COMPANY REPORT

Kajaria Ceramics – HOLD

Rich valuations, multiple headwinds to keep stock under check

Weak performance CMP (Rs) 510 12-mths Target (Rs) 459 Downside 10%
Kajaria Ceramics (KCL) reported consolidated sales growth of 6.5% yoy Stock data (As on July 23, 2019) Sector: Building Materials
in Q1FY20 as volumes grew by 9.6% yoy but net realizations dipped by Sensex: 37,983 Stock performance
2.8% yoy. Sales volume from own manufacturing/outsourced 52 Week h/l (Rs) 649/316 170 Kajaria Sensex

segments grew by 3%/61% yoy respectively while JV volumes dipped Market cap (Rs bn) 81.1 140
80.4 110
by 6% yoy. Gross margin came at 60%, down 550bps yoy led by Enterprise value (Rs bn)
80
unfavorable revenue mix (outsourced revenue contribution was at 25% 6m Avg t/o (Rs mn): 326
50
FV (Rs): 1
in Q1FY20 vs 18% in Q1FY19). However, EBITDA margin improved Jul-18 Nov-18 Mar-19 Jul-19
Div yield (%): 0.6
40bps yoy due to 280bps decrease in power cost as a percentage of Shareholding pattern (As of Jun’19 end)
Bloomberg code: KJC IN
manufacturing & JV sales. KCL’s working capital has further Promoter 47.6%
deteriorated from 58 days in Q4FY19 to 62 days in Q1FY20. BSE code: 500233
FII+DII 36.6%
NSE code: KAJARIACER Others 15.8%
KCL has been a very strong player in GVT/PVT segments led by best
quality, strong brand & distribution network. However, in recent times Exhibit 1: Result table (Consolidated)
Tier-II & organized players from Morbi have heavily invested in quality (Rs mn) Q1 FY20 Q1 FY19 % yoy Q4 FY19 % qoq
standards of GVT/PVT products, production efficiency, brand & Volume (MSM) 19.6 17.9 9.6 22.5 (12.7)
distribution network. Renewed concerns over demand in the housing ASP (Rs/sqm) 356 367 (2.8) 362 (1.6)
sector have been weighing on the stock. Further, the anticipated shift Total sales 7,000 6,570 6.5 8,153 (14.1)
from unorganized to organized players following the implementation EBITDA 1,060 968 9.5 1,229 (13.8)
of the GST has not played out owing to gaps in e-way bill surveillance. EBITDAM (%) 15.1 14.7 40.4 15.1 6.0
Hence, we believe 15% volume growth through further market share Depreciation (258) (227) 13.9 (217) 19.1
gain would be very challenging. We estimate volume growth of Interest (45) (42) 8.4 (33) 38.2
9.5%/10.5% in FY20E/FY21E respectively with realizations expected to Other income 53 24 121.8 65 (19.1)
remain under pressure in near term, leading to modest EBITDA CAGR PBT 809 724 11.8 1,045 (22.6)
of 11% over FY19-21E. The stock is trading at P/E of 32.3/27.8 Tax (305) (270) 13.2 (362) (15.7)
respectively, implying rich valuations with PEG ratio of 2.3x. We have Share in JVs/MI 6 2 (9)
bearish view on the stock & retain HOLD rating with revised target Adjusted PAT 510 456 11.9 674 (24.4)
price of Rs459 at 25x FY21E EPS. Source: Company, YES Sec - Research

July 24, 2019

Research Analyst: Umesh Raut  umesh.raut@ysil.in
Head of Research: Amar Ambani  amar.ambani@ysil.in (For important information about YES SECURITIES (INDIA) LTD. and other disclosures, refer to the end of this material.)
Kajaria Ceramics

