Kajaria Ceramics: Laying the ground

Investors with a long-term view can continue to hold the stock of Kajaria Ceramics. The company is the leader in the organised market (50 per cent of the total market) of ceramic and vitrified tiles. Its capacity has grown from 23.4 million sq m (msm) in 2009-10 to about 68.6 msm now, largely through JVs with players, such as Soriso Ceramics, Jaxx Vitrified and Taurus Tiles and also through internal capacity expansions. From our buy recommendation in May last year, the stock has rallied 22 per cent to ₹944 a share.

Though in the last quarter, volume growth was not as strong as expected, the company’s long-term prospects continue to be good. Growing aspirations of the middle class and the increasing disposable income of people should drive demand for tiles. The Centre’s levy of anti-dumping duty on tiles from China recently, is also a positive.

The Indian tile players should see their market share go up now as consumers, who have been buying imported Chinese tiles, make the switch due to lower cost differentials. At the current market price, the stock discounts its estimated earnings for 2016-17 by 26 times, at the upper end of the band of 13-28 times in the past three years.

In the December 2015 quarter, the company’s revenue grew 8 per cent Y-o-Y helped by volume growth of 8 per cent to 15.86 msm (16.13 msm in September 2015 quarter) and profits were up a strong 28 per cent, thanks to cost saving on fall in fuel prices.

In the December 2015 quarter, sales volume dropped 2 per cent sequentially. With many consumer durable players already struggling to keep sales growing, Kajaria’s lacklustre show has raised doubts of a demand slowdown due to a sagging real estate market. The tile industry has witnessed demand growth slowdown to 12 per cent annualised growth between 2013-14 and 2014-15 from about 14-15 per cent between 2010-11 and 2013-14. Real estate developers have been witnessing increase in inventory pile up due to a demand slowdown and this has hit offtake for building materials, such as tiles and sanitaryware. In the first nine months of 2015-16, the company reported 9 per cent growth in sales volume and 10 per cent rise in revenue, compared to the same period last year. Profit though, was up a sharp 32 per cent thanks to large savings in costs.

Kajaria’s revenue growth in the past has been robust. Sales grew at an annualised rate of 25 per cent between 2009-10 and 2014-15, outpacing several peers in the industry. This is thanks to its aggressive capacity expansions and acquisitions. Recently too, it acquired 51 per cent stake in a company called Floera Ceramics in Andhra Pradesh. This company is putting up a 5.7 msm capacity, which will be up and running by March next year and will add to Kajaria’s sales. Increasing market reach through acquisitions and its drive to grow sales through innovative products and expanding distribution reach in tier II/III cities should help Kajaria grow.

In the coming quarters, if demand picks up again due to rate cuts that lower home loan rates, and consumer sentiment turns positive, sales growth should revive.

Given its shift in product mix to more polished and vitrified tiles and drop in gas prices, Kajaria’s operating profit margin has improved sharply.

It expanded to 19.6 per cent in the recent December quarter from 15.6 per cent in the December 2014 quarter.

Following renegotiation of the RasGas contract by Petronet and landed price of LNG dropping further since January, operating margin should go up further in the coming quarters — power cost as a percentage of sales for most tile makers is about 30 per cent. Kajaria also has a low debt-to-equity ratio of 0.33 times (as of December 2015) and sufficient cash balance to fund future acquisitions.