kajaria ceramics

1

Feb 24, 2015Kajaria Ceramics Ltd

80

175

270

Jan-14 May-14 Sep-14 Jan-15

KJC Sensex

Consumer Discretionary Feb 24, 2015

Kajaria Ceramics LtdIndia Research – Stock Broking

Bloomberg Code: KJC IN HOLD

For private circulation only. For important information about Karvy’s rating system and other disclosures refer to the end of this material. Karvy Stock Broking is also available on Bloomberg, KRVY<GO>, Thomson Publishers & Reuters

Exhibit 1: Valuation Summary (Rs. Mn)YE Mar FY13 FY14 FY15E FY16E FY17ENet Sales 15832 18400 21933 26890 32975EBITDA 2477 2870 3424 4265 5230EBITDA Margin (%) 15.6 15.5 15.6 15.8 15.8Adj. Net Profit 1044 1242 1657 2110 2718

EPS (Rs.) 14.2 16.4 20.8 26.6 34.2RoE (%) 30.2 25.4 23.2 24.2 25.3PE (x)* 14.2 24.8 35.8 28.1 21.8Source: Company, Karvy Research; *For FY13,FY14 PE multiples are on historic basis

Kajaria: Capacity expansion to drive growth Revenue growth driven by capacity expansion: Revenue is likely to witness CAGR growth of 22% during FY14-17E period, on the back of 20.5 million square meter (MSM) capacity expansion. Post capacity expansion, the total capacity will increase to 67.1 MSM from 46.6 MSM in FY14.

Higher realizations due to better product mix: Realizations are likely to improve because of higher contribution from Value Added Products (VAP). EBITDA margin is expected to stabilize on account of easing natural gas prices and risk of gas price increase is waning. EBITDA is expected to post CAGR growth of 22% during FY14-17E. EPS is expected to show CAGR growth of 27% during the period FY 14-17E mainly because of declining interest expenses.

Government policies to provide fillip to Indian Ceramic tile Industry: Real estate industry is slowing down in recent years, however it is expected to get required boost from government policies. Housing sector which contributed for 70% of the ceramic tiles industry sales is likely to get much needed push from the government in order to address the prevailing housing shortage. Government’s policies such as developing 100 smart cities in next few years, Modi’s ‘Clean India’ campaign with ‘sanitization for all by 2019’ and ‘Housing for all by 2022’ schemes will lead to boom in the ceramic tiles industry in India for the next few years.

Valuation and Outlook There has been significant re-rating on the stock and is evident from Kajaria’s PE which has moved up from 22 times to 40 times. Re-rating was mainly because of company’s growth faster than industry and higher operating margins than its peers. At CMP of Rs.747, the stock is trading at 22x FY17E EPS. We initiate coverage on Kajaria and value the company at 25x FY17E EPS for target price of Rs. 855 with “HOLD” rating.

Key Risks • Slower than expected growth in housing sector

• Imports from China; Competition from foreign players

• Surge in natural gas prices

Recommendation (Rs.)

CMP* 747Target Price 855Upside (%) 14*CMP as on Feb 23, 2015

Stock InformationMkt Cap (Rs.mn/US$ mn) 60392 / 99052-wk High/Low (Rs.) 826 / 2923M Avg. daily volume (mn) 0.2Beta (x) 0.9

Sensex/Nifty 28975 / 8754O/S Shares(mn) 79.5

Shareholding Pattern (%)

Promoters 49.5FIIs 23.4DIIs 4.2Others 22.9

Analyst ContactVignesh S.B.K040 - 4485 [email protected]

Technical View

The stock is making repeated cycles of higher highs and higher lows suggesting good demand for the stock even at higher levels. Volume activity on any minor dip has also been good for the stock. Kajaria Ceramics is in a structural uptrend and looks well placed to surge higher towards our fundamental target. We recommend traders to accumulate the stock on dips for the mentioned target levels.

Stock Performance (%)

1M 3M 6M 12M

Absolute 22 34 31 151Relative to Sensex 17 29 17 75Source: Company, Karvy Research

Relative Performance*

Source: Bloomberg, *Indexed to 100

www.karvyonline.com

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Balance sheet (Rs.mn)

FY15E FY16E FY17ETotal Assets 14619 16914 19706Net Fixed assets 8110 9194 10412Current assets 5399 6646 8343Other assets 1109 1074 950Total Liabilities 14619 16914 19706Networth 7286 8874 10918Debt 2164 1864 1364Current Liabilities 3804 4683 5714Other liabilities 651 780 997