Exhibit 2: Cost analysis (Consolidated) Lack of demand recovery, strong emergence of Tier II players
As a % of net sales Q1 FY20 Q1 FY19 bps yoy Q4 FY19 bps qoq & moderation in earning growth warrant further de-rating
COGS 24.0 24.1 (12.5) 28.4 (445.7) The tile industry continues to remain competitive with strong
Traded goods 16.1 10.5 562.1 15.1 104.6 emergence of numerous Tier-II players based out of Morbi and several
Other expenses 13.0 14.0 (103.0) 12.7 31.5 large players from the listed segment. No visible demand recovery,
Power & fuel 19.2 23.4 (424.9) 17.9 132.0 especially from the real estate companies, may result in pricing pressure
Employee cost 12.6 13.2 (62.2) 10.9 171.6 and low offtake for KCL. Renewed concerns over demand in the
Total costs 84.9 85.3 (40.4) 84.9 (6.0) housing and real-estate sector have been weighing on the stock.
Source: Company, YES Sec - Research Further, the anticipated shift from unorganized to organized players
following the implementation of the GST has not played out. Many
Pricing environment likely to remain challenging owing to unorganized players continue to escape the tax net owing to gaps in e-
stiff competition, demand slowdown & liquidity crisis way bill surveillance. Lack of visible demand recovery coupled with
Ceramic manufacturers in Morbi have raised the prices of products muted margin expansion prospects would result in earning growth
primarily across wall/soluble tiles range by 10-20% owing to a move moderation over FY19-21E.
from cheaper to costlier fuel and restrictions imposed by the Rajasthan
government on sale of raw materials. Availability of raw materials have Minimal capex plans in near term
also been affected by the Rajasthan government's recent order to restrict Kajaria would be incurring Rs2.5 bn capex over the next two years of
transportation of mineral Felspar (mainly used as whitening agents) in which Rs1.5bn would be towards Southern India expansion, Rs210mn
form of grains, chips and gitti out of the state. The industry players in Sanitaryware, balance being maintenance capex. The company’s 5
expect a price hike across PVT/GVT product segments to pass on million square meter (MSM) GVT manufacturing plant in Andhra
increased raw material costs to customers. However, the sustenance of Pradesh is expected to be commissioned by September 2019. The
an industry wide price hike could be a challenge because of the surplus sanitaryware segment which is operating at full capacity utilization will
capacity in the industry & lack of demand recovery. see an increase of 1.5 lacs pieces p.a. expansion from 6 lacs pieces p.a.
by August 2019. The faucet manufacturing facility of 1 million pcs p.a.
GVT/PVT tiles products have already seen sharp price correction of operated at 72% capacity utilization during Q1FY20 (65% in FY19) is
around 30-40% over the past 5-6 quarters because of significant capacity expected to attain a 90% capacity utilization in FY20.
addition in the Morbi region and slowdown in the real estate sector.
Our interactions indicated that pressure on realizations of premium
products should continue, mainly because of higher competition from
aggressive approach adopted by emerging (Tier-II) Morbi players.

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Kajaria Ceramics

Exhibit 3: Quarterly volume trends Exhibit 5: Realizations expected to remain under pressure
25 JVs Outsourced Manufactured JVs Outsourced Manufactured
(MSM) (Rs/sqm) 391 388
382 381
390 374 375 376
366 370
20 363 366 365
390
370 354
11.5
15 11.1 350 366 366
10.5 11.3 10.9 362
11.3
9.9 9.9 10.5 352
8.7 9.4 8.7 8.7 330 347 346
10 335 336
4.8 310 324 326 328
2.8 3.5 4.0 315 318 316
1.3 1.8 2.2 3.3 3.3 3.2 2.7 3.2 4.4 314
5 290 304
5.8 5.4 6.0 5.4 6.2 292 295 292
5.0 4.5 4.5 4.4 4.7 5.0 5.3 4.4 290 288 291
270 286
0 278
271
Q1FY17 Q3FY17 Q1FY18 Q3FY18 Q1FY19 Q3FY19 Q1FY20 250
Q1FY17 Q3FY17 Q1FY18 Q3FY18 Q1FY19 Q3FY19 Q1FY20

