Kajaria Ceramics - Seeking wider footprint; Initiating with a Buy - Centrum

Our Buy rating on Kajaria Ceramics is based on three key drivers 1) The Rs.170bn (625msm) tile industry in India has registered long term CAGR growth of 12.2%. Under penetration coupled with rising per capita income and replacement demand will aid growth momentum 2) Strong brand equity, distribution network and recent capacity additions provide exposure to the high growth Indian tile market and 3) FCF generation (Rs2bn over FY14E-FY15E despite higher capex), declining leverage (0.5x in FY15E vs. 0.9x in FY13) and improvement in RoCE (22.3% in FY15E vs. 19.8% in FY13). Our forecast implies an EPS CAGR (FY13-FY15E) of 27.4%. We initiate with a Buy and target price of Rs330.

Capacity increase, thrust on production of vitrified tiles and JVs to help earnings growth: Kajaria raised its vitrified tiles production capacity by 19.4msm between FY10-FY14E through brownfield expansion, conversion of ceramic tile capacity to make vitrified tiles and acquisitions (JVs), which helped it to shift focus from trading (imports) to manufacturing, hence withholding cost pressures. Going forward, volume growth from JVs will help improve earnings.

Favourable growth opportunities in Indian tiles market - Kajaria well positioned: Tiles consumption in India has been growing at a strong pace and the growth momentum is expected to be maintained led by under penetration of tiles in smaller towns, rising per capita income, rising middle class population and increased aspiration to own houses. Strong brand equity and distribution network (825 dealers) will help Kajaria leverage on growth opportunities. It has demonstrated its ability to grow inorganically and this trend is expected to continue going forward.

Steep improvement in return ratios: With improvement in earnings (11.4x between FY09-FY13) without leveraging the balance sheet (even though capex was higher), RoCE/RoE improved to 19.8%/32.5% against 9.1%/5.8% in FY09. We further expect RoCE and RoE to improve to 22.3% and 32.7% respectively by FY15E. Working capital days have improved significantly to 35days in FY13 from 126days in FY09.

Valuation & Risks: The stock is trading at 13.1x FY14E EPS and 9.8x FY15E EPS of Rs17.3 and Rs23.1 respectively. We have valued the company at 14.3x FY15E EPS (mean+sd1) due to strong earnings, higher return ratios and the ability to generate free cash flow. We arrive at a price target of Rs330, an upside of 45.6% from CMP. Key risks to our thesis are: a) weak construction scenario, b) rising energy costs and c) threat from Chinese imports.

Source : Equity Bulls

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