Kajaria Ceramics: Perfect edge

The company’s efforts to grow capacity and improve product offering are positives

Investors with a long-term perspective can consider buying the stock of Kajaria Ceramics, a leading player in the tiles market, given that demand for home construction is looking up. From our ‘hold’ recommendation on the stock in November at a high valuation multiple of 46 times the trailing earnings of 12-months, the stock has corrected about 35 per cent. At ₹459 a share, it trades at a reasonable trailing PE of 31 times now.

Growth is all set to recover, with the increase in investments by the Centre in the Pradhan Mantri Awas Yojana and the push for Swachh Bharat Abhiyaan, implementation of GST and e-way bill regulations.

There would be a significant increase in demand for low- and mid-end ceramic tiles as also polished vitrified tiles, and players such as Kajaria Ceramics would stand to benefit.

With GST implementation, the share of unorganised players is set to reduce. Hence, Kajaria and other branded tile makers will derive increased pricing power, which will improve profit margins.

Kajaria’s continued efforts to grow capacity and improve product offering should also give it an edge over other players.

The company has a 10 per cent market share and a pan-India presence in ceramic tiles. Focus on JV-led expansion into new markets, right mix of high-value vitrified tiles in the portfolio, diversification into sanitaryware (stepped into the segment in 2014-15), go in favour of the stock.

Demand recovery

The residential real estate market has been witnessing some recovery from the second half of 2017-18. This is a positive, given that for Kajaria, 70 per cent of sales come from customers in the residential segment.

A CRISIL report indicates that over 40 million urban homes need to be constructed by 2022 to achieve the government’s ‘housing for all’ target, giving an opportunity to players in the building materials space.

The government is expected to fund about ₹1,20,000 crore over the next three to four years in affordable housing.

The RBI’s move in June to increase housing loan limits for priority sector lending (PSL) eligibility in June from the existing ₹28 lakh to ₹35 lakh in metropolitan centres (with a population of 10 lakh and above), and from ₹20 lakh to ₹25 lakh in other centres, provided the overall cost of the dwelling unit in the metropolitan and other centres does not exceed ₹45 lakh and ₹30 lakh, respectively, would also drive housing demand.

Kajaria Ceramics is the largest player in the organised market for ceramic tiles in the country. It has a total manufacturing capacity of 68.37 million sq m (of which 29.47 msm is ceramic floor and wall tiles) distributed across eight plants. The joint venture with four players together adds another 22.47 msm.

The company has about 1,400 dealers spread across the country. It plans two capacity expansions over the next one year — one, the greenfield expansion of 5 msm of glazed vitrified tiles in Floera Ceramics in Andhra Pradesh. This plant is expected to be commissioned by the end of 2018-19.

Further, it will also be setting up a polished vitrified tiles plant with 5.6 msm capacity in Rajasthan.

Margin improvements

Though sales (₹2,710.60 crore) for 2017-18 was up 6 per cent, profits dropped by 7 per cent due to higher costs. The operating profit margin was 16.8 per cent for the full year versus 19.5 per cent for 2016-17.

Margin contraction is explained mainly by higher fuel costs on increase in gas prices.

The price trajectory of fuel prices remains unclear. But revival in demand would allow the company to pass on costs. As and when input tax credits flow in, the company’s profitability would get a boost. In the near term, however, margin pressure may continue.

Kajaria had outstanding debt of ₹170 crore as of end-March 2018, down from ₹213 crore in 2016-17 and the debt-to-equity ratio is healthy at 0.12.

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