May 16, 2018 Kajaria Ceramics Ltd. …scaling high CMP INR 544 Target INR: 701 Result Update –Buy SKP Securities Ltd www.skpmoneywise.com Page 1 of 8 Company Background Kajaria Ceramics Limited (Kajaria), promoted by Mr. Ashok Kajaria in 1985, is the largest player in India’s Ceramic Tiles industry, with ~10% market share, under “KAJARIA” brand with a combined manufacturing capacity of 68.4 MSM which includes its own manufacturing facilities in Uttar Pradesh & Rajasthan and its JV manufacturing partners. It also sells tiles outsourced from Morbi, Gujarat. It also manufactures sanitaryware and faucets through JV partners, which provides it strategic product extension opportunities to leverage its channel. Investment Rationale Topline to grow at a CAGR of ~16.5% over FY17-20E During Q4FY18, Kajaria reported consolidated net sales of Rs 7,500.4 mn, registering marginal growth of ~4% y-o-y basis on account of muted volume growth. It witnessed ~5% volume growth to 20.24 MSM vis-a-vis last year and 6% growth during FY18 to 71.96 MSM. The contribution from owned, JVs, and outsourced tiles to the total consolidated revenues were ~60%, ~25 and ~15% respectively, during the quarter. Contributions from sanitaryware & faucet segments were Rs 490.8 mn. Going forward, with Kajaria’s focus on value added products, increasing contribution from GVT and PVT segment, and positive implications of GST, implementation of interstate (w.e.f. April 1, 2018) and intrastate (expected by June 1, 2018) e-way bill, we expect the Company to grow at a CAGR of ~16.5% during FY17-FY20E. EBIDTA Margins to expand: EBIDTA margins during Q4FY18, declined by 210 bps y-o-y to 16%, mainly on account of higher gas prices, decline in GVT realisations and losses in some of the JVs. Power & fuel cost to sales ratio increased to 20.3% during the quarter vis-à-vis 18% corresponding quarter last year. We expect industry to pick-up from FY19 onwards due to structural shift towards organised players post e-waybill implementation, which is expected to generate traction in the industry.With Kajaria’s focus on superior, value-added products, going forward, we expect the product mix to result in increase of margins to ~17.8%by FY20E. Expanding capacity of PVT & GVT tiles by 5.6 MSM and 5 MSM respectively: There is an increased demand for life style consumption products, especially from aspiring mass affluent. To meet the resultant demand of ceramic tiles, Kajaria is expanding the capacity of PVT tiles at existing location at Maluthana, Rajasthan, by 5.6 MSM with the capex of ~Rs 800 mn. Plant is expected to get commissioned by FY19E. With this expansion the total capacity of the company at Maluthana will increase to 12.1 MSM, from the current 6.5 MSM. Apart from the above capacity expansions through organic route, Kajaria is also in the process of acquiring 51% stake in Floera Ceramics Pvt Ltd (a JV), which has plans to setup 5 MSM (earlier 5.7 MSM) PVT tiles facility, at Andhra Pradesh, with an investment of ~Rs 1 bn. This capacity is expected to get on-stream by September 2018. West Bridge Crossover LLC has committed an investment of Rs 645 mn, for 15% equity stake in Kajaria Bathware Pvt Ltd - a subsidiary of Kajaria producing faucets at Gailpur, reposing the confidence in Kajaria. Ventured in plywood business: Kajaria has announced its entry into another building product viz. plywood by acquiring 50% stake in Kajaria Plywood Pvt Ltd., to leverage its customers and channels. Initially, it will trade in this segment for a couple of years to understand market dynamics. Plywood market is pegged at Rs 180 bn of which Rs 140 bn is dominated by unorganized segment, creating huge opportunities for branded players like Kajaria. VALUATION Better economic growth, leaving more disposable income for discretionary life style consumption, rapid urbanisation, changing customer preference towards quality branded products particularly amongst the growing mass affluent, increasing nuclear families and Governments’ thrust on “Housing for All” coupled with strong brand equity and recall and distribution network, augers well for the Company. It has de-risked its growth strategy with an asset light business model, adopting a joint venture route. We have valued the stock on the basis of P/E - method of relative valuation - of 30x of FY20E earnings. In view of the sharp correction in the share price to Rs 544 now, after a stupendous rally to a 52 week