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November 3, 2015

Kajaria Ceramics Ltd.

...Scaling High

CMP INR 883 Initiating Coverage - Accumulate

SKP Securities Ltd www.skpmoneywise.com of 17

Key Share Data

Face Value (INR) 2.0

Equity Capital (INR Mn) 158.9

Market Cap 70330.1

52 Week High/Low (INR) 925/541

Avg. Daily Volume (BSE) 22,314

BSE Code 500233

NSE Code KAJARIACER

Reuters Code KAJR.NS

Bloomberg Code KJC:IN

Shareholding Pattern (Sept 30, 2015)

47%

24%

5%

23%

Promoters

FII

DII

Public & Others

Particulars FY14 FY15 FY16E FY17E

Net Sales 18,363.1 21,868.9 24,674.3 29,034.1

Growth (%) 16.0% 19.1% 12.8% 17.7%

EBITDA 2,851.2 3,541.3 4,466.1 5,284.2

PAT 1,242.2 1,756.0 2,224.4 2,745.3

Growth (%) 18.9% 41.4% 26.7% 23.4%

EPS (INR) 16.4 22.1 28.0 34.5

BVPS (INR) 70.0 93.2 116.4 146.2

Key Financials (INR Million)

Particulars FY14 FY15 FY16E FY17E

P/E (x) 53.8 40.1 31.6 25.6

P/BVPS (x) 12.6 9.5 7.6 6.1

Mcap/Sales (x) 3.6 3.2 2.9 2.4

EV/EBITDA (x) 24.1 20.5 16.1 13.5

ROCE (%) 32.9% 31.0% 31.3% 32.1%

ROE (%) 23.5% 23.7% 24.0% 23.6%

EBIDTA Mar (%) 15.5% 16.2% 18.1% 18.2%

PAT Mar (%) 7.2% 8.5% 9.4% 9.9%

Debt - Equity (x) 0.4 0.3 0.3 0.2

Key Financials Ratios

Source: Company, SKP Research

Price Performance Kajariavs BSE LARGE-MID CAP

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Kajaria

BSE LargeMid Cap

Company Background

Kajaria Ceramics Limited (Kajaria), promoted by Mr. Ashok Kajaria in 1985, is the largest player in India’s Ceramic Tiles industry, with ~10% market share, under “KAJARIA” brand with a combined manufacturing capacity of 62.1 MSM which includes its own manufacturing facilities in Uttar Pradesh & Rajasthan and its JV manufacturing partners. It also sells tiles outsourced from Morbi, Gujarat. As strategic product extensions to leverage its customers and channels, it also manufactures sanitaryware and faucets through JV partners.

Investment Rationale

Capacity Expansion – Increasing tiles capacity to meet growing demand There is an increased demand for life style consumption products,

especially from aspiring mass affluents. To meet the resultant demand of ceramic tiles, Kajaria has increased its own capacity of by 3 MSM in Gailpur, with an approximate capex of ~Rs 300 mn, the plant has commenced full production in Sept 2015.

Kajaria is also setting up a new facility for PVT tiles having initial capacity of 6.5 MSM, at Thana Gazi, with an approximate capex of ~Rs 1,100 mn. The project is expected to go on-stream by Q4FY16.

The company is also acquiring 51% stake in Floera Ceramics Pvt Ltd (a JV), which have plans to setup PVT tiles facility, at Andhra Pradesh, with an investment of ~Rs 1,000 mn. This capacity is expected to commission in 2016-17. In June 2015, it has commissioned 5 MSM polished vitrified tiles facility, through its joint venture partner, Taurus Tiles Private Ltd.

Margins expected to stabilize with better product mix:

EBIDTA margins of the company are stable since FY10 at ~15%. Margins have since improved to 16.2%, 16.9% and 19.5% during FY15 and Q1FY16 and Q2FY16 respectively due to better product mix and operating leverage. Contribution from GVT and PVT tiles, which enjoy better realizations and margins, has increased from 52% (combined) in FY12 to ~57% during FY15. With Kajaria’s focus on superior, value-added products, going forward, we expect EBIDTA margins to stabilize ~18% in FY17E.

Topline from tiles to grow at a CAGR of ~15% over FY15-17E During FY15, Kajaria’s tiles division reported net sales of Rs 21.9 bn,

registering a robust growth of ~19% y-o-y, which could be attributed to timely increase in capacity; introduction of new designs and size of tiles; and increased contribution from sales of GVT and PVT tiles through JVs and outsourcing.

Going forward, with Kajaria’s focus on value-added products and increasing contribution from PVT and GVT segment, we expect the tiles segment to grow at a CAGR of 14% during FY15-FY17E.

Valuation

Better economic growth, leaving more disposable income for discretionary life style consumption, rapid urbanisation, changing customer preference towards quality branded products particularly amongst the growing mass affluents, increasing nuclear families and Governments’ thrust on “Housing for All” coupled with strong brand equity and recall and distribution network, augers well for the company. It has de-risked its growth strategy with an asset light business model, adopting joint venture route.

