rating matrix kajaria ceramics (kajcer) - myirisbreport.myiris.com/icicisl/kajceram_20140219.pdf ·...

February 19, 2014

Initiating Coverage

ICICI Securities Ltd | Retail Equity Research

Paving the way for growth…. Kajaria Ceramics (Kajaria), being the second largest tiles manufacturer in India, is likely to be the key beneficiary of the sturdily growing Indian tiles industry (volume growth: 14% during CY08-12). Given the low per capita consumption of ceramic tiles in India, structural favourable development towards organised players post GPCB closure notice to Morbi based units that run on coal based furnace and planned capex of | 400 crore over the next two years, we anticipate revenues and earnings will grow at a CAGR of 19.6% and 24.7%, respectively, during FY13-16E. We initiate coverage on the stock with a BUY recommendation and a target price of | 360. Indian tiles industry – offers steady growth prospects … With increasing disposable incomes, affordability, urbanisation, brand aspiration and home aesthetics, the India has emerged as one of the fastest growing tiles market globally (14.0% CAGR over CY08-12). With per capita consumption at 0.54 square metre per person in comparison to 3-4 square metre per person in peer countries, the prospects for India are huge in catching up with its global counterparts. Kajaria, being the second largest player in industry with current capacity of 45.2 MSM and with better margins and balance sheet strength, is likely to reap the benefits. Morbi development – Structurally positive for organised player… In November, 2013, Gujarat Pollution Control Board (GPCB) issued a closure notice to Morbi (hub for unorganised players) based ceramic units that run on coal gas furnace. This development is structurally positive for organised players like Kajaria as i) the organised pie will grow faster in the absence of cost advantage enjoyed by unorganised players due to coal gas furnace and ii) it has set the tone for consolidation in the industry. Capex outlined to fuel future growth; funding in place… Kajaria has lined up a capex of | 400 crore over the next two years to augment its capacity. To fund the same, it has already raised | 150 crore through equity share & warrants issue. This should support revenues & earnings growth at a CAGR of 19.6% & 24.7%, respectively, during FY13-16E. Positive on business potential; initiate with BUY recommendation We remain positive on Kajaria given the sturdy growth in the industry along with a favourable structural shift towards organised players, its better margin & return ratio profile coupled with a healthy balance sheet. We are initiating coverage on Kajaria with a BUY recommendation and a target price of | 360/share (valuing it at 0.7x PEG - last two year’s average, implying P/E of 18x FY15E). Exhibit 1: Financial Performance

FY12 FY13 FY14E FY15E FY16ENet Sales (| crore) 1,313.0 1,612.0 1,845.5 2,279.8 2,760.0 EBITDA (| crore) 206.2 244.6 271.6 341.3 414.6 Net Profit (| crore) 80.9 104.5 117.9 159.2 202.7 EPS - Diluted (|) 10.2 13.2 14.8 20.0 25.5 P/E (x) 28.8 22.3 20.3 15.0 11.8 Price / Book (x) 8.3 6.5 4.6 3.3 2.7 EV/EBITDA (x) 12.9 11.1 9.8 7.6 5.9 RoCE (%) 29.4 28.2 27.5 27.9 29.7 RoE (%) 28.7 29.0 22.5 22.1 23.2

Source: Company, ICICIdirect.com Research

Kajaria Ceramics (KAJCER)| 317

Rating Matrix Rating : Buy

Target : | 360

Target Period : 12 months

Potential Upside : 14%

YoY Growth (%) (%) FY13 FY14E FY15E FY16ENet Sales 22.8 14.5 23.5 21.1 EBITDA 18.6 11.0 25.7 21.5 Net Profit 29.2 12.8 35.0 27.3 EPS 29.2 12.8 35.0 27.3

Valuation Summary (x) FY13 FY14E FY15E FY16EP/E 22.3 20.3 15.0 11.8 Target P/E 27.4 24.3 18.0 14.1 EV / EBITDA 11.1 9.8 7.6 5.9 P/BV 6.5 4.6 3.3 2.7 RoNW (x) 29.0 22.5 22.1 23.2 RoCE (x) 28.2 27.5 27.9 29.7

Stock Data

Bloomberg/Reuters Code KJC IN / KAJR.NSSensex 20,723 Average volumes 114,504 Market Cap (| crore) 2,393.9

52 week H/L 333/ 175Equity Capital (| crore) 15.1 Promoter's Stake (%) 52.1 FII Holding (%) 25.6 DII Holding (%) 3.8

Comparative return matrix (%)

Return % 1M 3M 6M 12MKajaria Ceramics 8.1 26.1 43.9 58.9 Somany Ceramics 11.4 44.3 100.8 95.4 Cera Sanitaryware 1.2 35.7 51.1 84.5

Price movement

130

170

210

250

290

330

Feb-14Nov-13Aug-13May-13Mar-13

5,000

5,550

6,100

6,650

7,200

Price (R.H.S) Nifty (L.H.S)

Analyst’s name

Deepak Purswani, CFA [email protected]

Bhupendra Tiwary [email protected]


Company Background Kajaria Ceramic (Kajaria) is the second largest player in the ceramic/vitrified tiles space in India. It was founded in 1988 with 1 million square metre (MSM) capacity in Sikandrabad, Uttar Pradesh. The company, over the last 25 years, has raised capacity to 45.2 MSM and created a strong and widespread dealer network throughout India. Kajaria currently has an annual aggregate capacity of 45.2 MSM distributed across seven plants: Sikandrabad in UP, Gailpur in Rajasthan, four plants at Morbi in Gujarat and one at Vijayawada (Andhra Pradesh). The sharp capacity build-up has been achieved through the organic (expansion of its capacities at Gailpur and Sikandrabad) as well as inorganic route [JV/acquisition with Jaxx, Cosa, Soriso (Morbi) and Vennar (Vijayawada)].

Kajaria manufactures ceramic tiles, polished and glazed vitrified tiles for wall and floor applications. Additionally, the company also markets international tile brands, bathware and wooden flooring solution. Offering over 1100 designs in different sizes and operating through a network of 825 dealers, the company has a pan-India presence.

Exhibit 2: Plants of Kajaria


Shareholding pattern (Q3FY14)

15.618.4

24.3 25.6

3.2 3.11.4

3.8

0.0

9.0

18.0

27.0

Q4FY13 Q1FY14 Q2FY14 Q3FY14

(%)

FII DII

FII & DII holding trend (%) Shareholder Holding (%)

Promoters 52.1

Institutional investors 29.4

General public 18.5


Investment Rationale Industry offers steady growth prospects in organised space…

Global tile industry – China leads the pack but India fastest growing…

Global ceramic tile production and consumption stood at 11.2 billion square metre and 10.9 billion square metre, respectively, in CY12. China was the largest manufacturer as well as consumer constituting 46.6% of the total world production and 38.9% of world consumption of ceramic tiles. The domestic ceramic tile industry, pegged at 681 MSM in CY12, ranks third both in terms of production as well as consumption with its share rising from 4.8% in CY08 to 6.2% in CY12. We highlight that while global production has grown at 6.8% CAGR during CY08-12, the domestic tiles industry has been a leader growing at 15.4% CAGR during the same period. Similarly, global ceramic tiles consumption also witnessed 6.8% CAGR during CY08-12 wherein India again led the growth at 14% CAGR. The Indian tiles industry has exhibited strong growth vis-à-vis its global counterparts led by strong demand owing to the emergence of tiles as a durable, cost-effective and convenient flooring solution over natural stone. Increasing disposable incomes, affordability, urbanisation, brand aspiration and home aesthetics also catalysed the demand. Furthermore, lower cost of equipment and imposition of anti-dumping duty had given a major push to the domestic tiles industry, on the supply side.

