Kajaria Ceramics: Four reasons why Motilal Oswal has assigned a 'BUY' with TP of Rs 1,490

Shares of Kajaria Ceramics rose as much as 1.03 per cent to hit a high of Rs 1259.30 apiece on the BSE in the early trade on May 23, Tuesday. The stock had hit a 52-week high and low of Rs 1,279.95 and 898, respectively on September 21, 2022 and June 24, 2022. 

For the quarter ended March 2023, the company reported a decline of 25.87 per cent in consolidated net profit at Rs 97.23 crore. The company had posted a net profit of Rs 131.17 crore in the year-ago period, PTI reported. However, its revenue from operations was up 15.66 per cent at Rs 1,101.75 crore during the quarter under review as against Rs 952.51 crore in the corresponding period of the previous fiscal.

Kajaria Ceramics’ total expenses were at Rs 972.41 crore, up 22.97 per cent in Q4/FY 2021-22 as against Rs 790.75 crore in the same period a year ago. During the quarter, its revenue from tiles was at Rs 999.85 crore and Rs 101.90 crore from others, which includes bathware, sanitaryware and plywood business.

On May 23, domestic brokerage Motilal Oswal released a report wherein it initiated the coverage on the stock with a BUY rating. The target price has been set at Rs 1,490, implying a 20 per cent increase against the last closing price of Rs 1,246. The brokerage notes that Kajaria Ceramics enjoys nearly 6 per cent revenue share in the domestic market and it has gained market share steadily underpinned by a superior distribution network (7 per cent CAGR over FY12-23), improved geographical reach and premium/new tile launches (~750 SKUs in FY23).

Below is a list of key reasons why the brokerage has recommended buying shares of the company- 

Strong growth: The brokerage notes that KJC has delivered stronger growth than its competitors and continued to gain market share in a fragmented industry. The company reported a 14.4 per cent revenue CAGR over FY10-22 against 7.5 per cent for the other listed players. Kajaria Ceramics' revenue share within the organised listed players increased to 34 per cent in FY22 (36 per cent in 9MFY23) from 10 per cent in FY20. Its sales volume clocked an 11 per cent CAGR over FY10-23, which helped to improve its industry volume share.

Capacity expansions: KJC expanded its tiles manufacturing capacity by 16 per cent to 81.55 msm during FY23 (ex-Vennar Ceramics). It is likely to increase capacity further to 88.5msm by FY25E. We have factored in a 12 per cent tiles volume CAGR over FY23-25E. KJC diversified its presence in the Bathware segment (sanitaryware in FY16 and faucets in FY15) and it turned profitable in FY21. The company is increasing faucet capacity by 0.6m pieces (to 1.6m pieces) and sanitaryware capacity by 0.6m pieces (to 1.35m pieces), which will augment future growth. We expect a 27.5 per cent revenue CAGR in this segment over FY23-25.

Focus on increasing distribution network: KJC has 1,840 operative dealers (net addition of 140 dealers in FY23) v/s 750 dealers in FY12 (CAGR of 7.1 per cent over FY12-23), which help it generate higher volumes. The company targets to increase the dealer count by 450 in the next three years (150 dealers every year). KJC has created 80 exclusive showrooms across the country (50 showrooms opened in one year) to improve visibility. It commands a pricing premium of 5-6 per cent over peers, which is reflected in superior margins (OPM of 16.5 per cent for KJC, 10.9 per cent for SOMC, and 10.6 per cent for H&R Johnson in FY22).

Strong brand franchise underpinned by higher advertisement (AD) spends: KJC has cumulatively spent 2.5 per cent of its revenue (i.e., INR8.1b) in AD over FY11- 23, which helped it create brand visibility and a higher brand recall. The brokerage expects AD spending to be at 2.8 per cent of revenue until FY25. 

Motilal Oswal expects KJC to report nearly 11 per cent revenue CAGR over FY23-25 fueled by tiles volume CAGR of 12 per cent. Its volume reported a CAGR of 9 per cent over FY12-23. "We initiate coverage on KJC with a BUY rating and a TP of Rs 1,490 based on 40x FY25E EPS (v/s 35x last five-year average one-year forward P/E). We believe that a 30% earnings CAGR over FY23-25E, strong return ratios (RoE of 22%, ROCE of 26% and RoIC of 31% in FY25E), and a healthy balance sheet will help KJC maintain premium multiples," it said.

CATCH ALL THE LIVE MARKET ACTION HERE

Indian Ceramics industry

The Indian ceramics industry is valued at Rs 59,900 crore as of FY23 (share of organised players at 40 per cent) with a total production of more than 2,700 msm by CY22. Morbi, Gujarat accounts for over 70 per cent of the total production in India and houses over 700 production units, of which many are export-oriented units, the brokerage said in its report. Export of tiles from India has clocked a CAGR of 23 per cent over FY18-23 with nearly 17 per cent of domestic production being exported into different countries. KJC is primarily focused on domestic markets with a mere nearly 2 per cent of its total revenue being generated from outside India.

KJC has a 2.2 per cent share in total production (excluding outsourced volumes) of tiles in India; however, its market share in sales volume stands at 4.5% (v/s 4.2% in CY17). We believe KJC enjoys a 6 per cent revenue share in total domestic tiles currently, the report added. 

SHARE PRICE

Shares of Kajaria Ceramics have risen nearly 19 per cent between May 23, 2022 and May 22, 2023. In comparison, the Nifty50 index has rallied 13 per cent during the period, Trendlyne data show.