Balance Sheet RatiosRoE (%) 23.2 24.2 25.3ROCE (%) 30.7 33.1 34.6Net Debt/Equity 0.3 0.2 0.1Equity/Total Assets 0.5 0.5 0.6P/BV (x) 8.1 6.7 5.4Source: Company, Karvy Research

Cash Flow (Rs.mn)

FY15E FY16E FY17EEBITDA 3424 4265 5230Other Income 46 57 69Interest 280 317 232Tax 860 1098 1417Changes in WC (480) (149) (331)CF from Operations 1804 2701 3250Capex (1800) (1700) (1800)Others 4 20 48Cash flow from Investing (1796) (1680) (1752)Proceeds from issue of Equity Issue/Warrants

750 0 0

Inc / (Dec) in borrowing (200) (300) (500)Dividends paid (411) (523) (673)Others 89 119 160CF from Financing 228 (704) (1014)Change in Cash 236 317 485Source: Company, Karvy Research

Company BackgroundKajaria Ceramics is the largest manufacturer of ceramic & vitrified tiles in India. The company as of December 2014 has an annual aggregate capacity of 54.10 mn. sq. meters, distributed across seven plants Sikandrabad in Uttar Pradesh, Gailpur in Rajasthan, four plants in Morbi in Gujarat and one at Vijayawada in Andhra Pradesh. Kajaria Ceramics has increased its capacity from 1 MSM to 54.10 MSM in the last 25 years and offers more than 1200 options in ceramic wall & floor tiles, vitrified tiles and designer tiles. Kajaria enjoys a broad presence across ceramic tiles, Polished Vitrified Tiles (PVT) and Glazed Vitrified Tiles (GVT). Kajaria is the only ceramic tile company of India to achieve the rare distinction of being a Super brand for the eighth time in a row, a status shared by only sixty other corporate houses in India. Kajaria’s membership to the Indian Green Building Council, reassures the consumers and stakeholders that each product has been created in an eco-friendly process.

Exhibit 2: Shareholding Pattern (%)

Source: Company, Karvy Research

Exhibit 3: Revenue Segmentation (%)


Company Financial Snapshot (Y/E Mar)

Profit & Loss (Rs.mn)

FY15E FY16E FY17ENet sales 21933 26890 32975Optg. Exp 18556 22681 27815EBITDA 3424 4265 5230Depreciation 538 621 704Interest 280 317 232PBT 2605 3327 4294Tax 860 1098 1417PAT 1657 2110 2718Profit & Loss RatiosEBITDA margin (%) 15.6 15.8 15.8Net margin (%) 7.5 7.8 8.2P/E (x) 35.8 28.1 21.8EV/EBITDA (x) 18.0 14.5 11.8Dividend yield (%) 0.6 0.8 1.0Source: Company, Karvy Research

Promoter50%

DII4%

FII23%

Others23%

Own Manufacturing

53%

JV27%

Import / Outsourced

20%

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Revenue growth will be driven by capacity expansion and higher realizations from value added productsKajaria has been growing faster than the industry in the last few years and we expect the company to outperform the industry. Indian tile industry registered CAGR growth of 16% during FY10-14 compared to Kajaria’s CAGR growth of 24%. Capacity expansion, better product mix and higher realizations are expected to boost the revenue growth which is likely to post 22% CAGR growth during FY14-17E. Volumes are likely to grow at CAGR of 15% during FY14-17E and remaining growth contribution will be in the form of pricing and higher realizations. Kajaria’s related diversification by entering into sanitary-ware and faucet business will provide a boost to the revenue growth over the next couple of years. Kajaria’s sanitary-ware plant commissioned in H1FY15 and higher capacity utilization will be seen in FY16. Kajaria is setting up faucet plant which is expected to commence during Q1FY16.

Realizations to improveSales realizations per square meter is expected to grow at CAGR of 5% during FY14-FY17E on higher contribution from Value added products. Value added products share out of the total revenue is on the rise in the last few years from 27% in 2010 to 32% in 2014. This has lead to increased sales realization during the period and is expected to increase going forward. Product mix in FY2014 was skewed towards Ceramics tile segment which is at 56% and remaining from Vitrified tiles segment. Out of 20.5 MSM capacity planned for, close to 86% of the capacity is towards production of Polished Vitrified and expect the blended realization to be higher than the current levels of 376 per square meter (Q3FY15). In FY14 industry blended realizations stood at Rs. 324 compared to Kajaria realization of Rs. 354. Product mix is likely to change by the end of 2016 and contribution from vitrified tiles segment will be at 57% and ceramics tiles segment will stand at 43%.