Exhibit 3: Global tiles production

MSM CY08 CY09 CY10 CY11 CY12 CAGR (%)

China 3400 3600 4200 4800 5200 11.2

Brazil 713 715 753 844 866 5.0

India 390 490 550 617 691 15.4

Iran 320 350 400 475 500 11.8

Spain 495 324 366 392 404 -5.0

Italy 513 368 387 400 367 -8.0

Indonesia 275 278 287 317 330 4.7

Vietnam 270 295 375 380 298 2.5

Turkey 225 205 245 260 280 5.6

Mexico 223 204 210 219 229 0.7

Others 1,770 1,752 1,846 1,892 2,001 3.1

Total 8,594 8581 9,619 10596 11166 6.8


Exhibit 4: Global tiles consumption MSM CY08 CY09 CY10 CY11 CY12 CAGR

China 2830 3030 3500 4000 4250 10.7

Brazil 605 645 700 775 803 7.3

India 403 494 557 625 681 14.0

Iran 265 295 335 395 375 9.1

Indonesia 262 297 277 312 340 6.7

Vietnam 220 240 330 360 247 2.9

Saudi Arabia 136 166 182 203 230 14.0

Russia 191 139 158 181 213 2.8

USA 211 173 186 194 204 -0.8

Mexico 177 163 168 177 187 1.4

Others 3,073 2,883 3,075 3,210 3,382 2.4

World 8,373 8525 9,468 10432 10912 6.8


Exhibit 5: Global share in production

39.6 42.0 43.7 45.3 46.6

8.3 8.3 7.8 8.0 7.84.5 5.7 5.7 5.8 6.23.7 4.1 4.2 4.5 4.55.8 3.8 3.8 3.7 3.6

38.1 36.1 34.8 32.7 31.4

0

20

40

60

80

100

CY08 CY09 CY10 CY11 CY12

(%)

China Brazil India Iran Spain Others


Exhibit 6: Global share in consumption

33.8 35.5 37.0 38.3 38.9

7.2 7.6 7.4 7.4 7.44.8 5.8 5.9 6.0 6.2

47.9 44.2 43.3 41.5 40.9

0102030405060708090

100


(%)

China Brazil India Iran Indonesia Others


While global production has grown at 6.8% CAGR during

CY08-12, the domestic tiles industry has been a leader

growing at 15.4% CAGR during the same period


Growth potential for Indian tiles industry remains high as penetration still low…

We highlight that the potential of the industry is significant considering the per capita consumption of ceramic tiles in India. Currently, it is at 0.54 square metre per person in comparison to 3-4 square metre per person in peer countries like China, Brazil, Iran and Vietnam. We believe that with growing urbanisation, affordability and sanitation consciousness, the prospects for India are huge in catching up with its global counterparts.

Exhibit 7: India’s per capita consumption still among the lowest

3.07

4.00

0.540.99

4.84

3.70

0

1

2

3

4

5

China Brazil India Indonesia Iran Vietnam

(sq.

m)

China Brazil India Indonesia Iran Vietnam


Industry dynamics favourable for growth…

Structural shift to high end vitrified tiles There has been a structural shift in ceramic tiles demand with preference towards high-end vitrified tiles led by rising affordability, urbanisation, brand aspiration and home aesthetics. We highlight that while the domestic tile industry has grown at 11.3% CAGR during CY09-12, polished and glazed vitrified tiles have grown at 17.6% and 26% CAGR, respectively, during the same period.

Exhibit 8: Shifting preference for vitrified tiles

26% CAGR

17.6% CAGR

7.5% CAGR

11.3% CAGR CY09 - Indian Tile Industry - (494 MSM/ | 12000 cr) CY12 - Indian Tile Industry - (681 MSM/ | 19500 cr)

Polishedvitrified tiles

(145 MSM/ | 4700 cr)

Ceramic glazed tiles(334 MSM/ | 6400 cr)

Polishedvitrified tiles

(236 MSM/ | 8100 cr)

Ceramic glazed tiles(415 MSM/ | 9600 cr)

Glazedvitrified tiles

(15 MSM/ | 900 cr)

Glazedvitrified tiles

(30 MSM/ | 1800 cr)


Currently, per capita consumption of ceramic tiles in India

is at 0.54 square metre per person in comparison to 3-4

square metre per person in peer countries like China, Brazil,

Iran and Vietnam

Given the structural shift with preference towards high end

vitrified tiles led by rising affordability, urbanisation, brand

aspiration and home aesthetics, polished and glazed

vitrified tiles have grown at 17.6% and 26% CAGR,

respectively, during CY09-12


Organised space dominated by top 3 players…

The domestic tiles industry is characterised by organised and unorganised players. While national brands control 50% of the market, the remaining 50% is held by unorganised players (mostly present in Morbi in Gujarat). Half of the organised sales are contributed by top 3 players, namely H&R Johnson, Kajaria and Somany who continue to hog the share in the organised space (refer exhibit 10 and 11 for their rising pie among organised players).

Exhibit 9: Organised players sales Company Turnover as on FY13 (| cr)

H&R Johnson 1832Kajaria Ceramics 1734Somany Ceramics 1113Nitco Tiles 881Asian Granito 707RAK Ceramics* 700Orient Bell Ceramics 620Varmora* 400Regency Ceramics 190Bell Granito* 125Murudeshwar Ceramics 155Euro Ceramics 100Others (Simpolo, Sun Heart,Marbomax, Restile, Decolight, Spartek etc)* 943Total 9500

Source: Company, ICICIdirect.com Research *estimated

Exhibit 10: Top 3 players had 41% share among branded players…

FY10 - Organised players market share

59%

9%

12%

20%

H&R Johnson Kajaria Ceramics Somany Ceramics Others


Exhibit 11: …that has now grown to 49%...

FY13 - Organised players market share19%

18%

12%

51%

H&R Johnson Kajaria Ceramics Somany Ceramics Others


Morbi – Largely unorganised hub –facing the heat of rising cost

Morbi, in Gujarat, is a hub of ceramic tile manufacturers in India with ~500 manufacturing units (mostly unorganised), out of ~750 players in India. The region, according to various sources, produces 65-70% of the total ceramic products (vitrified tiles, wall tiles, floor tiles, quartz stone, sanitaryware, roofing tiles and mosaic tiles) in India. One of the key reasons behind Morbi being the ceramic city is easy availability of key raw materials such as various types of clay, red and black soil, minerals (including calcite and wollastonite) with frits and glazes readily available either locally or from neighbouring Rajasthan. It is also cost effective since GSPC has installed industrial gasoline in the region.