We have valued the stock on the basis of P/E - method of relative valuation - of 27x of FY17E and arrived at a price of Rs 932. The stock has rallied to a lifetime high of Rs 925 recently. Currently at Rs 883, given the rich

valuations and limited upside in the near future, pending triggers for a fresh re-rating or a stronger conviction, we recommend an Accumulate on dips.

Analysts: Nikhil Saboo

Tel No: +91-33-40077019; Mobile: +91-9330186643

e-mail: [email protected]

Vineet Agrawal

Tel No: +91-22-49226006; Mobile: +91-9819510575

e-mail: [email protected]



Indian Tiles Industry – An Overview:

Ceramic Tiles market can be broadly divided into two sub-segments viz Ceramic Tiles

and Vitrified Tiles. Vitrified Tiles can be further sub divided in to Polished Vitrified Tiles (PVT) and Glazed Vitrified Tiles (GVT).

Market Size: Ceramic tiles are an essential building material now. Despite the industrial slowdown in the past few years, Indian Tiles market grew from 494 million sq. Meters (MSM) in CY09 to 748 MSM in CY13 witnessing a CAGR of ~11%.

Structural shift from ceramic to vitrified tiles: A major change took over the ceramic tiles industry in the recent past with the introduction of the next generation vitrified tiles and porcelain tiles.

Globally, these tiles account for ~50% of total tile sales (by value). Contribution of these products is increasing year-on-year, in India, with structural shift in the consumer preference for superior, value added products.

Source: SKP Research

India is the third largest tiles producer, globally, with lowest per capita consumption: Top 3 tile producing countries in CY13 and per capita consumption is given below:

Country Production

(MSM) Production (% Share)*

Consumption (MSM)

Consumption (% Share)**

Per Capita Consumption

(sqm)

China 5700 48% 4556 39% 3.4

Brazil 871 7% 837 7% 4.1

India 748 6% 748 6% 0.5

Source: SKP Research; * Global Market Size in CY13 11913 MSM; ** Global Consumption 11574 MSM

Despite the double digit growth (~11%) of tiles market in India, its per capita consumption is about a third of global average. Majority of the tiles demand comes from residential segment followed by commercial and replacement segment.



Morbi (Gujarat), the second largest tiles cluster in the world, is the nerve centre of Indian tile industry: Value wise, Indian tiles industry is evenly divided amongst organized and unorganised sector. A major concentration of unorganised ceramic tiles producers is in Morbi, Gujarat accounting for nearly 50% (earlier 70%) of the total production. It is home for more than 600 tile manufacturers out of 700 in India.

India’s leading Ceramic Tiles players have strategically engaged Morbi’s tiles producers as outsourcing or joint venture (JV) partners. Morbi’s proximity to key raw materials and the overall manufacturing eco-system makes it a formidable region for tile manufacturers. Some tile producing units at Morbi are growing steadily and sustainably and are setting new benchmarks not just in terms of efficiency and quality but also in setting new trends in creative and customized designs, shades, sizes, etc. But they lack strong distribution network and brand recall at national level and have limited resources and management bandwidth. This provided a win-win situation for national and Morbi players to have a strategic engagement.

Break-up of domestic tiles market at a glance:


Unorganised market losing sheen: Earlier the unorganised market was highly competitive due to low cost manufacturing on account of tax evasion and low operating cost due to usage of coal based fuel, presence in highly fragmented tier-I cities, low level of premiumisation – ceramic tiles dominated sales, with no technology innovation.

Unorganised market is now loosing sheen due to –

Government’s move to curb black money: Liquidity crunch is expected to occur due to Central Government’s engineered move towards curbing black money. The move by the Government will lead to reduced cash transactions in building material segment, impacting the turnover of small unorganised players.

Policy Shift - Ban on coal based plant: Ban on usage of coal for manufacturing tiles has further marred liquidity of small players as natural gas is 30% costlier than coal, leading them to increase prices of ceramic tiles, thus, making their pricing competitive with organized players.

Change in Consumer Preference: With change in consumer preference for branded value-added building products (from ceramic to vitrified tiles) demand for GVT and PVT tiles are increasing, which offers better designs than ceramic tiles.

70%

15%

15%

Residential Demand

Commercial

Replacement

49%51%Organised

Unorganised



Demand Drivers: Given the various growth and development initiatives of the current

Government, the opportunity landscape for the industry is quite wide in India. Following

are the demand drivers which could propel tiles market in the near future:

Increasing Urbanization: India is rapidly organizing, which is gradually translating into more demand for ceramic tiles. A report by McKinsey Global Institute projects 40% of India’s population would be urbanized by 2030.

Growing Mass Affluent Segment: India’s mass affluent – probably the largest such segment in the world in PPP terms – is expected to grow from 58 mn in 2010 to 110 mn by 2020 (40% of the total national households from 24% in 2010). This segment is evolving towards international standards of lifestyle, translating into upsurge in demand for modern tiles.

