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Kajaria Ceramics - Impressive beat; rerating to continue - ICICI Securities

Posted On: 2021-01-21 22:26:38 (Time Zone: Arizona, USA)

Kajaria Ceramics (KJC) reported a strong beat in Q3FY21 - recording double-digit volume growth in tile segment (+10.5% YoY), 36% YoY growth in bathware, all-time high EBIDTA margin, and higher tile realisations YoY - thereby delivering one of the best performances (on all fronts) post the real estate sector slowdown since FY16. Q3FY21 also marks the adoption of a revised dividend policy, which endeavours to maintain strong dividend payout of 40-50% of consolidated PAT - which would not only reward shareholders but also strengthen KJC's RoCEs. With the industry tailwinds (demand and pricing) likely to sustain for branded ceramic tile players, we expect the double-digit volume growth (management guidance of 20-25% in FY22 and >15% in FY23/FY24) and healthy margins (guidance of about 20%) to sustain in the near-to-medium term. Upgrade to BUY.

- Valuation and risks: Factoring-in the sharp beat on all fronts, we increase our revenue and earnings estimates by 4.4%/8.2%/7.4% and 23.2%/30.8%/24.1% for FY21/FY22/FY23 respectively. We upgrade the stock to BUY (from Add) with a revised target price of Rs1,000 (earlier: Rs711) based on 35x FY23E earnings. We believe a 35x P/E multiple is justifiable considering the sustainable pricing and demand tailwinds for top branded players in the near term and expected sharp improvement (by 810bps) in KJC's RoCEs over the next two years. Downside risk to our estimates: higher gas prices, and increase in competitive intensity.

- Market share gains and tier-1 & below markets drive double-digit volume growth: KJC posted 13.1% YoY growth in revenues in Q3FY21 to Rs8.4bn (I-Sec: Rs8.1bn) driven by market share gains and higher demand from tier-2 & below markets in tile segment and 36% growth in bathware products. Realisations were up 0.3% YoY despite higher share of outsourced tiles and partial recovery in the metro cities. Considering demand tailwinds to sustain in near term and realisations likely to improve further (on account of narrowing of trade discounts) in near term, we model-in 7.3%/10% volume/revenue CAGRs over FY20-FY23E respectively.

- EBITDA margins at record highs; management guides for 20% margin for FY22: KJC's EBITDA margin for the quarter surprised positively at 21.7% (I-Sec: 18.5%) driven by operating leverage, lower gas cost & branding expenses and higher profitability in its bathware vertical and Morbi JVs. The record margin was achieved amid reversal of salary cuts QoQ. Despite recent hardening of input costs, we expect the company's EBITDA margin to sustain at 19-20% over next two years driven by expected improvement in product mix, stable employee costs and improving profitability of its JVs/bathware vertical. We model-in 20% / 19% EBITDA magins for KJC for FY22E / FY23E respectively.

- RoCEs to expand to >25% by FY23E: Strong FCF generation driven by sharp improvement in profitability, firm cash collections and muted capex in 9MFY21 drove KJC's net cash higher to Rs4.24bn as at Dec'20-end. With the management increasing its dividend payout to 40-45% of consolidated PAT, we expect RoCEs to cross 25% by FY23E - a key trigger for rerating.

Shares of KAJARIA CERAMICS LTD. was last trading in BSE at Rs.795.2 as compared to the previous close of Rs. 783.85. The total number of shares traded during the day was 98385 in over 4242 trades.

The stock hit an intraday high of Rs. 839.4 and intraday low of 775.15. The net turnover during the day was Rs. 80001138.

Source: Equity Bulls

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