Top 3 branded players command ~50% share in the

organised space clearly depicting their dominance

The Morbi region, according to various sources, produces

65-70% of the total ceramic products (vitrified tiles, wall

tiles, floor tiles, quartz stone, sanitaryware, roofing tiles

and mosaic tiles) in India


In the last few years, given the sharp rise in gas prices (~80% in the last two years), cost of production had gone up substantially. Consequently, in a bid to reduce production costs, Morbi-based ceramic manufacturers had switched over to coal-fired furnaces from the existing gas-based furnaces. However, since FY14 beginning, Gujarat Pollution Control Board (GPCB) restricted cargo handling at the Navlakhi port (which handles 60% of coal for the ceramic industry), leading to severe shortage of coal. Moreover, post the closure, ceramic players have to bring coal from Kandla and Mundra ports where transportation cost is higher by ~ 50%.

Difficulty for unorganised player; opportunity for organised players…

The Morbi situation would have two important implications for the sector. Firstly, unorganised players will have to shift back to gas fired furnaces, which means the cost parity enjoyed by unorganised players would go away. Hence, the share of the pie for organised players in the industry should grow faster, going ahead.

Secondly, the current situation has set the tone for consolidation in the industry. We believe that given the higher cost of operation and inability of unorganised players to push their products amid growing preference for branded products, they could now move towards either forming a JV or being taken over by organised players. This would again be positive for organised players, especially Kajaria, which has a healthy balance sheet.

Exhibit 12: Ceramic tiles capacity addition Year MSM

FY06 23.8

FY07 34.4

FY08 56.2

FY09 43.5

FY10 13.2

FY11 8.6

FY12 16.3

FY13 18.9

FY14E 8.9

FY15E 6.9 Source: CMIE, ICICIdirect.com Research

Exhibit 13: Acquisition in last two years Acquirer company Target company Capacity (million square

metres)Equity stake (%) Cost | crore Effective cost of acquisition

(|/square metre)Kajaria Ceramics Soriso Ceramics 2.3 51 6.0 51.2Kajaria Ceramics Jaxx Vitrified 3.1 51 6.3 39.7Kajaria Ceramics Vennar Ceramics 2.3 51 13.7 116.4Kajaria Ceramics Cosa Ceramics 2.7 51 11.6 84.3Somany Ceramics Vintage Tiles 2.7 26 5.0 71.2Somany Ceramics Commander Vitrified 2.7 26 3.3 46.3H & R Johnson Small Tiles 2.3 50 N.A N.A

Source: CMIE, ICICIdirect.com Research

The current situation in Morbi has set the tone for

consolidation in the industry given the higher cost of

operation and inability of unorganised players to push their

products amid growing preference for branded products

Rectangle


Kajaria - Present across all segments of ceramic tiles Kajaria is present across all segments of ceramic tiles viz. ceramic wall and floor tiles, glazed vitrified tiles and polished vitrified tiles. The company is now moving towards increasing its production of vitrified tiles to latch on to the structural shift of Indian consumers towards the same. Kajaria, which used to import vitrified tiles till FY10, has stepped up its vitrified tiles production capacity to 19.3 MSM currently. This is in keeping with the increasing preference towards high valued vitrified tiles given the rising affordability, urbanisation, brand aspiration and home aesthetics. Furthermore, its planned expansion is also towards capacity for vitrified tiles.

Exhibit 14: Presence in all segments makes Kajaria beneficiary

Ceramic wall and floor tilesSegment size - (415 MSM/| 9600 crore)

Manufactured at Gailpur, Sikandrabad, Morbi(Soriso) and Vijaywada (Vennar). Kajaria's total capacity 25.9

MSM. Also, outsourced from some units in Morbi

Polishedvitrified tiles (236 MSM/| 8100 crore)

Manufactured at Gailpur, Sikandrabad and Morbi (Jaxx and Cosa). Total capacity 13.40 MSM. Plus imports from

ChinaGlazedvitrified tiles

(30 MSM/| 1800 crore)

Manufactured at Gailpur and Sikandrabad. Total

capacity 5.9 MSM

Imports: 2 MSM

Domestic:28 MSM

Imports: 15 MSM

Domestic:221 MSM

Imports: 10 MSM

Domestic:405 MSM


Exhibit 15: Product segments of Kajaria

Product Segment Manuf. Locations Sizes Designs Price range (|/ sq mt) Gailpur Sikandrabad Morbi Vijaywada Total Ceramic wall and floor tiles 4 11 790 225-1100 15.5 3.5 4.6 2.3 25.9Polished vitrified tiles 5 3 58 425-1200 3.0 2.0 8.4 13.4Glazed vitrified tiles 2 6 175 600-1800 3.0 2.9 5.9

21.5 8.4 13.0 2.3 45.2 Source: Company, ICICIdirect.com Research

The company, which used to import vitrified tiles till FY10,

has stepped up its vitrified tiles production capacity to 19.3

MSM currently keeping up with the increasing preference

for high valued vitrified tiles given the rising affordability,

urbanisation and brand aspiration


Capacity additions through organic and inorganic route…

Kajaria has nearly doubled its capacity from 23.4 MSM in FY10 to 45.2 MSM. This was driven mainly through the acquisition of a stake in Cosa, Soriso, Vennar and Jaxx and expansion/conversion of existing facilities (refer Exhibit 16). Going ahead, capacity expansion of 7.5 MSM is expected in FY15 at Cosa (3 MSM) and Jaxx (4.5 MSM) along with 1.4x incremental capacity as a result of conversion from polished to glazed vitrified. We believe that volume growth, going ahead, will be driven mainly by newly added capacities through acquisition/capacity expansion as envisaged by the company.

Exhibit 16: Capacity nearly doubles from FY11 to H1FY14

21.0 19.6 21.9 24.2 25.9 25.9 25.9 25.9

2.411.0

14.116.8

19.3 19.328.2

36.2

23.4

30.636.0

41.045.2 45.2

62.1

54.1

0

8

16

24

32

40

48

56

64

72

80

FY10 FY11 FY12 FY13 M9FY14 FY14E FY15E FY16E

(MSM

)

Ceramic Tiles Vitrified Tiles

Commissioned the 6 MSM tile units (polished and glazed

vitrified) at Gailpur & conversion of a part of the

ceramic tile capacity to vitrified tiles (2.6 MSM)

Jaxx Acquisition - 3.1 MSM & Vennar expansion 2.3 MSM

Cosa - 2.7 MSM & Soriso expansion

2.3 MSM

Acquisition by Jaxx - 2.6

MSM

Cosa expansion -3 MSM & Jaxx expansion 4.5 MSM & conversion

leading to incrmental 1.4 MSM

Assumed expansion of 8 MSM with remaining

| 120 cr


Capex outlined to fuel future growth; funding in place… Kajaria has lined up a capex of | 400 crore over next two years to augment its capacity and for conversion to vitrified tiles & maintenance capex requirement. It has plans to add capacity of 4.5 MSM at Jaxx Vitrified and 3 MSM at Cosa that should support future revenue growth. To fund the same, the board has approved the issuance of fresh equity of 20 lakh equity shares (at a price of | 250/- aggregating to | 50 crore) and 38.8 lakh warrants (convertible into equity shares of the company at a price of | 257.37/share aggregating to | 100 crore) to WestBridge Crossover Fund, LLC. Additionally, internal accruals would be utilised to meet the capex requirement. With expected operating cash flows of ~| 350 crore over FY15-16, we believe Kajaria is comfortably funded in terms of capex plans.

