/21%/24% Vs 57%/20%/23% in previous quarter. The other segments delivered a healthy growth wherein, Bathware/Plywoods/Adhesives grew by 13%/74%/24% on YoY basis. Management laid down their three-year vision, wherein they stated that the company aims to achieve revenues of Rs65Bn by FY27E, of which tiles revenue should be Rs55Bn (implying a 11%CAGR over FY24-27E), and other segments to contribute Rs10Bn. Moreover, in FY27E, management aims to achieve total tile volumes of 150msm (translating into a 12%CAGR over FY24-27E), outperforming the industry growth of ~6-8%CAGR over the similar period. Concurrently, blended EBITDA margins are expected to be ~15-17%. The tailwinds from uptick in real-estate are likely to improve demand scenario from H2FY25E onwards. However, we reckon the domestic demand will remain challenging for KJC even though exports from Morbi are likely to revive with easing of red-sea issue, the competitive intensity in domestic markets will remain elevated with Morbi cluster adding capacity by 15-20%. Hence, we expect KJC to deliver a volume growth of 10% over FY24-26E & with pricing likely to remain under pressure, tile’s revenue should also grow by 10%CAGR over similar period. EBITDA margins are likely to come in at 15.5%/16% in FY25E/FY26E, respectively, translating into EBITDA growth of 15%CAGR over FY24-26E. At CMP, the stock trades at P/E(x) of 39x/33x on FY25E/FY26E EPS of Rs30/Rs35 & we continue to value the company at 35x on FY26E EPS, maintaining our NEUTRAL rating on the stock.

Result Highlights

* Revenue for the quarter stood at Rs12.41Bn (3% below est), a benign growth of 3%YoY & 8%QoQ.

* EBITDA margins came in at 13.9% (Vs est of 16%) as compared to 14.6%/15.5% in Q4FY23/Q3FY24 respectively, contraction was due to higher input cost which stood at 46.6% of sales Vs 44.6%/40.7% in Q4FY23/Q3FY24 respectively. Hence, Absolute EBITDA declined by 2%YoY & 4%QoQ to Rs1.72Bn.

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