Investment Focus - Kajaria Ceramics: Buy

Rajalakshmi Sivam BL Research Bureau | Updated on November 14, 2017


An early entry into the manufacture of vitrified tiles, low cost structure and better pricing power than other tile manufacturers have helped Kajaria Ceramics deliver strong growth, amid the competitive environment in the flooring industry.

Greater reliance on own manufacture rather than trading of imported tiles has helped maintain operating profit margins at 15 per cent.

The company is likely to see full benefits of its acquisition – JAXX Vitrified, Soriso Ceramics – in the coming year. The company's total tile manufacturing capacity would be around 36 million square metre by end FY13. This will offer Kajaria Ceramics a higher share of the tiles market and improve its pricing power.

Investors with a one-two year perspective can invest in the stock. At the current market price of Rs 170, the stock trades at a price earning multiple of 12 times its expected earnings for 2012-13.

Kajaria Ceramics has reported a sales growth of 40 per cent, year-on-year, in the first nine months of 2011-12. Sales volume in this period was up 34 per cent. The topline growth has been driven by the growing demand for tiles in India (at a CAGR of 15 per cent in the last three years), the preference for branded tiles and also Kajaria Ceramics' invasion into the mass segment in tier II towns and expansion in the value added segment of tiles and sanitary ware.

Of the major categories in flooring options, vitrified tiles have witnessed strong growth in the last two years. Consumer preference for this category of tiles follows its higher durability and easier maintenance. Kajaria Ceramics ventured into vitrified tile manufacturing in 2010. Currently one-third of its total capacity is in this segment.

Going ahead vitrified tiles will drive significant revenue growth and margin improvement for the company. Not many players in the organised tile industry have expanded into own manufacture of this product.

Kajaria Ceramics has been able to hike prices of both ceramic and vitrified tiles over the last quarter and prevent profit margins from dropping very significantly on cost pressures. Net profits for the nine months of FY12 recorded a 34 per cent increase. Margin at the operating profit level was down one percentage point at 15 per cent. Players such as Somany Ceramics and Asian Granito have suffered steeper margin cuts.

The increasing price of natural gas and the depreciation of the rupee have inflated production costs and reduced margins on the traded products. But this can be managed as the company enjoys pricing power and has leeway to increase prices on the high-end vitrified tiles.

The outstanding debt in the books of Kajaria Ceramics as of end-December 2011 was Rs 269 crore, down from Rs 280 crore in March 2011. The debt-to-equity ratio is at a comfortable 1:1. The company is looking for further opportunities to expand through the acquisition route and have a pan-India presence.

Published on March 31, 2012

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