Exhibit 17: Capex requirement and funding source | crore

Capex Requirement 400

Source of Funding

Issue of fresh equity of 2 mn equity shares at a price of | 250/- 50

Issue of 3.88 mn warrants convertible into equity shares at | 257.37/share 100

Internal Accruals 250

400 Source: Company, ICICIdirect.com Research

Going ahead, capacity expansion of 7.5 MSM is expected

in FY15 at Cosa (3 MSM) and Jaxx (4.5 MSM) along with

1.4x incremental capacity as a result of conversion from

polished to glazed vitrified

Capex Outlay | crore

Total Capex Outlay 400

Capex Breakup

Acquisition by Jaxx (2.6 MSM) 35

Jaxx & Cosa Expansion (7.5 MSM) 120

Maintenance capex 40

Conversion - Polished to Glazed Vitriried 50

Sanitaryware 35

Remaining expansion/acquisition 120


Favourable industry dynamics + capex = Healthy growth ahead We expect production volumes to grow at 15.5% CAGR during FY13-16E to 56.1 MSM led by capacity expansion in its JVs and other acquisitions. In terms of sales volume, we expect it to grow at 13.7% CAGR during FY13-16E. We highlight that sales volumes from imported/outsourced items would be muted at -0.1% CAGR during the same period, as a sharp depreciation in the rupee has led to an increase in cost of imports. Exhibit 18: Production volumes trend

18.0 16.1 20.0 19.327.1 28.0 27.3 29.7 30.0

2.58.6 12.8

18.926.1

18.0 16.120.0 19.3

29.6

36.740.1

48.6

56.1

0

10

20

30

40

50

60

FY08 FY09 FY10 FY11 FY12 FY13 FY14E FY15E FY16E

(MSM

)

Own JV


Exhibit 19: Sales volume to grow at 13.7% CAGR during FY13-16E

18.0 16.1 20.0 20.3 26.9 27.1 26.9 29.7 30.0

2.3 7.8 13.618.9

26.1

9.4

10.610.4

10.010.0

10.3

22.6 25.329.7

39.845.2

50.558.7

66.5

6.65.3

3.421.4

0

10

20

30

40

50

60

70


(MSM

)

Own JV Import/Outsourced


Exhibit 20: Sales to grow at 19.6% CAGR during FY13-16E

503665 736

953

13131612

1846

2280

2758

0

500

1000

1500

2000

2500

3000


(| c

rore

)

19.6% CAGR


We expect Kajaria’s production volumes to grow at 15.5%

CAGR during FY13-16E to 56.1 MSM led by capacity

expansion in its JVs and other acquisitions

Rectangle


Reducing leverage adds to our comfort… Kajaria has come a long way in the last five years in terms of reducing its leverage, which stood at a menacing 2.1x in FY08. The company currently (as on 9MFY14) has a net debt to equity of 0.42x. The sharp improvement in net debt to equity has been possible through an improvement in net working capital, which was at 132 days in FY08 to 30 days in FY13. Despite an increase in operational scale (gross block increased from | 490.1 crore in FY08 to | 919.5 crore in FY13 while sales grew at 26.2% CAGR during the same period), the company maintained stringent control on working capital management. Exhibit 21: Net debt to equity has come down significantly

329 317

258284 271

315

223

0

50

100

150

200

250

300

350

FY08

FY09

FY10

FY11

FY12

FY13

M9F

Y13

(| c

rore

)

0.0

0.6

1.2

1.8

2.4

(x)

Net Debt Net Debt to Equity (RHS)


Exhibit 22: Absolute working capital requirement

192 202

152

74101

141

-

40

80

120

160

200

240

FY08

FY09

FY10

FY11

FY12

FY13

(| c

rore

)


Exhibit 23: Working capital reduction clearly seen

132

72

27 26 30 29

107

0

30

60

90

120

150

FY08

FY09

FY10

FY11

FY12

FY13

M9F

Y13

(day

s)


Despite an increase in operational scale (gross block

increased from | 490.1 crore in FY08 to | 919.5 crore in

FY13 while sales grew at 26.2% CAGR during the same

period), the company maintained stringent control on

working capital management.

Rectangle


Strong distribution and brand provides an edge… We believe that Kajaria, with a track record of ~25 years in the domestic tiles industry, high brand equity and a distribution network will continue to lap up the high end segment growth. The company has a strong distribution network of 825 dealers and over 5,000 sales points. This allows it to move products quickest off the shelves (an average 1.25 lakh sq metre/day equivalent to 17 international football fields) in the country. Apart from having an exhaustive and strong dealer network, Kajaria has 24 display centres, which are located at its regional offices. These display centres allow customers/architects to select tiles, which they can then purchase from the nearest dealers. The company has different theme shops (refer exhibit 24) to cater to the demand for different types of tiles.

Exhibit 24: Strong distribution of Kajaria


Rectangle


Kajaria scores high on operating parameters vis-à-vis its peers…

Kajaria clearly superior in terms of market share gain among its peers… Kajaria is the second largest player in the ceramic tiles space with an annual capacity of 45.2 MSM, behind H&R Johnson, which leads the pack with 51 MSM and is followed by Somany Ceramics, which has a annual capacity of 33.7 MSM currently. However, we highlight that the company has enjoyed a superior CAGR of ~48% during FY10-13 vis-à-vis its key peers H&R Johnson and Somany who have grown at ~24% and ~40% CAGR, respectively, during the same period. This is clearly visible in terms of market share gain wherein Kajaria now enjoys ~18% share in the organised space in FY13 vs. ~12% in FY10. In terms of its peers, the organised market share of H&R Johnson at ~19% in FY13 was muted vs. ~20% share in FY10. In contrast, Somany’s share increased to ~12% in FY13 vs. ~9% in FY10. We believe the sharp uptick that Kajaria witnessed was driven by its increasing proportion of high end vitrified sales. Kajaria, which used to import higher valued vitrified tiles till FY10, has also stepped up its vitrified tiles production capacity to 19.3 MSM as on Q3FY14.