Rising disposable income: With growing middle class and rising income, real household disposable income has increased by about four times since 1990, translating in to a greater investment in homes. Rising disposable income at a glance:

1679 1776

2896

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3619

4395

4913 4931

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6671

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1990 1995 2004 2005 2006 2007 2008 2009 2010 2011

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hold


Growth in real estate: Urban household development, demand for pucca houses and changing consumer preference towards tiles is encouraging the demand for tiles to go up. There is a growth in demand for tiles owing to the water seepage problem that leads to mold formation in walls and ceilings.

Government’s Initiatives: GoI plans to develop 100 smart cities,

development of industrial corridors, housing for all by 2022, etc., all will

lead to a boost in demand for ceramic tiles. ‘Swaccha Bharat Abhiyaan’ will

lead to building of toilets and community toilets.

Organized market gaining ground: Gradually, organized market is stemming up from the unorganized predominance previously, for the reasons mentioned above. This is encouraging for better control purposes and price mechanisms to play.

With more and more unorganized players becoming part of the organized market, market segmentation is skewing towards creation of a centralized market, which can be brought under the purview of regulations. A proper government support and other infrastructural reforms could lead to a better play for Indian ceramic tiles industry in years to come.



Recent Development:

Initiation of Anti-dumping investigation on imports of vitrified tiles: India has initiated an anti-dumping investigation on imports of vitrified tiles (glazed/unglazed/porcelain) in polished or unpolished finish, with less than 3% water absorption, originating in or imported from China. Product under consideration is mainly produced and sold in two sizes viz 600 mm*600mm and 800mm*800mm, as the imports are mainly taking place in these two sizes.

Going forward, we feel that the business environment for Indian tile industry will become increasingly positive with such reformative steps being outlined by the Government.

Outlook:

With increasing construction activities, especially in tier - II & tier - III cities, tiles market in the country is set to flourish. Demand from institutional customers is outpacing the retail demand in many regions of the country.

The overall Indian tiles market is expected to witness CAGR of more than 18% for next five years. However, during the same period demand for vitrified tiles is expected to grow at CAGR of 21% due to increasing institutional sales and changing consumer preferences.

Global Scenario:

The world ceramic tiles production is growing at a healthy CAGR of 8.5% over 2009-13, with the market size of 11,913 MSM. China is the world’s largest tiles producer with 47% market share. Brazil is the second largest tile producer with production capacity of 871 MSM followed by India at 748 MSM.

In terms of exports China is the largest exporter followed by Spain and Italy. These top three countries together contribute close to 66% to the overall world ceramic tiles exports.

Top Ten Ceramic Tiles Producing Nations Top Ten Ceramic Tiles Exporting Nations


India has not grown much in terms of exports of ceramic tiles and currently consists of less than 0.5% of global market. As per ‘Indian Council of Ceramic Tiles and Sanitaryware’, India has exported tiles worth USD 441 mn in 2014. India Exports ceramics to markets such as UAE, Saudi Arabia and Malaysia.

Peer Comparison

FY13 FY14 FY15 FY13 FY14 FY15 FY13 FY14 FY15 FY13 FY14 FY15 FY13 FY14 FY15

Kajaria Ceramics Ltd 15833 18363 21869 15.5% 15.5% 16.2% 10.0% 10.8% 12.4% 6.6% 6.8% 8.0% 32.1% 32.9% 31.0%Somany Ceramics Ltd* 10501 12578 15411 8.1% 6.5% 6.2% 4.4% 3.5% 4.3% 3.0% 2.2% 2.9% 21.0% 12.7% 17.5%Asian Granito 7061 7575 8218 10.2% 8.8% 7.4% 2.4% 1.9% 1.8% 2.4% 1.9% 1.8% 6.8% 5.2% 5.0%Nitco Tiles 7691 7568 8239 -5.2% -3.4% -- -30.1% -27.9% -15.4% -30.1% -27.9% -15.4% -61.1% -- --

Revenue (Rs mn) EBIDTA (%) PAT (%) ROE (%)Players

EBT (%)

Source: Bloomberg and SKP Research Desk; *Standalone Numbers

1148

318 303

114 88 80 63 51 50 48

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Company Profile

Kajaria was incorporated in 1985, started by Mr. Ashok Kajaria, who graduated from California University, in collaboration with world’s second largest tiles manufacturer, Todagres, Spain. Kajaria started its production in August, 1988 at Sikandarabad, UP with capacity of 1 MSM per annum and established its second plant in Gailpur, Rajasthan with capacity of 6 MSM, commercial production of which started in 1998.

Under the leadership of Mr. Ashok Kajaria, Chairman and Managing Director, with ~39 years experience in ceramic industry, Kajaria has became the largest manufacturer and exporter of floor and wall tiles, with ~10% market share in India. Kajaria current installed capacity stands at 62.1 MSM per annum and it uses Monoporosa technology, which is the latest tiles manufacturing technology available in Europe.

Kajaria ventured in sanitaryware business in 2011 and tied up with leading European sanitaryware brand “VitrA”, a brand of Ezacibasi, one of the largest industrial groups in Turkey, for marketing and sales of bathware products, in India.

