Kajaria Ceramics - Cost controls cushion margin hit - HDFC Securities

Mr. Rajesh Ravi, Institutional Research Analyst, HDFC Securities

We maintain our BUY rating on Kajaria Ceramics (KJC) with an unchanged target price of INR 1,130/share (19 Jun'23E consolidated EBITDA). We continue to like KJC for its superior margin in the tiles segment (function of its robust distribution and cost controls) and its fast expansion in its bathware and ply businesses. In Q1FY22, KJC's consolidated revenue/EBITDA/APAT fell by 41/58/66% QoQ to INR 5.62/0.80/0.43bn respectively (with the lockdown impacting consolidated revenue). Its QoQ margin compression is much lower vs peers. With demand recovering June onwards, tiles prices have increased by ~3% in July, boosting cost pass-through and, hence, margin should rebound. KJC's upcoming capacities will continue to support its market share, strengthening its leadership position in the domestic market.

FY22Q1 performance: KJC's tiles/non-tiles revenue fell 40/51% QoQ, hit hard by the lockdown in Q1. Gas prices also rose ~10% QoQ, thereby further hitting profits. However, it managed to restrict the EBITDA margin (at 14.3%) contraction to ~6pp QoQ through its agile fixed cost controls. Its margin contraction is much lower than that of some of the smaller peers who reported ~10-15pp QoQ compression. Demand is on an upswing June onwards. KJC guided that its utilisation has firmed up to 95% in July against 75% in Q1, owing to healthy demand. It has also taken price hikes across both tiles (+3% in July) and bathware (+10% in May) to pass on the gas price and brass price inflation respectively.

Con call takeaways: KJC expects its tiles revenue to grow ~18-19% in FY22E, owing to strong distribution and market penetration. On a low base, it is targeting 50/100% jump in its bathware/ply segments. Its ongoing Capex of INR 2.5bn will increase its tiles capacity by 17% by early FY23E, bolstering its volume growth and market share gain. Over the next three years, KJC expects to expand its tiles market share in India to 15%+ from 12% currently. Continued buoyancy in export markets and elevated gas prices in the Morbi cluster will reduce competitive pressures for national players in domestic markets. We maintain our earnings estimates and target price.

Shares of Kajaria Ceramics Ltd was last trading in BSE at Rs. 1025.3 as compared to the previous close of Rs. 1027.4. The total number of shares traded during the day was 12311 in over 1360 trades.

The stock hit an intraday high of Rs. 1052.4 and intraday low of 1003. The net turnover during the day was Rs. 12674958.

Source : Equity Bulls

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