In terms of dealer network, Kajaria (82 dealers), however, lags behind its key competitor H&R Johnson (1000+ dealers) and Somany Ceramics (1768 dealers). The company, however, has indicated that instead of merely increasing the number of dealers for a wider reach and deeper penetration, it has adopted the inclusive growth philosophy. This enables existing dealers to widen and strengthen their business – to gain loyalty and, consequently, drive maximum revenues per dealer.

Exhibit 25: Kajaria clearly superior in terms of market share gain among its peers

Installed Capacity

45.251.0

33.7

0.0

11.0

22.0

33.0

44.0

55.0

Kajaria H&R Johnson Somany Ceramics

(MSM

)

736

1188

537

1612

1,83

2

1046

0

500

1000

1500

2000

Kajaria H&R Johnson Somany Ceramics

Net Sales

(| c

rore

)

FY10 FY13

48% CAGR

24% CAGR

40% CAGR

Dealer Network

8251000

1768

0

500

1000

1500

2000

Kajaria H&R Johnson SomanyCeramics

(No.

s)


20%

12%

9%

59%

H&R Johnson Kajaria Ceramics

Somany Ceramics Others


51%

12%

18%

19%

H&R Johnson Kajaria Ceramics

Somany Ceramics Others


Kajaria now enjoys ~18% share in the organised space in

FY13 vs. ~12% in FY10


Enjoys superior margins and return ratios … Kajaria enjoys a superior margin profile (margin of ~15-15.5% over the last 4 years) vis-à-vis its peers H&R Johnson (down to 4.9% in FY13 vs. 10.9% in FY10) and Somany Ceramics (down to 8.3% in FY13 vs. 14.8% in FY10). This is mainly on account of two reasons, namely its superior share in high value vitrified tiles (accounted for 54% in FY13) and the lower fuel cost on account of its long term contract with GAIL for its Gailpur plant.

Consequently, the return ratios of Kajaria (RoE and RoCE of 28.2% and 29%, respectively, in FY13) are also higher than Somany (RoE and RoCE of 19.3% and 23%, respectively, in FY13). Furthermore, Kajaria’s higher share in retail could also be another driver for its superior margins.

Exhibit 26: Kajaria: Superior margin and return ratio profile

EBITDA Margin

15.6 15.6 15.7 15.2

6.84.9

8.6 8.310.614.8

9.610.9

0

4

8

12

16

FY10 FY11 FY12 FY13

(%)

Kajaria H&R JohnsonSomany Ceramics

ROE

19.523.2

29.4 28.2

17.219.3

17.8 16.8

10

15

20

25

30

FY10 FY11 FY12 FY13

(%)

Kajaria Somany Ceramics

RoCE

18.8

28.7 29.0

22.0 23.0

27.2

25.6

27.6

10

15

20

25

30

FY10 FY11 FY12 FY13

(%)



Kajaria also better placed in terms of working capital and leverage… Kajaria has sharply improved its working capital days to 29 days in H1FY14 vs. 72 days in FY10 through maintenance of stringent control on working capital management. Consequently, the debt has also come down to 0.4x on Q3Y14 vs. 2x in FY09. While Somany also cut down its leveraging to 1.2x in H1FY14 vs. 2x in FY10 through sharp improvement in working capital (46 days in H1FY14 vs. 76 days in FY10), Kajaria stands better placed in this operating parameter too.

Exhibit 27: Kajaria’s leverage and WC details

1.4

2.0

1.3

1.9

1.0

1.5

0.91.2

0.7

1.2

0.0

0.5

1.0

1.5

2.0

2.5


(x)

FY10 FY11 FY12 FY13 H1FY14

72 76

27

70

26

54

30

47

29

46

01020304050607080


(day

s)

FY10 FY11 FY12 FY13 H1FY14


Kajaria enjoys a superior margin profile (margin of ~15-

15.5% over the last four years) vis-à-vis its peers H&R

Johnson (down to 4.9% in FY13 vs. 10.9% in FY10) and

Somany Ceramics (down to 8.3% in FY13 vs. 14.8% in

FY10).

Rectangle


Financials Revenues to grow at CAGR of 19.6% during FY13-16E Kajaria’s revenues have grown at a strong CAGR of 26.2% in FY08-13, driven mainly by its expansion of capacity (grew from 21 MSM in FY08 to 41 MSM in FY13) and increasing mix towards high value vitrified tiles. We expect net sales to witness a robust 19.6% CAGR to | 2758 crore during FY13-16E driven by its capacity expansion (it has plans for capacity addition of 4.5 MSM at Jaxx Vitrified and 3 MSM at Cosa) and other acquisitions through JVs. In terms of volumes, we expect it to grow at 14.5% CAGR during FY13-16E to 67.0 MSM. Similarly, the realisation is expected to grow at 5.2% CAGR during FY13-16E to | 415/sq m aided mainly by the increasing share of higher valued vitrified sales. Exhibit 28: Revenue to continue its growth momentum…

503665 736

953

13131612

1846

2280

2758

0

350

700

1050

1400

1750

2100

2450

2800


(| c

rore

)

100

150

200

250

300

350

400

450

500

(|)

Net Sales Realisation/sqm (RHS)


Margins to remain at 14.5-15% levels Kajaria has been one of the very few players that have maintained its margins in the 15-15.5% range driven by, namely, its superior share in high value vitrified tiles and the relatively lower increase in its fuel cost on account of its long term contract with GAIL for its Gailpur Plant for two-third its capacity. We expect Kajaria to maintain its margins at 14.5-15% during FY13-16E. Consequently, the EBITDA is also expected to grow at 19.1% CAGR (similar to topline) during the same period while EBITDA/sq m is expected to grow at 4.7% CAGR to | 62 in FY16E.

Exhibit 29: EBITDA/sq m trend

EBITDA/sqm

3842 45

50 52 54 5458 62

08

16243240485664


(|)


Exhibit 30: EBITDA and EBITDA margin trend

82 95 115149

206245 272

341

413

0

90

180

270

360

450

FY08

FY09

FY10

FY11

FY12

FY13

FY14

E

FY15

E

FY16

E

(| c

rore

)

12

13

14

15

16

17

(%)

EBITDA EBITDA Margin (RHS)


We expect net sales to witness a robust 19.6% CAGR to

| 2758 crore in FY13-16E driven by its capacity expansion

(it has plans for capacity addition of 4.5 MSM at Jaxx

Vitrified and 3MSM at Cosa) and other acquisitions through

JV

We expect the company to maintain its margins at 14.5-

15% levels during FY13-16E. Consequently, the EBITDA is

also expected to grow at 19.1% CAGR (similar to topline)

during the same period


PAT to grow at 24.7% CAGR during FY13-16E

Kajaria has witnessed strong PAT growth of 47.4% over FY08-13 driven by its robust topline growth and with muted interest expenses due to stagnant debt levels. We expect the bottomline to post a healthy CAGR of 24.7% during FY13-16E aided mainly by the strong topline show.