The Company has also taken strategic move in this space by investing 64% (now 82%) equity stake in Morbi based company which has an existing capacity to produce 0.7 mn pieces per annum (production commenced in April 2014). The Company has also set up a facility for manufacturing faucets, at Gailpur, Rajasthan, which stared its production in July, 2015.

Kajaria produces and sells mix of ceramic and vitrified tiles. Following is the business model of the company:

Source: The Company; *as of FY15

Strategic capacity enhancement through asset light model – Outsourcing through JVs to de-risk growth: In order to capitalize on the low per capita consumption of tiles and the growing demand in the industry, the Company has been focusing on enhancing its production volumes by entering into joint ventures with Morbi, Gujarat and Andhra Pradesh based ceramic tile manufacturers (asset light model) and acquisitions.

Kajaria

Sanitaryware & Faucets

Under JV Model with Somany

Sanitaryware Pvt. Ltd.

(Revenue Contribution: NIL*)

Tiles

Including Owned Manufacturing & Asset Light Model

Asset Light Model includes JVs & outsourcing with Morbi based players,

and imports from China

(Revenue Contribution: 100%*)

Tiles – Own Mfg (Revenue Contribution: 50%)

Tiles – JVs

(Revenue Contribution:31%)

Sanitaryware Annual Capacity: 700,000 pieces

Commencement of Production: April

2014

Faucets Annual Capacity: 100,000 pieces

Commencement of Production: July

2015 Tiles – Others

(Imports & Outsourcing) (Revenue Contribution: 19%)

Ceramic Tiles (Revenue Contribution: 41%)

PVT

(Revenue Contribution: 37%)

GVT

(Revenue Contribution: 20%)



Source: The Company & SKP Research Desk

Kajaria’s focus on enhancing capacities through asset light model not only reduces its capital investments but also de-risks the balance sheet, enhances return ratios and provides faster access to capacities thereby, resulting into low debt equity ratio (D/E). Kajaria’s D/E has significantly reduced from 2x in FY09 to 0.3x in FY15.

The JVs into which Kajaria entered in the recent past till Q2FY16 are given below:

Joint VenturesYear of

AcquisitionLocation Tile Category Stake

Capacity

(MSM)

Soriso Ceramics Pvt Ltd 2011 Morbi, Gujarat Ceramic Floor Tiles 51% 4.6

Jaxx Vitrified Pvt Ltd 2012 Morbi, Gujarat PVT 61% 10.2

Cosa Ceramics Pvt Ltd 2012 Morbi, Gujarat PVT 51% 5.7

Vennar Ceramics Ltd 2012 Andhra Pradesh High End Ceramic Tiles 51% 2.3

Taurus Tiles Pvt Ltd 2014 Morbi, Gujarat PVT 51% 5.00

Total JV Capacity (MSM) 27.8 Source: The Company; *investment for 51% stake

Outsourcing through local (Morbi) players: Apart from the above mentioned JVs, Kajaria also procures tiles through outsourcing it from Morbi based players.

Since unorganised sector players are willing to enter into an agreement with established players, JVs and outsourcing model diminishes competition and capital risk. During FY15, JVs and outsourcing model contributed 50% of total tiles sales.

Owned Manufacturing: Kajaria has its state-of-the-art manufacturing facilities at Sikandarabad, UP and Gailpur, Rajasthan with total manufacturing capacity at ~9.8 MSM and 24.5 MSM respectively.

Product category wise break-up of Kajaria’s total capacity is given below:

Capacity in MSM Ceramic Tiles PVT GVT Total

Owned Capacity 22.0 3.0 9.3 34.3% to total Capacity 76% 13% 100% 55%JV Capacity 6.9 20.9 0.0 27.8% to total Capacity 24% 87% 0% 45%Total Capacity 28.9 23.9 9.3 62.1% to total Capacity 47% 38% 15% 100%

Source: The Company and SKP Research Desk

Introduction of e-shield tiles: Kajaria launched e-shield digital Glazed Vitrified Tiles, about two years back, with innovative technology, enduring finishes, stylish designs and beautiful natural textures. These tiles falls under the Eternity HD range which was introduced for the first time in the Indian market by Kajaria.

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FY09 FY11 FY13 FY15 FY17E

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These are abrasion free tiles which mean they have the highest abrasion rating hence

scoring high on durability and longevity, making them suitable for any floor application, especially in high traffic areas like malls, commercial buildings, airports and stations.

These tiles are skid free; featuring versatile surfaces with an “R10” slip resistance rating which implies these tiles are perfect for zero slippage. This is a great safety feature especially for senior citizens and children who are prone to falls and is ideal for both commercial as well as home usage.

These tiles are also germ free, a specially formulated anti microbial glaze which is used during the manufacturing process enables these tiles to prevent habitation of germs and infection causing organisms – making them the ideal choice for spaces where this is of utmost importance like clinics, hospitals, research labs etc.