Exhibit 4: Revenue and Growth rate


Exhibit 6: Sales realization per square meter & Growth rate


Exhibit 5: Industry vs. Kajaria realization (per square meter)


Exhibit 7: PVT production volume to increase (MSM)


1313

0

1583

2

1840

0

2193

3

2689

0

3297

5

38%

21% 16%19%

23%

23%

-10%

10%

30%

50%

0

7000

14000

21000

28000

35000

FY12 FY13 FY14 FY15E FY16E FY17ERevenue (In Mn) Growth rate (RHS)

330

347

354

371

393

409

3%

5%

2%

5%

6%

4%

0%

2%

4%

6%

8%

300

330

360

390

420

FY12 FY13 FY14 FY15E FY16E FY17ERealisation per Sq mt Growth rate (RHS)

25.9 28.9 28.9

11.416.4

28.99.39.3

9.3

10

30

50

70

FY 2014 FY 2015 E FY 2016 E

Cermaic Tiles Polished Vitrified Tiles Glazed Vitrifed Tiles

325

354367

300

314

328

342

356

370

Industry FY14 Kajaria FY14 Kajaria H1FY15

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Housing shortage to boost demand for ceramics industryAccording to the planning commission, urban India is going to be home to 600 million people by 2031; an increase of 59% from 2011, which is nearly equal to twice the population of United States. India’s urban population grew from the 290 million reported in the 2001 census to an estimated 340 million in 2008, and it could soar further to 600 million by 2030. In current scenario approximately 594 million people, about half of India’s population do not have toilets or bathrooms as per census report. Housing shortage is estimated for urban India at 18.78 Million & at 40 million as per National Housing Board (NHB).

Exhibit 10: Related Diversification


Exhibit 11: Urban Housing shortage - Top 6 states

Source: Ministry of Housing, Karvy Research

Exhibit 8: Consistent capacity addition


The company has opted for related diversification and in the process of setting up faucet plant with the capacity to produce 1.00 million pieces per annum which is expected to commence in Q1FY16. The company’s sanitary-ware plant which has production capacity of 700000 pieces per annum has started commissioning towards the end of H1FY15 and expected to achieve full capacity in FY16. Kajaria has been pure tiles player and now by entering into production of sanitary-ware and faucet will transform company into complete solution provider in this segment.

Capacity Expansion of 20.5 MSM by FY16Kajaria had capacity of 46.6 MSM at the end of FY14 and company laid out plans to expand its capacity by 20.5 msm to reach 67.1 MSM by FY16. This target will be met by brown field, greenfield expansions & through joint ventures. In H1 FY15, capacity was increased by 7.5 MSM. Remaining capacity of 13.1MSM will be met through greenfield unit at Rajasthan with an annual capacity of 5 MSM expected to be completed by December 2015; brown field facility at Rajasthan with an annual capacity of 3 MSM to produce ceramic tiles. Company has ventured into JV with Taurus which is putting up a 5 MSM PVT capacity at Morbi.

Exhibit 9: Kajaria Manufacturing plants presence and expected capacity as of March 2016 (Units MSM)Plants Ceramic Tiles PVT GVT TotalSikandrabad (UP) 3.5 0 6.3 9.8Gailpur (Rajasthan) 18.5 8.0 3.0 29.5Morbi (Gujarat) 4.6 20.9 0 25.5Vijayawada (AP) 2.3 0 0 2.3Source: Company, Karvy Research

3646.6

67.1

0

25

50

75

FY12 FY14 FY16E

Capacity in MSM

3.1

1.9

1.3 1.3 1.3 1.2

0.8

1.6

2.4

3.2

UP MH WB AP TN RJHousing shortage in Million Units

Exhibit 12: Tiles demand break up

Source: Ministry of Housing, Karvy Research

Residential70%

Replacement15%

Commercial15%

Housing demand constitutes 70% of Indian tiles demand, replacement demand forms 15% and commercial demand forms 15%. Housing demand is highly correlated to construction activity and to economy. As far as replacement demand is concerned, the durability of tiles is between 8-10 years. Malls, airports and other commercial places have started using high end tiles and it is evident from the usage in construction of recent airport terminals.

100%96% 94%

4% 6%

75%

80%

85%

90%

95%

100%

FY15E FY16E FY17E

Tiles Business Faucet & Saniatary-ware Business

5


Market leaderKajaria ceramics has market share close to 20% in the organized sector and 10% market share in Indian ceramic industry. The company’s goal is to garner market share of 15% in next few years in Indian ceramics industry. With more capacity expected to become operational in next 12 months, it is well positioned to reach the goal of 15% market share in Indian ceramics industry. The company has entered into sanitary-ware and faucet segments, which is the key area of focus for the government and right time for the company to enter into the segment.