Exhibit 31: PAT growth trend

15 9

36

6181

105118

159

201

0

30

60

90

120

150

180

210


(| c

rore

) 47.4% CAGR

24.7% CAGR


Debt-equity to decline to 0.1x by FY16E

The company currently (as on 9MFY14) has a debt to equity of 0.42x, which is much below debt equity levels of 2.1x in FY08. The sharp improvement in net debt to equity was possible through the improvement in net working capital from 132 days in FY08 to 30 days in FY13. We expect the debt equity to further reduce to 0.1x mainly aided by the ~| 150 crore of fund raising (expected to be received over FY14 and FY15) and strong cash flow generation over FY13-16.

Exhibit 32: Debt-equity ratio trend

2.1

1.4 1.3

1.0 0.9

0.4 0.50.3

0.1

2.0

0.0

0.3

0.6

0.9

1.2

1.5

1.8

2.1

2.4

FY08

FY09

FY10

FY11

FY12

FY13

M9F

Y13

FY14

E

FY15

E

FY16

E

(x)

Debt to Equity


We expect the bottomline to post a healthy 24.7% CAGR

during FY13-16E aided mainly by the strong topline show

We expect the debt equity to further reduce to 0.1x mainly

aided by the ~| 150 crore of fund raising (expected to be

received over FY14 and FY15) and strong cash flow

generation over the FY13-16


Healthy return ratios albeit dilution to bring it lower in FY14E

There has been a sharp improvement in Kajaria’s return ratios during FY08-13 on the back of its strong bottomline show. We highlight that given the equity dilution (58.8 lakh shares issued to the WestBridge Crossover fund over FY14 and FY15), we expect return ratios to be lower in FY14 and FY15. However, the return ratios are expected to return to healthy levels (RoE and RoCE of 23.2% and 29.7%, respectively in FY16E) since the funds raised through equity dilution would be deployed for capex, which should lead to healthy bottomline growth, going ahead.

Exhibit 33: Return on equity and return on capital employed (%)

5.5

18.8

27.229.0

22.5 22.123.2

9.7

28.723.2

27.927.5 29.7

14.4

11.8

19.5 28.2

29.4

0

5

10

15

20

25

30


(%)

0

5

10

15

20

25

30

(%)

ROE ROCE (RHS)


The return ratios are expected to return to healthy levels

(RoE and RoCE of 23.2% and 29.7%, respectively, in FY16E)

since the funds raised through equity dilution would be

deployed for capex, which should lead to healthy

bottomline growth, going ahead


Risks & Concerns Chinese Threat

Chinese players have been the biggest threat to domestic players given their lower cost of production. Therefore, the government had placed an anti dumping duty on the Chinese import of polished vitrified tiles and ceramic tiles in sizes more than 10” x 17” at | 156 and | 140 per square metre, respectively. In June 2013, however, the duties expired and the government did not renew it. We highlight that at the current depreciated levels of INR (US$/INR at over ~| 62), import benefits do not exist. However, if the currency appreciates, it could bring back the cost advantage for the Chinese leading to large scale dumping.

Increasing gas price: Competition intensity may affect ability to pass on hike

Rising gas prices have been a major issue for tiles manufacturer sharply affecting the cost of production. We highlight that the inability to pass on the cost increase to customer due to intense competition in the sector could impact tiles manufacturer adversely. On the positive side, the recent development at Morbi should bring cost parity among organised and unorganised players, which should restrict price cuts in future.

Slowdown in housing

The primary demand driver for the ceramic tiles industry has been the housing sector. With major realty markets such as Mumbai and NCR witnessing muted volumes and Bengaluru showing initial signs of slower volumes, demand could be affected. However, we note that players are now expanding beyond metros to Tier II and III cities to cater to the new demand space.

Delay in capacity expansion/acquisition

Our volume growth estimates hinge on the assumption that Kajaria would either continue to go for capacity expansion, do an acquisition or follow a JV model. We highlight that any delay in existing capacity addition of such an acquisition could be a downward risk to our estimates.

We highlight that at current depreciated levels of INR

(US$/INR at over ~| 62), the import benefit does not exist.

However, if the currency appreciates, it could bring back

the cost advantage for the Chinese leading to large scale

dumping

Inability to pass on the cost increase to customers due to

intense competition in the sector could impact tiles

manufacturers adversely


Valuation

Kajaria has exhibited impressive revenue and earnings growth of 26.2% and 47.4%, respectively, over FY08-13 led by its capacity expansion and by moving to the high value vitrified tiles. The return ratios also jumped to ~29% in FY13 from the low single digits in FY08 while leverage has reduced sharply to 0.4x currently, from 2x in FY09.

Going ahead, we expect Kajaria to remain the beneficiary of the rising organised market pie given the preference for branded products as well as consolidation in the form of JV with local players. As a result, Kajaria is expected to witness 19.6% and 24.7% CAGR in topline and earnings, respectively, over FY13-16E.

In terms of PE and PEG ratio, the company has seen a sharp multiple re-rating over the years on the back of consistent earnings growth and reduction in the leverage. While the PE multiple has improved from 7.6x during FY10-12 to 13.4x over FY13-14, the PEG ratio has improved from 0.1x to 0.7x during the same period.

Going ahead, we remain positive on Kajaria given the sturdy growth in the industry, favourable shift towards organised players post the Morbi fuel development, its better margin & return ratio profile coupled with a healthy balance sheet. We initiate coverage on Kajaria with a BUY recommendation and a target price of | 360/share (valuing it at 0.7x PEG ratio, in line with its last two years average. Our PEG ratio implies 18x FY15 EPS based on earning CAGR of 27.4% during FY13-16E.

We highlight that while the stock seems on the higher end of the multiple, it has mirrored the growth trajectory as well as strength in balance sheet that the company has maintained through debt/equity reduction. We remain optimistic on Kajaria’s business prospects in the organised space and believe the robust growth trajectory is expected to continue. We, therefore, advise our clients to accumulate the stock on any sharp dip.

Exhibit 34: One year forward price/earning

0

50

100

150

200

250

300

350

Apr-0

8

Sep-

08

Feb-

09

Jul-0

9

Dec-

09

May

-10

Oct-1

0

Mar

-11

Aug-

11

Jan-

12

Jun-

12

Nov

-12

Apr-1

3

Sep-

13

Feb-

14

Price PER 17 PER 15 PER 13 PER 11 PER 9


We initiate coverage on Kajaria with a BUY recommendation

and a target price of | 360 (valuing it at 0.7x PEG ratio, in line

with its last two years average). Our PEG ratio implies 18x FY15 EPS based on earning CAGR of 27.4% during FY13-16E


Exhibit 35: Average P/E of 7.6x during FY10-12

0

4

8

12

Apr-0

9

Sep-

09

Feb-

10

Jul-1

0

Dec-

10

May

-11

Oct-1

1

Mar

-12

(x)

P/E Average(P/E)

Average P/E of 7.6x during FY10-12


Exhibit 36: Average P/E of 13.4x since FY13 beginning

8

10

12

14

16

18

Apr-1

2

Jul-1

2

Oct-1

2

Jan-

13

Apr-1

3

Jul-1

3

Oct-1

3

Jan-

14

(x)

