We are recommending Buy on our Actionable View point "Kajaria Ceramics" as per following:-
CMP: Rs 535 Target: Rs 615 (15% Upside)
Kajaria Ceramics Q3FY2019 Results Review: Viewpoint - Improving business dynamics
· Strong volume growth coupled with lower interest expense leads to 19% y-o-y growth in consolidated net earnings: Kajaria Ceramics (Kajaria) reported 14.7% y-o-y growth in consolidated net revenue to Rs. 759 crore for Q3FY2019, backed by a 15.9% y-o-y volume growth. On the other hand, blended realisation remained under pressure (down 2.2% y-o-y, flat q-o-q). Sales volume from own manufacturing/JVs/outsourced grew by 10%/13%/26% y-o-y, respectively. The bathware segment registered 40.6% y-o-y revenue growth to Rs. 49 crore. Further, overall operating margin contracted by 70 BPS y-o-y to 15.9%, owing to higher gas prices (power cost as a percentage of sales increased by 212 BPS y-o-y) and lower blended realisation. Kajaria turned net debt surplus (Rs. 63 crore) by Q3FY2019 from net debt of Rs. 88 crore in Q4FY2018. Hence, net interest for the quarter declined by 30% y-o-y leading to consolidated net profit growth of 19.3% y-o-y to Rs. 64.8 crore for the quarter.
· Capacity expansion plans on track to increase volume growth going ahead: Kajaria Floera, a wholly owned subsidiary is on track to put up its 5 MSM p.a. manufacturing facility in Andhra Pradesh by Q1FY2020. Further, the company will be expanding its sanitaryware capacity by 1.2 lakh pieces p.a (from existing 6 lakhs pieces p.a.), which is expected to be completed by Q1FY2020. The faucet plant at Rajasthan operated at 73% capacity utilisation and is expected to achieve optimum capacity utilisation in FY2020. The company aims to sell 100 MSM tiles by FY2021 from 72 MSM sold in FY2018.
· Outlook – expect structural growth story to play out post elections: The recent decline in crude oil prices along with government sops for the MSME sector (a big consuming market for Kajaria) suggests a likely improvement of operating margins and sustained volume growth going ahead respectively. We believe that post elections, stricter implementation and plugging the loopholes (like making multiple trips by generating single e-way bill) should aid organised players such as Kajaria in gaining market share. Further, easing of gas prices and improvement in GVT realisation are key catalysts in regaining operating margins lost during the trailing 4-5 quarters.
· Valuation – Reiterate Positive view with 12-15% upside potential: We have fine tuned our estimates for FY2019-2020 and have introduced FY2021 estimates in this note. Kajaria has run-up ~40% since our last viewpoint dated 26th October 2018 on the back of lowering gas prices (key input cost). We believe, that with fuel costs having stabilised and the key trigger with respect to stricter implementation of e-way bills around the corner (post general elections), Kajaria is set to benefit in terms of improving volume and operating margin profile. Hence, we maintain our positive view on the stock with 12-15% upside potential.
· Key risks: Increase in crude prices followed by higher gas prices is a key negative risk to our call.
Regards,
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