Exhibit 16: Organized sector market share as of March 2014


Manufacturing plants spread across IndiaKajaria has manufacturing presence in key markets across India, which helps them to cut down logistics costs. Plants produce variety of ceramic category products such as ceramic tiles, PVT and GZT. In western region, plants are located in Gujarat and Rajasthan; and in Central India, they have plant in UP. These plants cater to Central India and Northern India. Markets as far as south India are concerned, plant is located in Andhra Pradesh. North and West are major markets for tiles and next would be the southern market. Kajaria is well placed to tap the demand because of housing shortage in top states where production plants are present.

20% 19%

13%

8% 7% 7% 6% 4% 5% 4%6%

2%

7%

12%

17%

22%

H & R Johnson

Kajaria Cermaics

Somany Cermaics

Nitco Tiles Asian Granito

RAK Ceramics

Orient Bell Ceramics

Varmora Simpolo Sun heart Others

Exhibit 14: Kajaria gaining market share


Exhibit 15: Kajaria out performing industry’s growth rate


15%12% 12%

14% 14%

21%16%

19%23% 23%

0%

10%

20%

30%

FY13 FY14 FY15E FY16E FY17EIndian Tiles Industry Kajaria

Exhibit 13: Kajaria manufacturing plants presence and capacity as of September 2014 (Units MSM)Plants Ceramic Tiles PVT GVT TotalSikandrabad (UP) 3.5 0 6.3 9.8Gailpur (Rajasthan) 15.5 3.0 3.0 21.5Morbi (Gujarat) 4.6 15.9 0 20.5Vijayawada (AP) 2.3 0 0 2.3Source: Company, Karvy Research

6.6% 6.7%7.7% 8.0% 9.1%

0%

3%

5%

8%

10%

FY10 FY11 FY12 FY13 FY14Kajaria's market share in Industry

6


Kajaria’s segment market share Kajaria has decent market share across major tiles segment. Among these segments, it has highest market share of 25% in Glazed vitrified tiles, 7% in vitrified tiles segment and 6% in Ceramic tiles division. Polished vitrified tiles segment has been growing at CAGR of 20% in last 4 years compared to 14% growth in Ceramic tiles segment indicates shift in preference by customers towards Vitrified tiles segment.

Strong Distribution ChannelThe company has wide and deep distribution network with more than 900 dealers and 10000 sales points across India. Kajaria is planning to increase its dealers and extend its reach towards non-metros. This would help the company to reach Tier II and Tier III cities and gain access to new places and help Kajaria to convert their additional production into sales. In urban locations, Kajaria markets its products through Kajaria world and Kajaria studio.

Organized players gaining market shareTowards the end of 2013, Gujarat High Court ordered Gujarat Pollution control board to shut down the coal based gasifiers. Order came on the back of ceramic units polluting and they were asked to switch over from coal to natural gas. As a result the demand for Liquefied Natural Gas (LNG) shot up and prices started to impact the unorganized players. Gradually, they have started losing market share as competitive edge waned and were unable to compete with organized players which lead

Exhibit 17: Segment Market Share (%)


Exhibit 18: Industry Segment growth rate (%)


5.8% 7.3%

24.5%

0%

5%

10%

15%

20%

25%

30%

Ceramic wall & floor tiles

Polished Vitrified tiles

Glazed Vitrified tiles

Wide range of product offering Kajaria is expanding its presence in entire value chain by offering new products adopting latest technologies. With digital printing technologies, tiles are preferred over natural stones because former has attractive looks and cheaper than the latter. Large format tiles and double charge vitrified tiles are gaining traction in the market which are preferred by customers. Vitrified tiles segment caters to higher end and middle end segments whereas ceramics tiles are offered to value customers. Kajaria offers products at various price ranges starting from Rs. 200 Square meter to Rs. 1800 Square meter.

13

2026

0

10

20

30

Ceramic tiles Polished vitrified tiles

Glazed vitrified tiles

CAGR Growth 2009-2013

Exhibit 19: Industry scenario - 2008


Exhibit 20: Industry scenario - 2014


Organized players

49%

Unorganized players

51%Organized players

40%Unorganized players

60%

7


Implementation of Goods and Service Tax (GST) would be beneficiary to organized players such as KajariaBy implementing GST, more companies will come under the tax bracket which will increase the costs and taxes for unorganized players. Under GST proposal, companies with turnover of Rs.10 lakh has to pay GST and this will lead to small players in unorganized segment will end up paying excise or value added taxes. Organized players will be beneficiaries as they get deduction from their suppliers. Price differential between the organized and unorganized players for their products is expected to shrink to 10% compared to 18% differential now. In the current scenario, indirect tax rate for manufacturing goods is at 26% compared to proposed rate of 20% under GST (10% for excise and 10% for VAT). This will lead to lower pricing for the products and benefits are likely to be passed on to the customer.