P/E Average(P/E)

Average P/E of 13.4x since FY13 beginning


Exhibit 37: Also, 0.7x PEG implies 18x FY15E EPS

7.6

13.4

18

0.1

0.7 0.7

02468

101214161820

FY10-12 FY13 onwards Target base

(x)

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

(x)

PE PEG


Exhibit 38: Earnings to grow at CAGR of 24.7% during FY13-16E

0

30

60

90

120

150

180

210

FY08

FY09

FY10

FY11

FY12

FY13

FY14

E

FY15

E

FY16

E

(| c

rore

)

24.7% CAGR


Exhibit 39: Net debt to equity to improve further

2.12.0

1.4 1.31.0 0.9

0.4 0.50.3

0.10.0

0.5

1.0

1.5

2.0

2.5

FY08

FY09

FY10

FY11

FY12

FY13

M9F

Y13

FY14

E

FY15

E

FY16

E

(x)

Debt to Equity


With the consistent earnings growth and reduction in the

leverage, Kajaria’s PEG ratio has improved to 0.7x in the

last two years vs. 0.1x during FY10-12. Going ahead, we

value the stock at 0.7x PEG, which implies 18x FY15E EPS

based on earnings CAGR of 24.7% during FY13-FY16E

Rectangle


Exhibit 40: One year forward EV/EBITDA

0

500

1,000

1,500

2,000

2,500

Apr-0

8

Aug-

08

Dec-

08

Apr-0

9

Aug-

09

Dec-

09

Apr-1

0

Aug-

10

Dec-

10

Apr-1

1

Aug-

11

Dec-

11

Apr-1

2

Aug-

12

Dec-

12

Apr-1

3

Aug-

13

Dec-

13

(| C

rore

)EV 5.5x 6.6x 7.7x 4.4x 3.4x


Peer matrix

Kajaria is currently available at a premium to its peers (Somany in the tiles space and Cera in the sanitary ware space) given its leadership position as well as strong growth depicted in earnings, even on a larger base. We highlight that while on the multiples front it seems expensive, current multiples seem to mirror the business growth prospects and superior positioning of Kajaria in the industry.

Exhibit 41: Peer matrix

FY13 FY14E FY15E FY13 FY14E FY15E FY13 FY14E FY15E FY13 FY14E FY15E FY13 FY14E FY15E

Kajaria Ceramics 2394 13.2 14.8 20.0 24.1 21.3 15.8 29.0 22.5 22.1 6.5 4.6 3.3 11.1 9.8 7.6 34.3

Somany Ceramics 475 9.3 8.7 11.5 7.1 15.9 12.0 22.9 18.0 20.1 1.5 2.7 2.2 3.9 6.9 5.8 33.2

Cera Sanitaryware 952 36.5 39.9 49.3 12.2 19.3 15.6 29.0 24.8 25.1 3.1 4.4 3.5 7.4 11.3 9.1 45.2

Mkt Cap (| crore)

EPS Price/Earnings(x) RoE (%) Price / Book (x) EV / EBITDA (x) Sales CAGR (FY09-13) (%)


Rectangle


Tables Exhibit 42: Profit & Loss Account (Consolidated)

(| Crore) FY12 FY13 FY14E FY15E FY16ENet Sales 1,313.0 1,612.0 1,845.5 2,279.8 2,760.0 Other Income 1.5 3.0 5.3 6.0 8.9 Total Revenue 1,314.5 1,615.0 1,850.8 2,285.8 2,768.9

Raw Material Expenses 310.6 371.7 417.5 515.2 623.4 Employee Expenses 107.2 136.4 173.4 208.1 251.8 Net Purchases of Stock in Trade 340.3 376.7 428.8 531.2 642.7 Total Operating Expenditure 1,106.8 1,367.3 1,574.0 1,938.5 2,345.4

EBITDA 206.2 244.6 271.6 341.3 414.6 Interest 48.5 45.4 43.5 39.0 41.4 PBDT 159.2 202.3 233.3 308.3 382.1 Depreciation 39.3 44.6 47.1 56.8 62.8 PBT 119.9 157.7 186.2 251.5 319.3 Total Tax 38.1 49.9 63.1 85.3 107.7 PAT before MI 81.8 107.8 123.1 166.2 211.6 Minority Interest 1.0 3.3 5.2 7.0 8.9 PAT 80.9 104.5 117.9 159.2 202.7

EPS (|) 11.0 14.2 15.6 21.1 26.8 EPS - Diluted (|) 10.2 13.2 14.8 20.0 25.5



Exhibit 43: Balance sheet (Consolidated) (| Crore) FY12 FY13 FY14E FY15E FY16EEquity Capital 14.7 14.7 15.1 15.9 15.9 Reserve and Surplus 267.4 346.2 509.2 704.7 859.6 Total Shareholders funds 282.1 360.9 524.3 720.6 875.5

Minority Interest 7.2 27.5 32.7 39.8 48.7

Total Debt 278.2 320.2 260.2 260.2 260.2

Deferred Tax Liability 64.4 65.6 65.6 65.6 65.6

Total Liabilities 631.9 774.2 882.8 1,086.2 1,250.0

Gross Block 782.7 919.5 1,024.5 1,144.5 1,264.5 Less Accumulated Depreciation 261.7 299.5 346.6 403.4 466.2 Net Block 520.9 620.0 677.9 741.1 798.3 Capital WIP 2.4 7.8 55.8 85.8 7.8 Total Fixed Assets 523.3 627.8 733.7 826.9 806.1

Investments 0.1 0.1 0.1 0.1 0.1

Inventory 186.5 219.7 237.4 294.8 358.3 Debtors 118.9 143.6 163.1 202.5 246.1 Loans and Advances 54.8 50.3 54.0 67.0 81.4 Cash 7.2 5.5 3.3 76.3 219.7 Other Current Assets 0.2 0.5 0.5 0.5 0.5 Total Current Assets 367.6 419.7 458.2 641.0 906.0

Creditors 177.6 165.8 188.3 233.8 284.1 Other Current Liabilities 45.8 63.8 72.4 89.9 109.3 Provisions 35.7 43.8 48.5 58.1 68.7 Net Current Assets 108.5 146.3 149.0 259.2 443.8

Total Assets 631.9 774.2 882.8 1,086.2 1,250.0



Exhibit 44: Cash flow statement (Consolidated) (| Crore) FY12 FY13 FY14E FY15E FY16EProfit after Tax 80.9 104.5 117.9 159.2 202.7 Depreciation 39.3 44.6 47.1 56.8 62.8 Interest 48.5 45.4 43.5 39.0 41.4 Cash Flow before working capital cha 168.7 194.5 208.5 255.0 307.0 Net Increase in Current Assets (49.0) (53.8) (40.8) (109.8) (121.6) Net Increase in Current Liabilities 21.6 14.3 35.8 72.6 80.4 Net CF from operating activities 141.2 155.0 203.6 217.8 265.8

