Cholamandalam Securities

Kajaria Ceramics (Buy)

Target: ₹474

CMP: ₹401

Kajaria Ceramics (KJC) posted a weak set of Q4-FY20 numbers on the topline front with steep volume decline. Sales volumes fell 20 per cent YoY to 18.2 million square metres (MSM) on account of Covid-19 impact, specifically in the second half of March. KJC’s revenue declined 20 per cent YoY to ₹650 crore while EBITDA was down 21.8 per cent YoY at ₹90 crore. Kajaria’s sales volume decline of about 20 per cent YoY was largely attributable to disruption in logistics and closure of plants due to lockdown. The company restarted its Gailpur plant (partially), Malootana & Jaxx plants (in full capacity) in June and plans to open other plants gradually. However, overall weakness in the real estate sector and slowdown in the economy implies that volume growth would only be back by FY22. The management has refrained from giving guidance for FY21 given uncertainties surrounding the pandemic and timing of economic recovery.

However, Kajaria has maintained a strong balance sheet. The company reported 80bps YoY decline in EBITDA margin to 14.3 per cent. Kajaria’s prudent cost cutting measures across man power, operating expenses and spending on advertising would help the company in FY21E to maintain margins. In addition the company intends to postpone all capacity expansions to FY22. These measures will support the company to sail through crisis in FY21E.

Valuation: We are positive on the long term prospects of the company given its leadership position and execution capabilities. While FY21 is likely to be a challenging year for the building materials sector, as a whole, with discretionary nature of demand and real estate pressure, Kajaria with a healthy cash balance, relatively resilient performance and superior brand presence, is likely to tide over the challenging times. 

At CMP of ₹392, the stock is trading at 31.5xFY21E and 24.0xFY22E earnings. We maintain our BUY rating on the stock with a revised target price to ₹474, valuing the company at 29xFY22EPS.

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