Household by material of floorCeramics tiles market is influenced by rapid urbanization and preference towards middle and higher end tiles. There is increased scope for people shifting from other floor materials such as cement, mud & stone to other floor materials because of higher disposable incomes & rising middle class population. In India, 47% of the population lives in houses which have mud flooring, cement flooring (37%) and 11% in mosaic & tiles flooring as per census 2011. Close to 26% of urban population lives in houses with tiles flooring and 46% lives in houses which have cement flooring. On the other hand, only 3.7% of rural population lives in houses with tiles flooring and 62.6% of population lives in houses which have mud as flooring. Facts show the huge opportunities for the Indian tiles industry. As urbanization happens people shift from rural areas to cities which will lead to huge demand for flooring materials.

Government providing fillip to the Ceramic IndustrySmart cities – Building 100 smart cities in next few years as outlined by Prime Minister will be big boost for construction and building materials space. Government has decided to deploy funds close to Rs. 6,00,000 cr for the development of smart cities. Focus is likely to be on existing cities and brown field development. Smart cities are expected to spur the demand for everything from construction materials to digital technology, automobiles, energy, healthcare and transport systems in forthcoming years. With assumption of 1 lakh people in each smart city and 4 members residing in each house, smart city plan would generate demand for 25 lakh new homes. Housing demand constitutes 70% of the demand for the ceramics Industry.

Exhibit 21: Percentage of Households by material of floor (%) INDIA RURAL URBAN 1991 2001 2011 2001 2011 2001 2011Mud 67 57 47 72 63 18 12Stone - 6 8 5 6 9 12Cement 21 27 31 18 24 48 46Mosaic/ Floor tiles 4 7 11 2 4 21 26Others 8 3 4 3 3 4 4Source: Company, Karvy Research

to consolidation in the space. In 2008, unorganized players had market share of above 60% and organized players had smaller portion of 40%. In the current scenario, the trend has changed with organized players capturing higher pie and they have successfully managed to garner close to 50% market share in 2014. Organized players such as Kajaria and Somany growing faster than the industry which would help the organized players to gain more market share in future.

Organized players such as Kajaria are opting for joint ventures with unorganized players which provide instant access to readily available capacity and faster revenue generation. On the other hand, unorganized players get access to pan India market for their products and brand recognition. Growth for organized players is faster than the unorganized players because of wide variety of product offerings, pan India market access and strong brand recognition.

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Exhibit 22: Business AssumptionsY/E Mar (Rs. Mn) FY14 FY15E FY16E FY17E CommentsIndia Business (Consolidated)

Revenue 18400 21933 26890 32975Capacity addition to drive sales growth.

Revenue Growth (%) 16.8 19.4 22.6 22.6

EBITDA 2870 3424 4265 5230 Margins to improve on the back of decline in fuel &

power costs.EBITDA Margins (%) 15.5 15.6 15.8 15.8

PAT 1242.5 1656.7 2110.2 2717.7Expected to be strong on decline in finance costs.

Diluted EPS (Rs) 16.4 20.8 26.6 34.2

Diluted EPS Growth (%) 15.8 26.8 27.4 28.8

Net CFO 1662 1804 2701 3250Strong cash flows on improving RoAs and reduction in

working capital days.

Net Debt 2303 1928 1547 879 Debt is expected to decline going forward

Free Cash Flow 50 287 604 1088Source: Company, Karvy Research

Exhibit 23: Karvy vs. Consensus Karvy Consensus Divergence (%) CommentsRevenues (Rs.mn)

FY15E 21933 22190 (1.2)Sales driven by capacity expansion and higher value productsFY16E 26890 27353 (1.7)

FY17E 32975 32684 0.9EBITDA (Rs.mn)

FY15E 3424 3440 (0.5)EBITDA to improve on lower fuel costs and higher contribution from higher margin products

FY16E 4265 4294 (0.7)FY17E 5230 5213 0.3EPS (Rs.)

FY15E 21 21 (2.6)EPS to grow on the back of decline in finance costsFY16E 27 27 (2.9)

FY17E 34 34 0.8Source: Bloomberg, Karvy Research

Revenues expected to grow at CAGR of 22% during FY 14-17E, driven by capacity expansion and higher contribution from VAP such as Vitrified tiles segments. Realizations are likely to improve on the back of increasing contribution from Vitrified tiles segment. In H1FY15, realization came in at Rs.366 per Sq mt compared to Rs.354 per sq mt in FY14, because of increased contribution from Vitrified tiles. Sales realization is expected to grow at CAGR of 5% during FY14–17E driven by change in product mix and product pricing.