Deferred Tax Liability 4.0 1.3 - - - (Purchase)/Sale of Fixed Assets (71.0) (149.1) (153.0) (150.0) (42.0) (Purchase)/Sale of Investments 3.3 - - - - Net CF from Investing Activities (58.2) (127.6) (147.8) (143.0) (33.1)

- - - - - Inc / (Dec) in Equity Capital - - 0.4 0.8 - Dividend (21.4) (25.7) (29.5) (37.9) (47.8) Interest (48.5) (45.4) (43.5) (39.0) (41.4) Other Adjustments in Networth 0.0 (0.1) 74.6 74.2 - Inc / (Dec) in Secured Loans (9.5) 15.9 (60.0) - - Inc / (Dec) in Unsecured Loans (0.3) 26.1 - - - Net CF from Financing Activities (79.6) (29.1) (58.0) (1.9) (89.2)

- - - - - Net Cash flow 3.4 (1.7) (2.2) 73.0 143.4 Opening Cash 3.8 7.2 5.5 3.3 76.3 Closing Cash/ Cash Equivalent 7.2 5.5 3.3 76.3 219.7



Exhibit 45: Ratio analysis FY12 FY13 FY14E FY15E FY16E

Per Share Data (|)EPS 11.0 14.2 15.6 21.1 26.8 Cash EPS 16.3 20.3 21.8 28.6 35.1 BV 38.3 49.0 69.4 95.3 115.8 Operating profit per share 28.0 33.2 35.9 45.1 54.8

Operating Ratios (%)EBITDA / Total Operating Income 15.7 15.2 14.7 15.0 15.0 PAT / Total Operating Income 6.2 6.5 6.4 7.0 7.3

Return Ratios (%)RoE 28.7 29.0 22.5 22.1 23.2 RoCE 29.4 28.2 27.5 27.9 29.7 RoIC 26.7 26.0 25.5 28.2 34.1

Valuation Ratios (x)EV / EBITDA 12.9 11.1 9.8 7.6 5.9 P/E 28.8 22.3 20.3 15.0 11.8 EV / Net Sales 2.0 1.7 1.4 1.1 0.9 Sales / Equity 4.7 4.5 3.5 3.2 3.2 Market Cap / Sales 1.8 1.5 1.3 1.1 0.9 Price to Book Value 8.3 6.5 4.6 3.3 2.7

Turnover Ratios (%)Asset turnover 2.2 2.3 2.2 2.3 2.4 Debtors Turnover Ratio 11.0 11.2 11.3 11.3 11.2

Creditors Turnover Ratio 7.4 9.7 9.8 9.7 9.7

Solvency Ratios (x)Net Debt / Equity 1.0 0.9 0.5 0.3 0.1 Current Ratio 1.4 1.5 1.5 1.7 2.0 Quick Ratio 0.7 0.7 0.7 0.9 1.2



Indian tiles industry

The domestic tiles industry (| 19,500 crore as on FY13) is characterised by organised and unorganised players. While national brands control 50% of the market, the remaining 50% is held by unorganised players (mostly present in Morbi, Gujarat).

Exhibit 46: Ceramic tiles plants in India AML for Antique Marbonite Pvt. Ltd., Morbi, GujaratAGL for Asian Granito (India) Ltd., Sabarkantha, GujaratCGT for Coral Gold Tiles Pvt. Ltd., Morbi, GujaratCGL for Coral Granito Pvt. Ltd., Morbi, GujaratCTL Cengres Tiles Ltd., Dist. Mehsana, GujaratECL for Euro Ceramics Ltd., Kutch, GujaratGCL for Gokul Ceramics Pvt. Ltd., Rajkot, Gujarat HRJ for H & R Johnson(India), Dewas-MP, Kunigal-Karnataka, Pen-Maharashtra, Karaikal-Pondicherry, Baddi-HPKCL for Kajaria Ceramics Ltd., Sikandrabad-UP, Gailpur-Rajasthan, Mobi-GujaratMCL for Murudeshwar Ceramics Ltd., Karaikal-Pondicherry, Hubli,Bangalore-Karnataka, OGL for Oracle Granito, Sabarkantha, Gujarat OCL for Orient Ceramics , Sikandrabad, UP OVL for Jaxx Vitrified Pvt. Ltd., Morbi, Gujarat RAK for R.A.K Ceramics India Pvt. Ltd., Samalkot, AP RGL for Regent Granito , Himatnagar, Gujarat SGL for Senso Granito Pvt. Ltd., Rajkot, Gujarat SCP for Sentini Cermica Pvt. Ltd., Krishna, AP SIC for Silica Ceramics (P) Ltd., West Godavari, AP SCL for Somany Ceramics, Bahadurgarh-Haryana, Kadi-Gujarat SVP for Simpolo Vitrified Pvt. Ltd., Morbi, GujaratSJT for Spectrum Johnson Tiles, Rajkot, Gujarat STL for Sunshine Tile Co. ., Rajkot, Gujarat SWC Swastik Ceracon Ltd., Dist. Mehsana, GujaratUCL for Umiya Ceramic Pvt. Ltd., Morbi, GujaratVGL for Varmora Granito (P) Ltd., Rajkot Gujarat

Source: ICCTAS, ICICIdirect.com Research

Exhibit 47: Indian tiles industry production trend

390490

550617

691

0100200300400500600700800


(MSM

)

0

6

12

18

24

(%)

Production YoY (RHS)


Exhibit 48: Indian tiles industry consumption trend Company Turnover as on FY13 (| cr)

H&R Johnson 1832Kajaria Ceramics 1734Somany Ceramics 1113Nitco Tiles 881Asian Granito 707RAK Ceramics* 700Orient Bell Ceramics 620Varmora* 400Regency Ceramics 190Bell Granito* 125Murudeshwar Ceramics 155Euro Ceramics 100Others (Simpolo, Sun Heart,Marbomax, Restile, Decolight, Spartek etc)* 943Total 9500



RATING RATIONALE ICICIdirect.com endeavours to provide objective opinions and recommendations. ICICIdirect.com assigns ratings to its stocks according to their notional target price vs. current market price and then categorises them as Strong Buy, Buy, Hold and Sell. The performance horizon is two years unless specified and the notional target price is defined as the analysts' valuation for a stock. Strong Buy: >15%/20% for large caps/midcaps, respectively, with high conviction; Buy: > 10%/ 15% for large caps/midcaps, respectively; Hold: Up to +/-10%; Sell: -10% or more;

Pankaj Pandey Head – Research [email protected]

ICICIdirect.com Research Desk, ICICI Securities Limited, 1st Floor, Akruti Trade Centre, Road No. 7, MIDC, Andheri (East) Mumbai – 400 093

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ANALYST CERTIFICATION We /I, Deepak Purswani, CFA PGDM(FINANCE) Bhupendra Tiwary MBA (FINANCE) research analysts, authors and the names subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect our personal views about any and all of the subject issuer(s) or securities. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report. Analysts aren't registered as research analysts by FINRA and might not be an associated person of the ICICI Securities Inc.

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