Generates majority of revenues from Tier – II and Tier – III Cities: Kajaria’s revenues are heavily skewed towards the rapidly growing Tier – II and Tier – III cities with ~80% contribution. With urbanization trends increasing in Tier - II and Tier - III cities, demand for tiles, sanitaryware and bathroom fittings are on rise, providing Kajaria an opportunity to tap this market.

Good Clientele and Brand Recall: The Company’s greatest asset is the recall value of its brands among customers. Being present in the industry for many decades has enabled Kajaria to develop long standing customer relationships. About 70% of the Kajaria’s revenue comes from retail clients while the rest is contributed by institutions (majorly developers and Government orders).

SSource: Company

Strong Distribution Network: Kajaria, the dominant player of GVT in India, offers its customers largest product basket in terns of design and size, through its strong distribution network. Over the years, Kajaria has established a strong and widespread distribution network, encompassing ~900 active dealers and ~10,000 touch points through which it reach wide spectrum of retail customers (in Tier – II and Tier – III cities) and maintains its strong position in the tile industry.

Developers Government



Raw Materials

Tiles: Sand and white clay are the main raw materials for manufacturing tiles, apart from Feldspar, dolomite and some other minerals.

Sanitaryware and Faucets: The basic ingredients for making ceramics is Kaolinite, clay, feldspar and quartz sand which form the basis for this extremely durable and hard material. The basic raw material used in manufacturing faucets is brass, since it is highly resistant to corrosion and calcification.

Procurement and Pricing: Kajaria procures the above mentioned raw materials locally from contract miners, to whom the mines are leased by the Government on long term basis. There is not much fluctuation in the prices of raw materials of tiles and sanitaryware. Raw material cost to sales ratio for Kajaria reflects a gradual decreasing trend from 56.2% in FY11 to 38.8% during FY15.

Investment Rationale

1. Capacity Expansion – Increasing Tiles capacity:

Brownfield expansion at Gailpur, Rajasthan: To take advantage of robust demand, Kajaria has increased its own capacity of ceramic tiles by 3 MSM, in Gailpur, with an investment of Rs 300 mn, the plant has commenced full production in Sept 2015.

Greenfield expansion at Thana Gazi, Rajasthan: Kajaria is also setting up a new facility for PVT tiles having initial capacity of 6.5 MSM, at Thana Gazi, with an approximate capex of Rs 1,100 mn. The project is expected to go on-stream by Q4FY16.

Acquisition of Floera Ceramics Pvt Ltd. (FCPL): Apart from the above capacity expansions through organic route, Kajaria is also in the process of acquiring 51% stake in FCPL, which have plans to setup PVT tiles facility with an initial capacity of 5.7 MSM, at Andhra Pradesh. The capex for the same is ~Rs 1,000 mn and the plant is expected to go on-stream by FY17.

In June 2015, the company has commissioned 5 MSM polished vitrified tiles facility, through its joint venture partner, Taurus Tiles Private Limited.

Installed capacity of Kajaria, for tiles, post expansion, at a glance:

Pre-Expansion

FY15 FY16E FY17E FY16E FY17ESikandarabad, UP 9.8 - - 9.8 9.8 Gailpur, Rajasthan 21.5 3.0 - 24.5 24.5 Thana Gazi, Rajasthan - 6.5 - 6.5 6.5 Soriso Ceramics Pvt Ltd 4.6 - 4.6 4.6 Jaxx Vitrified Pvt Ltd 10.2 - 10.2 10.2 Cosa Ceramics Pvt Ltd 5.7 - 5.7 5.7 Vennar Ceramics Ltd 2.3 - 2.3 2.3 Taurus Tiles Pvt Ltd - 5.0 5.0 5.0 Floera Ceramics Pvt Ltd - 5.7 - 5.7

Total 54.1 14.5 5.7 68.6 74.3

Expansion Post ExpansionOwnership Pattern (MSM) Plant/Co

Owned

JV/Associates

Source: The Company



2. Margins expected to stabilize with better product mix:

EBIDTA Margins of the company was stable since FY10 till FY14 at ~15.5%. The margins have improved to 16.2% 16.9% and 19.5% during FY15, Q1FY16 and Q2FY16, respectively due to better product mix and better operating leverage (reduction in raw material coast and fuel cost).

The contribution of GVT and PVT tiles, which enjoys better realizations and margins vis-à-vis ceramic tiles, has increased from 52% (combined) in FY12 to ~57% during FY15. With Kajaria’s focus on value-added products, going forward, we expect the product mix to improve further, resulting in stabilization of margins at ~18%.

PAT margins were improved from 4.9% in FY10 to 8% and 9.1% in FY15 and H1FY16 respectively. We expect PATM to improve further to ~9.5% by FY17E with repayment of long-term loans and reduction in working capital loans on the cards.