Exhibit 24: Sales realization per square meter (Rs.)


Realizations to improve on back of increase in value added products

346354

371

393

409

330

355

380

405

430

FY13 FY14 FY15E FY16E FY17E

9


EBITDA reported CAGR growth of 27% during FY12-FY14. EBITDA is likely to witness CAGR growth of 22% because of improved realization from value added products and fall in fuel costs which is a major component of expenses. Kajaria is adding more dealers and expected to increase promotional expenses in order to increase its reach across Tier II and III cities where demand is seen increasing and to promote the brand. Increase in promotional costs is likely to be offset by benefits of lower fuel expenses. EBITDA per sq mt is expected to reach Rs.64 Sq mt by FY17E from Rs.55 per Sq mt in FY14. EBITDA per square meter growth expected at CAGR of 5% during FY14-17E.

Exhibit 25


Operating Margins to Stabilize (%)

15.6%

15.5% 15.6%

15.8% 15.9%

15.5%

15.6%

15.7%

15.8%

15.9%

FY13 FY14 FY15 FY16 FY17

Exhibit 26: Expense break up for square meterFY12 FY13 FY14 FY15E FY16E FY17E

Raw material costs 163 157 158 169 176 183Employee costs 27 30 33 35 37 38Power & fuel costs 53 67 72 78 79 82Selling & distribution 12 13 12 13 13 14Other expenses 22 26 25 26 28 29EBITDA 52 54 55 58 61 64Source: Company, Karvy Research

Kajaria registered CAGR of 23% in PAT during FY12-14. PAT is likely to grow at a CAGR of 27% during FY14-17E (mainly on the back of lower finance costs). Interest coverage ratio has improved from 3.47 times in FY12 to 6 times in FY 14 and is expected to further strengthen to 17 times in FY17. Sharp reduction in working capital cycle days lead to increased cash flows from operations and reduced the need for short term borrowings. Debt level fell to Rs. 2360 Million in March FY14 compared to Rs. 3200 Cr as of March FY13. PAT margins improved to 6.73% in FY14 from 6.15% in FY12.

Exhibit 27


Fall in Interest costs to boost PAT margins

454 408

280 317

232

6.6% 6.7%

7.5% 7.8%8.2%

4%

5%

6%

7%

8%

9%

200

300

400

500


Finance Costs PAT Margins (RHS)

73

62

3730

38

40 3738 39

20

35

50

65

80

FY09

FY10

FY11

FY12

FY13

FY14

FY15

E

FY16

E

FY17

E

Payable days Inventory daysDebtors Days WC days

Working capital days have significantly reduced from 62 days in FY10 to 40 days in FY14. This reduction was mainly on account of inventory days which declined from 69 days to 41 days from FY14. Inventory days have fallen indicating company is able to convert its inventories faster and improved the cash conversion time frame. Working capital as % of sales has reduced from 16% in FY10 to 11% in FY14 which has reduced the requirement of short term working capital loans. Debtor days are stable over the years at 37 days during FY10 and 30 days in FY14. Stable debtor days indicate company’s ability to collect debt and are best in the industry whereas its competitors are taking longer time to collect.

Exhibit 28


Reduction in working capital cycle days

10


Significant amount of debt has come off the balance sheet on the back of improvement in working capital cycle days. Debt has reduced sharply from Rs.3200 Mn in FY13 to Rs. 2360 Mn as of March FY14. Debt Equity ratio has declined to 0.41 from 0.82 during the same period. We expect debt equity ratio to decline going forward despite significant capacity addition on the cards. Equity infusion from West Bridge Cross Over fund will help the company to meet its funding requirement for capex. Return on Assets has increased from 9% in FY12 to 11% in FY14 and to reach 14% in FY17. RoAs are expected to improve on account of higher product realization from commissioning of new plants.

Exhibit 29: Decline in Debt Equity ratio


Strengthening Balance sheet

1.0 0.9

0.40.3

0.20.1

0.0

0.3

0.5

0.8

1.0

FY12 FY13 FY14 FY15E FY16E FY17E

Debt Equity (x)

Stable return ratios (%)Exhibit 30:


Kajaria’s RoE declined mainly on account of equity dilution in the form of issue of equity shares to West Bridge Cross Over fund and conversion of warrants to equity. However, RoE is expected to improve going forward from 23% in FY15E to 25% in FY17E. RoCE is expected to improve from 30% in FY15E to 34% in FY17E on the back of declining debt levels in the coming years.

