Our call. Kajaria Ceramics: growth momentum building up

The stock of Kajaria Ceramics, the second largest player in the organised market for tiles, is a good option for those with an investment horizon of two to five years. The domestic tile market has recorded an average annual growth of 12 per cent in the last five years. Going ahead, a pick-up in the housing sector and the growing income of the middle-class will help players in this sector, including Kajaria.

Last October, the Gujarat Pollution Control Board asked tile makers in Morbi — the country’s hub for unorganised tile manufacturers — to stop using coal for running their furnaces. This resulted in many players shutting shop as liquefied natural gas, the alternative fuel, is very expensive. This is a positive turn of events for organised players as it will help them gain market share.

Kajaria’s revenues have grown at a compounded annual rate of 25 per cent in the last three years with the net profit growing at 29 per cent.

Growth will continue to be strong, fuelled by higher revenues and margins through a better product mix.

At the current market price, the stock discounts its estimated earnings for 2015-16 by 25 times. Its one-year forward multiple has been in the 10-32 times range in the last three years.

Despite the stock price nearing the upper end of its valuation band, an improvement in earnings is expected to ensure good returns for investors over the long term.

After doubling its capacity to 46.4 million square metres (msm) in the last four years, through expansion at its own plants and buying stake in smaller, unbranded tile companies, Kajaria intends to increase its capacity by about 50 per cent in the next two years.

In the current financial year, the company will add about 10.5 msm of capacity. The large distribution network should translate the increased production into higher sales. The company has a network of 900 dealers and 10,000 sales points across the country.

Profits should also grow robustly, thanks to the changing product mix. The company’s focus on value-added vitrified tiles (glazed and polished), which currently account for about 45 per cent of revenues, should help shore up margins.

Also, with natural gas prices falling significantly and not likely to rise sharply from here, the company will see its fuel costs moderate.

In the June quarter of this fiscal, the company’s consolidated revenue was 15 per cent higher.

The net profit jumped 50 per cent, helped by improved margins and a lower interest expense (down 35 per cent).

Raw material costs as a percentage of sales dropped to 41.9 per cent from 45.9 per cent in the same period last year. Operating margin stood at 15.9 per cent, expanding from 14.7 per cent in the previous year, thanks to increased sales of value-added products.

Funding the expansions plans should not be difficult for the company. It recently raised about ₹150 crore from a PE company. Its debt-to-equity is a low 0.4, down from 0.82 in 2012-13.

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