Product Mix (%) EBIDTA & EBIDTA Margins (%)

PAT & PAT Margins (%) ROE & ROCE (%)

Source: SKP Research Desk

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46

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15.6% 15.7%15.5% 15.5%

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n)

46% 44% 44% 41% 42% 40%

37% 39% 38%37% 36% 37%

15% 15% 17% 20% 20% 21%

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FY12 FY13 FY14 FY15 FY16E FY17E

Others

GVT

PVT

Ceramic Tiles

606.2808.9

1045.11242.2

1756.0

2224.4

2745.3

6.4% 6.2%6.6% 6.8%

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9%

10%

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T M

argi

n (

%)

PA

T (`

mn

)

27.2%28.7% 29.0%

23.5% 23.7% 24.0% 23.6%

27.6%

34.2%

32.1%32.9%

31.0% 31.3%32.1%

15%

20%

25%

30%

35%

40%


ROE (%) ROCE (%)



3. Top-line expected to grow at a CAGR of ~15% over FY15-17E, with focus on value-added products:

In FY15, Kajaria reported net sales of Rs 21.9 bn, registering a robust growth of ~19% y-o-

y which could be attributed to increase in capacities by 5.6 MSM and 7.5 MSM in FY14 and FY15 respectively. New designs and sizes of tiles also made significant contribution to the revenues.

Contribution from GVT and PVT tiles together was 57% during FY15 via-a-vis 55% in the previous year. PVT and GVT tiles witnessed a robust CAGR growth of ~18% and ~30% during FY12-FY15.

Going forward, with Kajaria’s focus on value-added products and increasing contribution from PVT and GVT segment, we expect the tiles business to grow with a CAGR of ~14% during FY15-FY17E.

Sales Contribution from tiles segment at a glance:

Tiles – Volume wise Sales Tiles – Volume wise Segment Contribution

Tiles – Value wise Sales Tiles – Value wise Segment Contribution


26.9 27.1 27.6 29.3 30.735.0

2.38.2

14.218.5

24.0

27.0

10.6

10.3

10.3

11.0

9.3

10.2

0

10

20

30

40

50

60

70

80


MSM

Tiles - Outsourced

Tiles - JV

Tiles-Own Manufacture68%

59%53% 49.9% 48.0% 48.5%

6% 18% 27% 31% 37.4% 37.3%

27% 23% 20% 19% 14.6% 14.2%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%


Outsourced (%)

JV (%)

Owned Mfg (%)

7.9 8.9 9.5 10.8 11.513.8

0.6

2.94.8

6.89.1

10.5

4.6

4.4

4.0

4.2

3.6

4.1

0

5

10

15

20

25

30


Rs

bn Tiles - Outsourced

Tiles - JV

Tiles-Own Manufacture

60% 55% 52% 50% 47% 49%

5% 18% 27% 31% 37% 37%

35%27% 22% 19% 15% 15%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%


Outsourced (%)

JV (%)

Owned Mfg (%)



4. Focus on Asset Light Model helps in De-leveraging Balance Sheet:

As mentioned above, Kajaria has been focusing on enhancing its production volumes by entering into joint ventures with Morbi based ceramic tile manufacturers (asset light model) and acquisitions.

Kajaria’s focus on enhancing capacities through asset light model not only reduces its capital investments but also de-risks the balance sheet, enhances return ratios and provides faster access to capacities thereby, resulting into low debt equity ratio (D/E). Kajaria’s D/E has significantly reduced from 2x in FY09 to 0.3x in FY15 (as shown in the graph below).

Debt position of Kajaria at a glance:

25

88

.28

10

16

.36

91

6.7

5

89

2.6

9

85

1.3

0

96

4.0

0

13

98

.87

13

68

.23

40

.00

10

66

.83

11

43

.28 17

35

.06

10

86

.80

12

56

.30

14

06

.30

11

06

.30

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

0

500

1000

1500

2000

2500

3000FY

10

FY1

1

FY1

2

FY1

3

FY1

4

FY1

5

FY1

6E

FY1

7E

x

`m

n

Long Term Debt (LHS) Short Term Debt (LHS) D/E (RHS)


Key Concerns

1. Competition from unorganised players: Building product industry is dominated by small

unorganized players. Though, Indian consumers are gravitating towards the organized segment, offering branded products, any increase in the competitive intensity from unorganized segment may be detrimental for the company.

2. Increase in fuel prices: Increase in gas prices, a key input in this energy intensive industry, poses a threat to business in terms of increase in operating cost. To mitigate this, the Company has increased the proportion of value added tiles in the sales mix. Kajaria has also implemented numerous small and critical process improvements which optimized consumption of gas, eliminating wastage.

.

3. Extended slowdown in real estate sector may dampen business sentiments: Kajaria’s tiles and sanitaryware segment is highly dependent on real estate sector. Any extension of slowdown to Tier – II and Tier – III cities may dampen business prospects of Kajaria.

4. Competition from China: Cheap tiles imported from China could pose a threat to the business of Kajaria due to absence of anti-dumping duty. Presently, GoI and State Government of Gujarat, where majority of tiles are manufactured, are supporting Indian manufacturers against dumping of tiles.

5. Forex Risk: The Company faces foreign exchange risks due to its imports and exports. Any adverse currency fluctuation may pose threat to the profitability of Kajaria.