23.2

%

24.2

%

25.3

%30.7

%

33.1

%

34.6

%

12.4

%

13.2

%

14.7

%

5%

15%

25%

35%

FY15E FY16E FY17ERoE RoCE RoA

Kajaria expected to generate strong operating cash flowsExhibit 31: (Rs. mn)


Company has marked 45% expansion in capacity which will generate strong cash flows in the next couple of years. Majority of new capacity is expected to commission in next 12 months and most of them are towards production of vitrified tiles which will fetch higher realizations. In next couple of years, Kajaria is expected to transform into a company with strong free cash flows which will lead to strengthening of its financials and help the company to expand its business in future.

976

1662

1804

2701

3250

0

1100

2200

3300


Operating cash flow

11


Exhibit 32: Company Snapshot (Ratings) Low High 1 2 3 4 5Quality of Earnings 9 Domestic Sales 9 Exports 9 Net Debt/Equity 9 Working Capital req 9 Quality of Management 9 Depth of Management 9 Promoter 9 Corporate Governance 9 Source: Company, Karvy Research

Valuation & OutlookWe initiate coverage on Kajaria and value the company at 25x FY17E EPS for target price of Rs. 855 with HOLD rating. Kajaria is currently trading at 22x times FY17E EPS. We have assigned average PE multiple of 25 times in which the stock has been trading in the last couple of years. Kajaria has seen significant re-rating which is evident from its PE moving to 40x from 22x. Re-rating was mainly because company was growing faster than industry and has higher operating margins than its peers. Strong revenue growth rate and with operating margins highest in the industry indicate the company’s competitiveness. With 20.5 MSM capacity coming up in the next 12 months, revenues likely to get boost from the capacity addition. Management has focused on certain issues such as reducing debt, successfully reduced the working capital days and raised money from PE players to fund capex for the growth. Now the focus for the company is to capture the 15% market share in the industry.

Exhibit 33: P/E Band (x)

Source: Bloomberg, Karvy Research

Exhibit 34: P/B Band (x)

Source: Bloomberg, Karvy Research

2

4

6

8

10

Feb-13 Jun-13 Oct-13 Feb-14 Jun-14 Oct-14 Feb-15PB Avg Highest Lowest

5

15

25

35

45

Feb-13 Jun-13 Oct-13 Feb-14 Jun-14 Oct-14 Feb-15PE Avg Highest Lowest

Exhibit 35: Comparative valuation summary

CMPM-cap

(Rs. mn)EPS (Rs.) P/E (x) RoE (%)

FY15E FY16E FY17E FY15E FY16E FY17E FY15E FY16E FY17E

Kajaria Ceramics 747 60392 20.8 26.6 34.2 35.8 28.1 21.8 23.2 24.2 25.3Somany Ceramics 361 14518 11.4 16.5 22.6 31.6 21.9 16.0 18.3 22.3 24.9Source: Company, Bloomberg, Karvy Research

12


Exhibit 40: Scenario analysis of earnings and target prices based on % cost of raw materials to sales revenue

Base assumption

YoY Cost of raw materials as a % of Sales revenue 3% 2% 1% -1% -2% -3%

EBITDA margin (%)

FY15E 15.5 14.3 14.7 15.2 16.0 16.4 16.8

FY16E 15.8 14.5 15.0 15.4 16.3 16.7 17.1

FY17E 15.8 14.5 15.0 15.4 16.3 16.7 17.1

EPS (Rs.)

FY15E 20.85 18.5 19.3 20.1 21.6 22.4 23.2

FY16 E 26.55 23.7 24.6 25.6 27.5 28.5 34.2

FY17E 34.2 30.6 31.8 33.0 35.4 36.6 37.8

Target price 855 796 827 858 920 950 981

Change in TP (%) - (10.5) (7.0) (3.5) 7.6 11.1 14.7Source: Company, Karvy Research, NA: Not Applicable

Peers Group ComparisonExhibit 36: Trend in EBITDA margins


Exhibit 38: Trend in RoE


Exhibit 37: Sales Growth Rate (%)


Exhibit 39: Debt Equity Ratio Trend (%)


Key Risks

• Slower than expected growth in housing sector

• Imports from China; Competition from foreign players

• Surge in natural gas prices

15.7

15.8

15.615.5

15.3

15.6

15.8

16.1

5

10

15

FY11 FY12 FY13 FY14

Somany Kajaria (RHS)

37.6%

20.6%

16.2%

10%

20%

30%

40%

FY12 FY13 FY14

Somany Kajaria

27.129.5 30.5

26.1

15

20

25

30

35

10

15

20

25

30

FY11 FY12 FY13 FY14Somany kajaria (RHS)

