Multi Baggers

Kajaria Ceramics

Company Background

Incorporated in 1985, Kajaria is engaged in manufacture of ceramic wall and floor tiles, glazed and polished vitrified tiles and is involved in marketing of international tile brands, bathware and wooden flooring solutions. Its manufacturing facilities are located at Sikandrabad (U.P.) and Gailpur (Rajasthan) with manufacturing capacity of 9.70 million sq. metres and 16.7 million sq. metres, respectively. The company has top clientele like Unitech, DLF, Parsvnath, Magarpatta, Prestige Group, Hiranandani, Raheja Developers and many others. The company manufactures more than 400 options of flooring solutions under the brand name such as Kajaria, Kerrogres, Eternity, Aparici, Saloni ceramica, Ergon and GRESPANIA Ceramica. It also trades in third party products using its strong brand equity

In February 2011, it acquired a 51% interest in Soriso Ceramic Pvt Ltd, having a 2.30 million square meters per annum ceramic floor tile manufacturing facility in Gujarat.

Trading Data

Key Highlights of third quarter results

The company's net revenues increased by 38% yoy and 10.3% qoq to Rs 351Cr driven by strong domestic demand and improved product mix. For 9MFY12, the net sales increased by 39% yoy to Rs 934Cr. This robust revenue visibility was on account of strong volume growth of 32% yoy with manufacturing volumes up by 35%. Average realisations increased by 5% to Rs 340/sqm on back of price hike taken during the quarter.

EBITDA improved significantly with 41% increase during the quarter to Rs 56Cr. EBITDA margins stood strong at 16% up by 40bps yoy and 80bps sequentially due to recent price hike and improved product mix. Inventory gain on traded products on account of recent rupee depreciation helped in margin expansion.

PAT for the quarter increased by 19% yoy and 9% qoq. However interest expense of Rs 15.4Cr includes Rs 0.5Cr against forex losses due to exchange rate fluctuations on trading. For 9MFY12, PAT grew by robust 34% yoy.

EPS for 9MFY12 stands  at Rs 7.68 as against Rs 5.74 during 9MFY11 registering a robust growth of 34% yoy. EPS for the quarter stood at Rs 2.82.

Strengths

Company on growth trajectory with strong top line growth

Healthy demand at consumers level coupled with favourable shift towards value added products helped the company to post strong top-line growth. Net revenues increased by 43% yoy on back of strong volume expansion and rise in average realisation during the quarter. The company expects strong 25-30% growth in its top-line over FY13 on account of increasing imports and outsourced volumes coupled with Brownfield expansion.  Successful integration of Soriso Ceramics has attained value addition for the company and opened more opportunities for inorganic growth thereby expanding existing capacities.

Stable balance sheet with improving working capital cycle

The company has maintained strong balance sheet by deleveraging it to a great extent over the quarters. Its D/E ratio as of Dec’11 stood at 0.96 as against 1.26 in Mar’11 and at the same time its working capital cycle improved significantly. The company is likely to repay ~40Cr of debt during H2FY12. The working capital cycle now is reduced to 11 days for FY11 as against 49 days in FY10. The cash flows from operations rose by nearly 50% over the previous fiscal and its RoE and also improved drastically.

Key Concerns

Increase in gas and other input cost to increase operating cost. Company’s gas costs increased to $9.5/mmbtu during Q2FY12 as compared to $7/mmbtu same period last year.

EBITDA margins to remain range bound as increasing share of value added products to offset by higher operating cost.

Outlook & Valuation

Despite short term economic headwinds, demand remained unaffected due to the company’s strong retail presence across the country. Kajaria is likely to witness robust revenue and earnings visibility over the coming years on account of strong demand and increased contribution by high end products in the portfolio. The company is expected to report revenue growth a CAGR of 22% over FY11-13 and 30% CAGR in earnings. At the CMP of 111, the stock is trading at 10x its FY12 EPS of 11 and 8x its FY13 EPS of 14. Thus owing to better position in terms of both margins and return ratios due to brand equity, a BUY rating is recommended with a price target of Rs 150, an upside of nearly 35% within a time horizon of 12-15 months.

Disclaimer: Stock is not in the proprietary or client portfolios