On a strong footing: BUY

The stock of Kajaria Ceramics offers a value ‘buy’ at current levels. From Rs 261 last December, it is down 32 per cent.

The stock has corrected following a drop in operating profits in the December 2012 quarter. High cost of imported gas and discounts given to clear the stock of imported vitrified tiles eroded profit margins.

However, over the next one or two quarters, with the company likely to take further price hikes, profitability may improve.

The recent correction in stock price seems overdone. At the current market price of Rs 180, the stock discounts its likely FY-14 earnings by 11 times.

Kajaria Ceramics has a total capacity of 41 million square metres. Sales for the first nine months of FY-12 increased 22 per cent with volumes rising 13 per cent. Net profit increased by 30 per cent.

Strong market presence

The Indian tile industry has grown at a compounded annual rate of 15 per cent in the last five years on the back of demand from tier II markets and high growth in the vitrified category. Vitrified tiles are stronger than ceramic equivalents and are also scratch-resistant.

While most players were slow in their response to changing consumer preferences (from ceramic tiles to vitrified equivalents) and in catering to the new consumers in tier II markets, Kajaria Ceramics made some quick moves.

The company has ramped up its vitrified tile capacity faster than other players through both new and brownfield expansions and the acquisition of Jaxx Vitrified and Cosa Ceramics. The vitrified capacity is 16.8 million sq m now — an eight-fold increase in three years.

Share in market?

Over this period, it also made inroads into the urban and semi-urban markets through an expanded dealer network. The company has over 825 dealers, catering to 5,000 sales points across the country.

Its revenue has grown at a compounded rate of 25 per cent annually in the last three years. Outsourced tiles (domestic plus imported) now make up 24 per cent of the total sales volume, down from 30 per cent in FY11.

In the organised (half of the total industry) market for tiles in India, Kajaria Ceramics is the second largest player. For FY12 the company reported revenue of Rs 1,407 crore.

Kajaria Ceramics enjoys a superior profit margin compared to peers in the industry, due to its higher share of own manufacture in sales and a presence in high-end segments such as polished and glazed vitrified tiles.

For the nine months of FY13, the company’s operating profit margin was 14 per cent.

Asian Granito and Somany Ceramics have reported a margin of 9-11 per cent at the operating level for the same period.

However, in the December 2012 quarter Kajaria’s operating profit margins declined by two percentage points over the year ago period due to higher fuel cost.

With the rupee also playing spoilsport, the cost of imported gas for the company increased.

However, this need not be a cause for worry as the company is likely to pass on increase in costs to its customers, which may reflect with a lag. Reports suggest that the company has already taken a round of price increases in January.

Also, despite the pressure from increased fuel cost, the company recorded a growth of 18 per in net profits for the December-2012 quarter. The savings on interest costs with some of the outstanding loans repaid, helped the company.

Return on EQUITY improves

The return on equity has significantly improved to 32 per cent in FY12 from 20 per cent in FY10.

This is thanks to fall in cost of imported Italian machinery, lower interest cost and improved profit margins following the addition of high-end tiles in the product mix.

Outstanding debt in the company’s balance sheet as of December-2012 is Rs 225 crore (standalone), down from Rs 263 crore in FY10.

Interest costs as a percentage of sales form just 2 per cent now. Debt-to-equity, at 0.63 times, is comfortable.

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