Kajaria Ceramics is expected to benefit from a strong demand growth outlook for the domestic tile industry. Indian tile industry valued at $3720 mn is expected to grow at a CAGR of 8.6% in value terms over 2020-2027 driven by residential real estate market especially the new construction segment. The residential segment (comprised more than 80% of the tile demand in 2019) is slated to grow at 9% CAGR over 2020-2027. Kajarai Ceramics stock price today Rs 988, down Rs 10 or 1%. 

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Similarly, new construction segment comprises 85% of the tile demand which is expected to grow at 8.8% CAGR over 2020-2027. Kajaria Ceramics had witnessed 10.5% yoy rise in tile volumes in Q3 FY21 led by demand continuing from tier 1 to 3 cities along with a pickup in demand from metros.

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Further, Morbi tile industry had already reached Rs 9797 cr ceramic tile exports as on January 2021 end and is further expected to end FY2021 with Rs. 12,200 crore exports versus Rs 12000 cr exports in FY2020. A sustained rise in exports for Morbi tile industry players (benefiting from anti-dumping duty on Chinese imports by US and anti-China sentiments) is expected to lead market share gain for Kajaria Ceramics domestically led to achieving higher than industry growth rates.

Consequently, the management showed optimism with 20-25% yoy rise in tile volume growth expectation for FY2022 (also due to low base of FY2021 due to covid) and 15%+ yoy rise in FY2023 and FY2024. Consequently, the management is planning capex of Rs 150-200 cr for brownfield expansion during FY2022 (10MSM tile capacity can be added at a capex of Rs 200 cr). On the key input cost front, the gas prices increased sharply from December 2020 reaching peak levels in February 2021 owing to rise in crude prices due to winter season. However, the gas prices have begun to stabilize now.

However, the tile industry has a tailwind of margin expansion if the Indian government brings natural gas under the ambit of GST which would aid in claiming input tax credit leading to higher operating margins for the industry. Kajaria Ceramics has also improved its net cash position to Rs 494 cr which along with strong cash flow generation and low capex requirement led to revision in its dividend policy (higher payout expected in the range of 40-45% vs 20-25% earlier).

Sharekhan believes Kajaria Ceramics is poised for multi-year high growth rate led by improving demand for tile industry and market share gains. Sharekhan expects revenue/ operating profit/net profit to rise at a 19%/26.5%/27.6% CAGR over FY2021E-FY2023E. Sharekhan retains Buy rating on Kajaria Ceramics with a revised price target of Rs 1200.