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Kajaria Ceramics - Laying the ground: Hold
The Hindu Business Line  |  July 22, 2019

Rajalakshmi Nirmal

The housing sector blues are a cause for concern, but a Budget boost for affordable homes paves the way for future growth


Shareholders of Kajaria Ceramics can stay invested in the stock. Since July 2018, when we put out a ‘buy’ recommendation at Rs 459, the stock rallied to Rs 648 in May 2019, but has since fallen to Rs 528. Renewed concerns over demand in the housing and real-estate sector have been weighing on the stock. Further, the anticipated shift from unorganised to organised players following the implementation of the GST has not played out. Many unorganised players continue to escape the tax net owing to gaps in e-way bill surveillance.


While the thrust on the affordable housing segment in the Budget is a positive for the tiles sector, the subdued demand from the real estate sector at large may continue to hurt companies, including Kajaria Ceramics, for a while.


 One positive development for organised tile players, including Kajaria, is the National Green Tribunal (NGT) decision to ban coal-based units in March. As a result of this move, many unorganised players in Morbi, Gujarat, have shut down. This may soon reflect in market share gains for organised players.


While announcing the company results for the quarter to March 2019, Kajaria’s management has issued guidance projecting 15 per cent volume growth in 2019-20 against 12 per cent in 2018-19. At the current market price, the stock discounts its trailing 12-month earnings by 39 times.


Growing business


Kajaria is the largest manufacturer of ceramic and vitrified tiles (glazed and polished) in India and is well placed to benefit from an improved demand scenario. For 2018-19, despite the challenges, the company reported total sales volume of 80.3 msm (million square metres), up from 72 msm in the previous year. Kajaria has a total capacity of 68 msm — 28.10 msm ceramic wall and floor tiles, 22.4 msm polished vitrified tiles and 17.5 msm glazed vitrified tiles — with units in Uttar Pradesh, Rajasthan, Gujarat and Andhra Pradesh.


It is also setting up a 5 msm glazed vitrified tiles plant in Andhra Pradesh, which is expected to be commissioned in a month. The new capacities will help the company grow sales volume and reach new markets.


Kajaria is looking to increase its market share from 10 per cent to 14 per cent over the next few years. It is betting on a shift in consumer demand from unbranded tiles to products of organised large players.


The recent NGT order should work in the company’s favour. Of about 850 tile manufacturing units in the Morbi cluster, half were running on coal-based gasifiers and, of these, 250 have shut down and 150 have switched to gas-based plants, according to reports.


Players who have switched to gas-based plants have hiked prices of wall tiles by 5-8 per cent, bringing them closer to the price of products made by organised players. The narrowing of the price gap eases concerns of players like Kajaria, to the extent that it puts them at an advantage vis-a-vis the unorganised players.


The company has a network of 1,500 active dealers and 240 exclusive showrooms (which contribute 30 per cent to total sales). The plan is to take the count of exclusive showrooms to 400 by 2020-21.


Over the next year, an emphasis on new product development and aggressive marketing is expected to propel growth. But recovery in residential demand has not been strong enough, outside of the affordable housing category.


In 2018-19, the company recorded sales volume growth of 12 per cent to 80.3 msm (in addition to its own manufacturing and production from JV units, the company also buys and sells outsourced tiles). Revenue for the year was Rs 2,956 crore, up 9 per cent, Y-o-Y. The sanitaryware and faucet business recorded a 32 per cent increase in revenue.


Kajaria Bathware, the company’s subsidiary, which sells sanitaryware and faucet, contributes about 6 per cent to the company’s revenue, and has been doing well. While the sanitary plant has a production capacity of six lakh pieces per annum, and is nearing optimum capacity utilisation, capacity expansion by 1.5 lakh pieces per annum will be over by August. The faucet facility has a capacity of 1 million pieces per annum and operates at 65 per cent capacity. It is expected to touch capacity utilisation of 90 per cent this year.


Margin outlook


In 2018-19, Kajaria’s profits were down 4 per cent Y-o-Y due to higher raw material cost and margin pressure. Operating profit margin for the year was 15.2 per cent versus 16.84 per cent in 2017-18.


The recent announcement by Gujarat Gas of a cut in gas prices by 8 per cent (with effect from July 1) may help players, including Kajaria, in the tiles space. Reduced cost can aid margins.


In the sanitary ware and faucet division, the company made a loss in 2018-19. However, with revenue guidance at 30 per cent, and the benefits of operating leverage kicking in, the company expects to make profits. This will boost the company’s overall profit margins.