Kajaria Ceramics: Holding ground

Investors with a medium-term view can hold the stock of Kajaria Ceramics. The company is the largest player in the organised market for ceramic tiles in India. It has a total manufacturing capacity of 68 million square metre (msm); ceramic floor and wall tiles make up 28.10 msm; polished vitrified tiles 22.4 msm and glazed vitrified tiles 17.5 msm.

From our buy recommendation on the stock last July, the stock is up 20 per cent. However, given the weak outlook for real-estate demand, fresh buys in the stock can be avoided for now.

Demand across segments, including the affordable housing category, is very weak with unsold inventories on the rise. With Kajaria’s revenue dependant to the extent of 70 per cent on customers in the residential segment, the outlook on revenue for the next six months at least is weak.

Weak consumer sentiment coupled with funds crunch for real-estate players — that has resulted in fewer launches from last year — has pulled down demand for building materials, including tiles and sanitaryware. In the September quarter 2019, Kajaria Ceramics reported a muted sales growth. Profits, however, were up strongly, thanks to corporate tax cut.

However, given Kajaria’s brand strength and its geographical presence across the country, the company should benefit when demand revives. Shift in demand from the unorganised to organised segment, as a fallout of GST when it happens, would benefit Kajaria.

At the current market price of ₹545, the stock discounts the trailing earnings of one year by 31 times. The last three-year average PE multiple of the stock is 41 times.

Slowing sales

In the September 2019 quarter, Kajaria reported a muted volume growth of 1 per cent y-o-y. Sales growth too came at just 1 per cent, signalling no improvement in price from last year. The company’s sanitaryware/faucets business was also weak, with revenue dropping compared with last year. Weak consumer sentiments, drop in sales in Kashmir, and floods in some parts of the country due to monsoon, affected sales, according to the management.

For the first half of April-September 2019, too, growth figures were nothing to write home about. Sales growth was 2 per cent y-o-y. Though the company expects some recovery in sales volumes in the second half of the year, there is uncertainty in the near term.

With the 5 msm glazed vitrified tile Greenfield project at Srikalahasti in Andhra Pradesh commissioned in September 2019, sales volume for H2 may be better, but the company may not be able to meet its guidance given at the start of the year. Kajaria’s management had initially guided for a volume growth of 12-13 per cent in 2019-20, but now looks like it may end up with a volume growth of 8-9 per cent.

Margins fall

The company’s operating profit margin in the September quarter was 14.72 per cent, down from 15.14 per cent in the June 2019 quarter and 15.02 per cent in the September 2018 quarter. Savings from energy cost due to decline in price of fuel did not help margins.

Drop in margins is attributable mainly to change in sales mix with more low-margin products being sold. Realisation was up q-o-q, but down y-o-y.

However, PAT recorded a strong growth in the September quarter due to the government’s recent move to cut corporate tax.

On sales of ₹714.68 crore (up 1 per cent) in the September quarter, the company reported a PAT of ₹93.19 crore, a growth of 86 per cent from last year.

In the second half of 2019-20, performance on the sales front may be better than what was seen in the first half, and PAT growth is also likely to be good, thanks to benefit from tax cut.

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