1.3

1.00.9

0.4

0.1

0.6

1.1

1.6

0.1

0.6

1.1

1.6

2.1

FY11 FY12 FY13 FY14

Somany kajaria (RHS)

13


Financials

Exhibit 41: Income StatementYE Mar (Rs. Million) FY13 FY14 FY15E FY16E FY17ERevenue 15832 18400 21933 26890 32975Growth (%) 20.6 16.2 19.2 22.6 22.6Operating Expenses 13386 15593 18556 22681 27815EBITDA 2477 2870 3424 4265 5230Growth (%) 19.3 15.9 19.3 24.6 22.6Depreciation & Amortization 446 470 538 621 704Other Income 30.4 62.9 46.2 56.6 69.4EBIT 2030 2400 2885 3644 4526Interest Expenses 454 408 280 317 232PBT 1576 1992 2605 3327 4294Tax 499 678 860 1098 1417Adjusted PAT 1044 1242 1657 2110 2718Growth (%) 29.1 19.0 33.3 27.4 28.8Source: Company, Karvy Research

Exhibit 42: Balance SheetYE Mar (Rs. Million) FY13 FY14 FY15E FY16E FY17ECash & Cash Equivalents 55 61 236 317 485Sundry Debtors 1436 1648 1968 2413 2959Inventory 2197 1931 2582 3166 3981Loans & Advances 329 510 609 747 916Gross Block 9113 10180 11980 13580 15380Net Block 6125 6861 8110 9194 10412Total Assets 10476 11756 14619 16914 19706Current Liabilities & Provisions 2684 2945 3835 4721 5761

Debt 3202 2364 2164 1864 1364Other Liabilities 706 744 802 833 872Total Liabilities 6592 6052 6801 7419 7997Shareholders Equity 147 151 159 159 159Reserves & Surplus 3462 4890 7127 8715 10759Total Networth 3609 5291 7286 8874 10918Minority Interest 275 409 531 621 791Total Networth & Liabilities 10476 11756 14619 16914 19706Source: Company, Karvy Research, NA: Not Applicable

14


Exhibit 43: Cash Flow StatementYE Mar (Rs. Million) FY13 FY14 FY15E FY16E FY17EPBT 1576 1992 2605 3327 4294Depreciation 446 470 538 621 704Interest 454 408 280 317 232Tax Paid 499 678 860 1098 1417(Inc)/dec in Net WC (595) 148 (480) (149) (331)Other Income 30 63 46 57 69Cash flow from operating activities 976 1662 1804 2701 3250(Inc)/dec in capital expenditure (1543) (1568) (1800) (1700) (1800)(Inc)/dec in investments 0 0 0 0 0Others 8 9 4 20 48Cash flow from investing activities (1535) (1559) (1796) (1680) (1752)Inc/(dec) in borrowings 568 (690) (200) (300) (500)Issuance of equity/ Warrants 754 750Dividend paid (214) (257) (411) (523) (673)Others 170 62 89 119 160Cash flow from financing activities 524 (131) 228 (704) (1014)Net change in cash (1) 17 236 317 485Source: Company, Karvy Research

Exhibit 44: Key RatiosYE Mar (%) FY13 FY14 FY15E FY16E FY17EEBITDA Margin (%) 15.6 15.5 15.6 15.8 15.8EBIT Margin (%) 12.8 13.0 13.1 13.5 13.7Net Profit Margin (%) 6.6 6.7 7.5 7.8 8.2Dividend Payout ratio 21.1 21.3 21.2 21.2 21.2Net Debt/Equity 0.5 0.3 0.2 0.2 0.1RoE (%) 30.2 25.4 23.2 24.2 25.3RoCE (%) 36.8 32.6 30.7 33.1 34.6Source: Company, Karvy Research

Exhibit 45: Valuation ParametersYE Mar FY13 FY14 FY15E FY16E FY17EEPS (Rs.) 14.2 16.4 20.8 26.6 34.2DPS (Rs.) 3.0 3.5 4.4 5.6 7.3BV (Rs.) 49.0 66.7 91.7 111.7 137.4PE (x)* 14.2 24.8 35.8 28.1 21.8P/BV (x)* 3.9 5.5 8.1 6.7 5.4EV/EBITDA (x)* 9.0 12.9 18.0 14.5 11.8EV/Sales (x) 3.9 3.4 2.8 2.3 1.9Source: Company, Karvy Research, * P/E, P/BV and EV/EBITDA for FY13, FY14 are on historic basis.

15


Stock Ratings Absolute ReturnsBuy : > 15%Hold : 5-15%Sell : <5%

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kajaria ceramics

Documents

expected growth

eps rs

growth revenue growth

cagr growth

cmp of rs

companys growth

target price of rs

post capacity expansion