Kajaria ceramics: Leader in ceramics with strong growth profile and healthy return ratios, Initiating with BUY - IIFL

We are initiating coverage on Kajaria with a BUY rating and a 12-month target price of Rs 225/share, implying 19% upside. Kajaria is the largest tile manufacturer in India with continued market share gains in a growth industry and a strong execution track record. A strong focus on profitability and return ratios has led to 25%/100%+ revenue/EPS CAGR over FY09-12 and we expect a healthy 20%/29% CAGR over FY12-15E. With ROEs healthy at 30%+, debt/equity comfortable at 0.6x and positive free cash flow generation, we expect recent expansion in P/E multiples to sustain. BUY.

Healthy market trends: Indian tile market is relatively under penetrated with a number of households beginning to use tiles. Organized segment is seeing a faster growth rate due to growing brand awareness and demand for quality products in houses. Further, per capita consumption of tiles still remains low (0.52 sq. mt per person) with scope for significant expansion over the next few years. Kajaria is one of the strongest brands in the tile market (present since 1988) and is well placed to leverage on this trend.

Kajaria leading the branded segment: Kajaria has leveraged its long standing presence in the tile market and its strong distribution network to deliver strong growth in the last 5 years. A gradual upgradation in consumer preferences and increased company focus on margins/ROE has led to Kajaria improving its product mix in several ways 1) Higher-end tiles (vitrified), 2) Focus on big sizes that have higher margins, 3) Added capacity to increase proportion of manufactured tiles (vs traded tiles).

Financials to keep improving: Kajaria continues to add capacity largely through inorganic route given that a number of unbranded players are available at cheap valuations. With lead over other branded players growing, we expect current financial metrics to sustain. Key risk to thesis remains from a macro slowdown impacting demand for tile segment.

Valuation and risks

We value Kajaria at 12-month forward P/E of 10x, at a discount to current valuations of 11x. Growth continues to be strong backed by strong return ratios and industry leadership position that we believe would continue to sustain current multiples. In our view, the risk to our multiple is on the upside if Kajaria keeps delivering.

Source : Equity Bulls

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