high of Rs 768 recently, we recommend a BUY on the stock with a target price of Rs 701/- (~29% upside) in 18 months. Key Share Data Face Value (INR) 1.0 Equity Capital (INR Mn) 158.9 Market Cap (INR mn) 86462.3 52 Week High/Low (INR) 768/503 Avg. Daily Volume (BSE) 66,528 BSE Code 500233 NSE Code KAJARIACER Reuters Code KAJR.NS Bloomberg Code KJC:IN Shareholding Pattern (Mar 31, 2018) 48% 9% 28% 15% Promoters DII FII Public & Others Particulars FY17 FY18 FY19E FY20E Net Sales 25,496.3 27,106.0 31,773.2 36,777.5 Growth (%) 5.6% 6.3% 17.2% 15.7% EBITDA 4,963.3 4,563.5 5,465.0 6,546.4 PAT 2,528.4 2,349.5 3,001.5 3,712.4 Growth (%) 9.3% -7.1% 27.8% 23.7% EPS (INR) 15.9 14.8 18.9 23.4 BVPS (INR) 73.9 85.0 96.7 110.4 Key Financials (INR Million) Particulars FY17 FY18 FY19E FY20E P/E (x) 34.2 36.8 28.8 23.3 P/BVPS (x) 7.4 6.4 5.6 4.9 Mcap/Sales (x) 3.4 3.2 2.7 2.4 EV/EBITDA (x) 17.7 19.1 16.0 13.2 ROCE (%) 30.8% 24.8% 26.4% 29.3% ROE (%) 21.5% 17.4% 19.5% 21.2% EBIDTA Mar (%) 19.5% 16.8% 17.2% 17.8% PAT Mar (%) 9.9% 8.7% 9.4% 10.1% Debt - Equity (x) 0.1 0.1 0.1 0.1 Source: Company, SKP Research Key Financials Ratios Price Performance Kajaria vs BSE 200 -30% -20% -10% 0% 10% 20% May-17 May-17 Jun-17 Jul-17 Aug-17 Aug-17 Sep-17 Oct-17 Oct-17 Nov-17 Dec-17 Dec-17 Jan-18 Feb-18 Feb-18 Mar-18 Apr-18 May-18 Kajaria BSE 200 Analyst: Vineet Agrawal Tel No: +91-22-49226006; Mobile: +91-9819510575 e-mail: [email protected]
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Kajaria Ceramics Ltd. · Kajaria Ceramics Limited (Kajaria), promoted by Mr. Ashok Kajaria in 1985, is the largest player in India’s Ceramic Tiles industry, with ~10% market share,
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May 16, 2018
Kajaria Ceramics Ltd.
…scaling high
CMP INR 544 Target INR: 701 Result Update –Buy
SKP Securities Ltd www.skpmoneywise.com Page 1 of 8
Company Background
Kajaria Ceramics Limited (Kajaria), promoted by Mr. Ashok Kajaria in 1985, is the largest player in India’s Ceramic Tiles industry, with ~10% market share, under “KAJARIA” brand with a combined manufacturing capacity of 68.4 MSM which includes its own manufacturing facilities in Uttar Pradesh & Rajasthan and its JV manufacturing partners. It also sells tiles outsourced from Morbi, Gujarat. It also manufactures sanitaryware and faucets through JV partners, which provides it strategic product extension opportunities to leverage its channel.
Investment Rationale
Topline to grow at a CAGR of ~16.5% over FY17-20E During Q4FY18, Kajaria reported consolidated net sales of Rs 7,500.4 mn, registering
marginal growth of ~4% y-o-y basis on account of muted volume growth. It witnessed ~5% volume growth to 20.24 MSM vis-a-vis last year and 6% growth during FY18 to 71.96 MSM.
The contribution from owned, JVs, and outsourced tiles to the total consolidated revenues were ~60%, ~25 and ~15% respectively, during the quarter. Contributions from sanitaryware & faucet segments were Rs 490.8 mn.
Going forward, with Kajaria’s focus on value added products, increasing contribution from GVT and PVT segment, and positive implications of GST, implementation of interstate (w.e.f. April 1, 2018) and intrastate (expected by June 1, 2018) e-way bill, we expect the Company to grow at a CAGR of ~16.5% during FY17-FY20E.
EBIDTA Margins to expand: EBIDTA margins during Q4FY18, declined by 210 bps y-o-y to 16%, mainly on account
of higher gas prices, decline in GVT realisations and losses in some of the JVs. Power & fuel cost to sales ratio increased to 20.3% during the quarter vis-à-vis 18% corresponding quarter last year.
We expect industry to pick-up from FY19 onwards due to structural shift towards organised players post e-waybill implementation, which is expected to generate traction in the industry.With Kajaria’s focus on superior, value-added products, going forward, we expect the product mix to result in increase of margins to ~17.8%by FY20E.
Expanding capacity of PVT & GVT tiles by 5.6 MSM and 5 MSM respectively: There is an increased demand for life style consumption products, especially from
aspiring mass affluent. To meet the resultant demand of ceramic tiles, Kajaria is expanding the capacity of PVT tiles at existing location at Maluthana, Rajasthan, by 5.6 MSM with the capex of ~Rs 800 mn. Plant is expected to get commissioned by FY19E. With this expansion the total capacity of the company at Maluthana will increase to 12.1 MSM, from the current 6.5 MSM.