Source: Company, YES Sec - Research Source: Company, YES Sec - Research

Exhibit 4: Outsourcing sale was at 25% Q1FY20 vs 18% Q1FY19 Exhibit 6: Power & fuel cost is on declining trend
JVs Outsourced Manufactured P&F Cost P&F Cost (% of mfg+JV Sales)
120 (%) (Rs/sqm) (%)
120 28.4 30
27.5
26.2 25.6
100 25.4
24.5
100 23.6 25
22.1 22.8
21.8
80 20.3 20.3 19.9
54 55 54 53 54 57 57 57 55 51 55 80 20
59 59
60
60 15

101.2

99.1
95.9
11

94.6
40

91.0
14 16 17

87.8
18 24

84.4
83.4

82.2
19 20 20 22

78.5
18 19 25 40 10

74.2
73.8

73.7
20 35 31 30 29 28 23 23 23 23 22 23 24 20 20 5

0
Q1FY17 Q3FY17 Q1FY18 Q3FY18 Q1FY19 Q3FY19 Q1FY20 0 0
Q1FY17 Q3FY17 Q1FY18 Q3FY18 Q1FY19 Q3FY19 Q1FY20

Source: Company, YES Sec - Research Source: Company, YES Sec - Research

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Kajaria Ceramics

Exhibit 7: Financial summary

Y/e 31 Mar (Rs mn) FY17 FY18 FY19 FY20E FY21E
Revenues 25,496 27,106 29,562 32,153 35,831
yoy growth (%) 5.6 6.3 9.1 8.8 11.4
EBITDA 4,963 4,564 4,495 4,903 5,587
EBITDAM (%) 19.5 16.8 15.2 15.2 15.6
Adjusted PAT 2,528 2,342 2,314 2,508 2,917
yoy growth (%) 9.3 (7.4) (1.2) 8.4 16.3

EPS (Rs) 15.9 14.8 14.3 15.8 18.4

P/E (x) 36.4 39.1 40.6 36.7 31.5
P/BV (x) 7.8 6.8 5.8 5.2 4.6
EV/EBITDA (x) 19.0 20.4 20.3 18.6 16.2
D/E (x) 0.2 0.1 0.1 0.1 0.0
ROE (%) 23.5 18.5 15.8 15.0 15.5
ROCE (%) 32.4 26.3 24.0 23.1 23.8
Source: Company, YES Sec - Research

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RECOMMENDATION PARAMETERS FOR FUNDAMENTAL REPORTS

Analysts assign ratings to the stocks according to the expected upside/downside relative to the current market price and the estimated target price. Depending on the expected
returns, the recommendations are categorized as mentioned below. The performance horizon is 12 to 18 months unless specified and the target price is defined as the analysts’
valuation for a stock. No benchmark is applicable to the ratings mentioned in this report.

BUY > 15%

ADD 5% to 15%
HOLD -15% to +5%
SELL > - 15%
POSITIVE: Positive is rating given to stocks we like but yet to be formally included in our coverage universe.
NEGATIVE: Negative is rating given to stocks yet to be formally included in our coverage universe, but we find valuations expensive vis-a-vis fundamentals.
NEUTRAL: Neutral rating is given to stocks that are not under our formal coverage yet, but we find current valuation fairly representing fundamentals.

ABOUT YES SECURITIES (INDIA) LIMITED

YES SECURITIES (INDIA) LIMITED (‘‘YSL’’) was incorporated on 14th March 2013 as a wholly owned subsidiary of YES BANK LIMITED. YSL does not have any other
associates. YSL is a SEBI registered stock broker holding membership of NSE and BSE. YSL is also a SEBI registered Category I Merchant Banker, Investment Adviser and a
Research Analyst. YSL offers, inter alia, trading/investment in equity and other financial products along with various value added services. We hereby declare that there are
no disciplinary actions taken against YSL by SEBI/Stock Exchanges.

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Registered Office: Unit No. 602 A, 6th Floor, Tower 1 & 2, Indiabulls Finance Centre,
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DISCLOSURE OF INTEREST
Name of the Research Analyst : Umesh Raut
The analyst hereby certifies that opinion expressed in this research report accurately reflect his or her
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