Valuations

Better economic growth, leaving more disposable income for discretionary life style consumption, rapid

urbanisation, changing customer preference towards quality branded products particularly amongst the

growing mass affluent, increasing nuclear families and Governments’ thrust on “Housing for All” coupled

with strong brand equity and recall and distribution network, augers well for the company. It has de-

risked its growth strategy with an asset light business model, adopting a joint venture route.

Kajaria is the market leader in tiles segment, with ~10% market share and strong brand recall. We have

valued the stock on the basis of P/E - method of relative valuation - of 27x of FY17E. The stock has

rallied to a life time high of Rs. 925/- recently and currently, at Rs. 883/-, in view of a rich valuations and

limited upside in the near future, pending triggers for a fresh re-rating or a stronger conviction, we

recommend an ‘Accumulate on dips’.

0

100

200

300

400

500

600

700

800

900

1000

Apr-08 Apr-09 Apr-10 Apr-11 Apr-12 Apr-13 Apr-14 Apr-15

Adj Close Price 6 12 18 24 30 36




Q2FY16 Consolidated Result Review

(All data in Rs mn unless specified, Y/e March)

Particulars Q2 FY16 Q2 FY15 % Change Q1FY16 % Change H1FY16 H1FY15 % ChangeNet Sales 6103.7 5411.6 12.8% 5487.2 11.2% 11590.9 10444.7 11.0%TOTAL EXPENDITURE 4910.6 4598.5 6.8% 4558.8 9469.4 8830.1 7.2%Raw Material Consumed 1280.6 1090.6 17.4% 1377.1 -7.0% 2657.7 2110.8 25.9%% to Sales 21.0% 20.2% -- 25.1% -- 22.9% 20.2% --Purchase of traded goods 768.6 1223.5 -37.2% 701.4 -- 1470.0 2314.6 -36.5%% to Sales 12.6% 22.6% -- 12.8% -- 12.7% 22.2% --Employee Expenses 632.2 502.5 25.8% 587.4 7.6% 1219.6 987.6 23.5%% to Sales 10.4% 9.3% -- 10.7% -- 10.5% 9.5%Stores & Spare Parts 0.0 0.0 -- 0.0 -- 0.0 0.0 --% to Sales 0.0% 0.0% -- 0.0% -- 0.0% 0.0% --Fuel Cost 1253.5 1159.1 8.1% 1124.4 11.5% 2377.9 2273.2 4.6%% to Sales 20.5% 21.4% -- 20.5% -- 20.5% 21.8% --Other Expenses 975.7 622.8 56.7% 768.5 27.0% 1744.2 1143.9 52.5%% to Sales 16.0% 11.5% -- 14.0% -- 15.0% 11.0% --EBIDTA 1193.1 813.1 46.7% 928.4 28.5% 2121.5 1614.6 31.4%EBIDTA Margin 19.5% 15.0% -- 16.9% -- 18.3% 15.5% --Depreciation 178.0 135.4 31.5% 164.7 8.1% 342.7 262.1 30.8%EBIT 1015.1 677.7 49.8% 763.7 32.9% 1778.8 1352.5 31.5%EBIT Margin 16.6% 12.5% -- 13.9% -- 15.3% 12.9% --Interest 96.0 84.1 14.1% 73.6 30.4% 169.6 159.7 6.2%Other Income 8.5 14.2 -40.1% 12.1 -29.8% 20.6 27.0 -23.7%Exceptional Items 0.0 0.0 -- 0.0 -- 0.0 0.0 --Forex Difference 0.0 0.0 -- 0.0 -- 0.0 0.0 --EBT 927.6 607.8 52.6% 702.2 32.1% 1629.8 1219.8 33.6%EBT Margin 15.2% 11.2% 12.8% 14.1% 11.7%Tax 319.6 192.9 65.7% 218.7 46.1% 538.3 397.9 35.3%Extraordinary Items 0.0 0.0 -- 0.0 -- 0.0 0.0 --Prior period taxes written bk. 0.0 0.0 -- 0.0 -- 0.0 0.0 --Minority Interest 20.5 17.5 -- 21.3 -- 41.8 38.7 --Share of Associate Company 0.0 0.0 -- 0.0 -- 0.0 0.0 --Reported Profit After Tax 587.5 397.4 47.8% 462.2 27.1% 1049.7 783.2 34.0%PAT Margin 9.6% 7.3% -- 8.4% -- 9.1% 7.5% --Diluted EPS (` ) 7.5 5.2 44.2% 5.8 28.9% 13.3 10.2 30.1%

Source: Company, SKP research



Consolidated Financials

Exhibit: Balance Sheet

Particulars FY14 FY15 FY16E FY17E Particulars FY14 FY15 FY16E FY17E

Total Income 18,363.1 21,868.9 24,674.3 29,034.1 Share Capital 151.2 158.9 158.9 158.9

Growth (%) 16.0% 19.1% 12.8% 17.7% Reserve & Surplus 4,890.3 7,250.4 9,093.4 11,457.2

Expenditure 15,511.9 18,327.6 20,208.3 23,749.9 Shareholders Funds 5,291.5 7,409.4 9,252.3 11,616.2

