- Quarterly tiles sales were higher by 11 percent
- Bathware sales grew in excess of 30 percent for full year
- New capacities to go on stream by Q2 FY20
- Trading at 37 times FY20 estimated earnings
Kajaria Ceramics displayed another quarter of resilient operational performance in Q4 FY19. Double-digit volume growth in the tile business was noteworthy in a stagnant industry environment. Cost corrections in joint ventures, along with continued traction in bathroom and faucets segment, aided top line and bottom line.
Key results highlights
- Tile volumes for the quarter stood at 22.5 million square metre (MSM), which implies a growth of 11 percent year-on-year (YoY). Revenue growth was weaker than volumes as the competitive industry dynamics pressured realisations, down 3 percent YoY. For the full year, the company ended with a volume and revenue growth of 12 percent and 9 percent, respectively.
- Despite the sharp increase in gas prices, the management has been able to maintain its operating margin in the broad range of 15-16 percent. Q4 margin declined sequentially due to a slight change in business mix (higher share of low margin products), rise in manufacturing costs and marketing spend.
- Kajaria’s new business segments (sanitaryware, faucets and plywood) continue to scale up at a healthy pace. In January-March, sanitaryware and faucets grew 11 percent YoY and achieved sales of Rs 53 crore while the plywood business contributed Rs 7 crore to top line. Overall share of this segment has gone up to 6.8 percent in FY19, from 5.1 percent in FY18.
- Kajaria’s JVs have been a drag on the financial performance of the company, but are witnessing a steady improvement. Cost control measures, along with operational efficiencies, helped the firm reduce JV losses to nearly Rs 3 crore in FY19, from Rs 31 crore in FY18. In fact, the JVs witnessed a turnaround after adjusting for the Rs 5.5 crore of losses from the recently started plywood business.
Takeaways from the analyst meet
- The industry has been facing a subdued demand environment on the back of muted new construction activity in the real estate sector. The company expects tile market to be flat in FY20 despite the stagnation in recent years. However, the management is targeting 15 percent volume growth in the tile business through market share gains.
- The recent National Green Tribunal (NGT) order on shutdown of all ceramic units in Morbi and Wankaner that run on coal gasifier will force tile manufacturers to shift to gas for power and fuel requirements in order to comply with industry regulations. This will create a level-playing field for branded players like Kajaria and pave the way for some consolidation in the sector.
- The capacity expansion in Andhra Pradesh remains on track as the new 5.0 MSM glazed vitrified tile plant of Kajaria Floera, the wholly-owned subsidiary, is expected to be commissioned by Q2 FY20.
- Kajaria’s sanitaryware plant in Morbi (Gujarat) is operating at full capacity utilisation and its expansion is under way. The capacity build-up, which is expected to be completed in August 2019, will increase to 7.5 lakh pieces, from 6 lakh pieces. The faucets plant is operating at 65 percent utilisation and provides sufficient headroom for growth for the next 12-18 months.
- The company has been able to make inroads in the sanitaryware and faucet market, which is dominated by Cera, Jaguar and HSIL. The business is progressing well and reported a top line growth of 33 percent YoY. In FY20, the management is targeting Rs 230-240 crore of revenues (vs Rs 185 crore in FY19) along with a profit of Rs 8-10 crore.
- The plywood business is based on asset-light business model where the company will be sourcing from manufacturers at multiple locations and will focus only on the branding and distribution network. The company has roped in actor Ranveer Singh as the brand ambassador of Kajaria Ply.
Outlook and Recommendation
- Kajaria’s (CMP: Rs 619, market cap: Rs 9,842 crore) resilient operational show in the past 3-4 quarters indicates the management execution capabilities in a tough market environment.
- The market has taken cognisance of the robust performance and the stock is trading near 52-week highs. Considering the muted near-term growth prospects, the valuations (37 times FY20 estimated earnings) appear a bit stretched at current levels. The stock, however, should be kept on the radar as Kajaria enjoys a market leadership position and strong brand recall.
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