Apart from the above capacity expansions through organic route, Kajaria is also in the process of acquiring 51% stake in Floera Ceramics Pvt Ltd (a JV), which has plans to setup 5 MSM (earlier 5.7 MSM) PVT tiles facility, at Andhra Pradesh, with an investment of ~Rs 1 bn. This capacity is expected to get on-stream by September 2018.
West Bridge Crossover LLC has committed an investment of Rs 645 mn, for 15% equity stake in Kajaria Bathware Pvt Ltd - a subsidiary of Kajaria producing faucets at Gailpur, reposing the confidence in Kajaria.
Ventured in plywood business: Kajaria has announced its entry into another building product viz. plywood by acquiring
50% stake in Kajaria Plywood Pvt Ltd., to leverage its customers and channels. Initially, it will trade in this segment for a couple of years to understand market dynamics. Plywood market is pegged at Rs 180 bn of which Rs 140 bn is dominated by unorganized segment, creating huge opportunities for branded players like Kajaria.
VALUATION
Better economic growth, leaving more disposable income for discretionary life style consumption, rapid urbanisation, changing customer preference towards quality branded products particularly amongst the growing mass affluent, increasing nuclear families and Governments’ thrust on “Housing for All” coupled with strong brand equity and recall and distribution network, augers well for the Company. It has de-risked its growth strategy with an asset light business model, adopting a joint venture route.
We have valued the stock on the basis of P/E - method of relative valuation - of 30x of FY20E earnings. In view of the sharp correction in the share price to Rs 544 now, after a stupendous rally to a 52 week high of Rs 768 recently, we recommend a BUY on the stock with a target price of Rs 701/- (~29% upside) in 18 months.
Long Term Debt (LHS) Short Term Debt (LHS) D/E (RHS)
Kajaria Ceramics Ltd.
SKP Securities Ltd www.skpmoneywise.com Page 5 of 8
KEY CONCERNS
1. Increase in fuel prices: Increase in gas prices, a key input in this energy intensive industry, poses a threat to business in terms of increase in operating cost. To mitigate this, the Company has increased the proportion of value added tiles in the sales mix. Kajaria has also implemented numerous small and critical process improvements, which optimized consumption of gas, eliminating wastage.
.
2. Extended slowdown in real estate sector may dampen business sentiments: Kajaria’s tiles and sanitaryware segment is highly dependent on real estate sector. Any extension of slowdown to Tier – II and Tier –III cities may dampen business prospects of Kajaria.
3. Forex Risk: The Company faces foreign exchange risks due to its imports and exports. Any adverse currency fluctuation may pose threat to the profitability of Kajaria.
VALUATION
Better economic growth, leaving more disposable income for discretionary life style consumption,
rapid urbanisation, changing customer preference towards quality branded products particularly amongst the growing mass affluent, increasing nuclear families and Governments’ thrust on “Housing for All” coupled with strong brand equity and recall and distribution network, augers well for the company. It has de-risked its growth strategy with an asset light business model, adopting a joint venture route.
We have valued the stock on the basis of P/E - method of relative valuation - of 30x of FY20E earnings. In view of the sharp correction in the share price to Rs 544 now, after a stupendous rally to a 52 week high of Rs 768 recently, we recommend a BUY on the stock with a target price of Rs 701/- (~29% upside) in 18 months.
EBIDTA: One year forward looking P/E band
Source: SKP Research
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Adjusted Price 9 18 27 36 45 54
Kajaria Ceramics Ltd.
SKP Securities Ltd www.skpmoneywise.com Page 6 of 8
SKP Securities Ltd www.skpmoneywise.com Page 7 of 8
Note:
The above analysis and data are based on last available prices and not official closing rates. SKP Research is also available on Bloomberg and Thomson First Call.
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Source: SKP Research; Price adjusted for stock split Source: BSE, SKP Research; Price adjusted for stock split
Period (months)
Date RatingAdj Issue
PriceAdj Target
PriceUpside
Potential
300
350
400
450
500
550
600
650
700
750
800
03-
No
v-1
5
03-
Jan
-16
03-
Mar
-16
03
-May
-16
03
-Ju
l-1
6
03
-Sep
-16
03-
No
v-1
6
03-
Jan
-17
03-
Mar
-17
03
-May
-17
03
-Ju
l-1
7
03
-Sep
-17
03-
No
v-1
7
03-
Jan
-18
03-
Mar
-18
03
-May
-18
Adj Close Price Adj Target Price
Kajaria Ceramics Ltd.
SKP Securities Ltd www.skpmoneywise.com Page 8 of 8
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