Material Cost 4,511.0 4,866.6 5,650.4 6,619.8 Total Debt 1,938.1 2,220.3 2,805.2 2,474.5

Pur of Traded Goods 3,304.2 3,611.0 3,133.6 3,687.3 Deferred Tax (Net) 713.2 790.9 790.9 790.9

Employee Cost 600.4 683.6 888.3 1,045.2 Other Long Term Liab - - - -

Storage & Spare Parts 3,717.0 4,853.5 5,181.6 6,097.2 Total Liabilities 8,355.1 11,045.5 13,578.2 15,734.9

Power & Fuel & Othr Exp. 930.8 1,382.4 1,653.2 1,945.3

Other Expenses 2,448.5 2,930.5 3,701.2 4,355.1 Net Block inc. Capital WIP 7321.2 9378.4 10198.8 10025.5

EBITDA 2,851.2 3,541.3 4,466.1 5,284.2 Investments 0.8 0.8 0.8 0.8

Depreciation 470.0 558.8 692.0 754.7 Non-Current Asset - - - -

EBIT 2,381.2 2,982.5 3,774.1 4,529.5 Inventories 1930.9 3033.2 2714.177 3919.606

Other Income 18.7 72.2 49.3 58.1 Sundry Debtors 1,648.5 2,071.0 2,467.4 2,903.4

Interest Expense 408.2 293.9 329.6 284.6 Cash & Bank Balance 61 111.6 1069.4 1725.2

Profit Before Tax (PBT) 1,991.7 2,760.8 3,493.8 4,303.0 Other Current Assets 8.5 17.9 20.2 23.8

Income Tax 678.2 854.3 1,164.5 1,434.2 Loans & Advances 785.3 979.5 1480.46 2032.389

Profit After Tax (PAT) 1,242.2 1,756.0 2,224.4 2,745.3 Current Liabilities & Prov 3,401.0 4,546.9 4,373.1 4,895.8

Growth (%) 18.9% 41.4% 26.7% 23.4% Net Current Assets 1,033.2 1,666.3 3,378.6 5,708.6

Diluted EPS 16.4 22.1 28.0 34.5 Total Assets 8,355.2 11,045.5 13,578.2 15,734.9

Exhibit: Cash Flow

StatementExhibit: Ratio Analysis

Particulars FY14 FY15E FY16E FY17E Particulars FY14 FY15 FY16E FY17E

Profit Before Tax (PBT) 1,991.7 2,703.3 3,493.8 4,303.0 Earning Ratios (%)

Depreciation 470.0 558.8 692.0 754.7 EBIDTA Margin (%) 15.5% 16.2% 18.1% 18.2%

Interest Provided 355.3 295.0 329.6 284.6 PAT Margins (%) 7.2% 8.5% 9.4% 9.9%

Chg. in Working Capital (153.7) (657.8) (741.0) (1,674.2) ROCE (%) 32.9% 31.0% 31.3% 32.1%

Direct Taxes Paid (647.2) (799.2) (1,164.5) (1,434.2) ROE (%) 23.5% 23.7% 24.0% 23.6%

Other Charges 0.4 (2.4) - - Per Share Data (INR)

Operating Cash Flows 1,661.2 1,802.7 2,280.3 1,949.3 Diluted EPS 16.4 22.1 28.0 34.5

Capital Expenditure (1,567.7) (2,695.8) (1,512.4) (581.4) Cash EPS (CEPS) 22.7 29.1 36.7 44.0

Investments - - - - BVPS 70.0 93.2 116.4 146.2

Others 54.0 65.6 - - Valuation Ratios (x)

Investing Cash Flows (1,513.7) (2,630.2) (1,512.4) (581.4) P/E 53.8 40.1 31.6 25.6

Changes in Equity 62.1 155.3 - - Price/BVPS 12.6 9.5 7.6 6.1

Inc / (Dec) in Debt (689.8) 282.2 584.9 (330.6) EV/Sales 3.7 3.3 2.9 2.4

Dividend Paid (inc tax) (256.6) (309.5) (381.5) (381.5) EV/EBITDA 24.1 20.5 16.1 13.5

Interest Paid - - - - EB/EBIT 28.9 24.3 19.1 15.7

Financing Cash Flows (130.5) 874.3 203.4 (712.1) Balance Sheet Ratios

Chg. in Cash & Cash Eqv 17.0 46.8 971.3 655.8 Debt - Equity 0.4 0.3 0.3 0.2

Opening Cash Balance 34.2 51.2 98.0 1,069.4 Current Ratio 1.3 1.4 1.8 2.2

Closing Cash Balance 51.2 98.0 1,069.4 1,725.2 Fixed Asset Turn. Ratios 2.7 2.5 2.4 2.9

Figures in INR Million

Source: Company Data, SKP Research

Exhibit: Income Statement Figures in INR Million Figures in INR Million



Notes:

The above analysis and data are based on last available prices and not official closing rates. SKP Research is also available on Bloomberg,

Thomson First Call & Investext Myiris, Moneycontrol, Tickerplant and ISI Securities.

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