Feb 24, 2015
Consumer Discretionary
Kajaria Ceramics Feb 24, 2015 Ltd
Kajaria Ceramics Ltd
India Research – Stock Broking
HOLD
Bloomberg Code: KJC IN
Kajaria: Capacity expansion to drive growth
Recommendation (Rs.)
Revenue growth driven by capacity expansion: Revenue is likely to
CMP*
747
Target Price
855
Upside (%)
14
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.
*CMP as on Feb 23, 2015
Stock Information Mkt Cap (Rs.mn/US$ mn)
826 / 292 0.2
3M Avg. daily volume (mn)
Beta (x)
0.9
Sensex/Nifty
28975 / 8754
O/S Shares(mn)
79.5
Shareholding Pattern (%) Promoters
49.5
FIIs
23.4
DIIs
4.2
Others
22.9
Stock Performance (%) 1M
3M
6M
12M
Absolute
22
34
31
151
Relative to Sensex
17
29
17
75
Source: Company, Karvy Research
Relative Performance* 270 175 80 Jan-14
Key Risks
60392 / 990
52-wk High/Low (Rs.)
May-14 KJC
Sep-14
Jan-15 Sensex
Source: Bloomberg, *Indexed to 100
• Slower than expected growth in housing sector
Technical View
• Imports from China; Competition from foreign players • Surge in natural gas prices
Exhibit 1: Valuation Summary (Rs. Mn) YE Mar
FY13
FY14
FY15E
FY16E
FY17E
Net Sales
15832
18400
21933
26890
32975
EBITDA
2477
2870
3424
4265
5230
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.
EBITDA Margin (%)
15.6
15.5
15.6
15.8
15.8
Adj. Net Profit
1044
1242
1657
2110
2718
EPS (Rs.)
14.2
16.4
20.8
26.6
34.2
Analyst Contact
RoE (%)
30.2
25.4
23.2
24.2
25.3
Vignesh S.B.K
PE (x)*
14.2
24.8
35.8
28.1
21.8
040 - 4485 7902
Source: Company, Karvy Research; *For FY13,FY14 PE multiples are on historic basis
[email protected]
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, Thomson Publishers & Reuters 1
Feb 24, 2015
Kajaria Ceramics Ltd
Company Financial Snapshot (Y/E Mar)
Company Background
Profit & Loss (Rs.mn)
Kajaria 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.
FY15E
FY16E
FY17E
Net sales
21933
26890
32975
Optg. Exp
18556
22681
27815
3424
4265
5230
Depreciation
538
621
704
Interest
280
317
232
PBT
2605
3327
4294
Tax
860
1098
1417
PAT
1657
2110
2718
15.6
15.8
15.8
7.5
7.8
8.2
P/E (x)
35.8
28.1
21.8
EV/EBITDA (x)
18.0
14.5
11.8
0.6
0.8
1.0
EBITDA
Profit & Loss Ratios EBITDA margin (%) Net margin (%)
Dividend yield (%) Source: Company, Karvy Research
Balance sheet
Cash Flow (Rs.mn)
(Rs.mn)
FY15E
FY16E
FY17E
14619
16914
19706
EBITDA
Net Fixed assets
8110
9194
10412
Other Income
Current assets
5399
6646
8343
Other assets
1109
1074
950
14619
16914
19706
Changes in WC
Networth
7286
8874
10918
CF from Operations
1804
2701
3250
Debt
2164
1864
1364
Capex
(1800)
(1700)
(1800)
Current Liabilities
3804
4683
5714
Others
4
20
48
651
780
997
(1796)
(1680)
(1752)
750
0
0
Total Assets
Total Liabilities
Other liabilities
FY16E
FY17E
3424
4265
5230
46
57
69
Interest
280
317
232
Tax
860
1098
1417
(480)
(149)
(331)
Cash flow from Investing Proceeds from issue of Equity Issue/Warrants
Balance Sheet Ratios
FY15E
RoE (%)
23.2
24.2
25.3
Inc / (Dec) in borrowing
(200)
(300)
(500)
ROCE (%)
30.7
33.1
34.6
Dividends paid
(411)
(523)
(673)
89
119
160
Net Debt/Equity
0.3
0.2
0.1
Others
Equity/Total Assets
0.5
0.5
0.6
CF from Financing
228
(704)
(1014)
P/BV (x)
8.1
6.7
5.4
Change in Cash
236
317
485
Source: Company, Karvy Research
Source: Company, Karvy Research
Exhibit 2: Shareholding Pattern (%)
Exhibit 3: Revenue Segmentation (%) Import / Outsourced 20%
Promoter 50%
Others 23%
Source: Company, Karvy Research
DII 4%
JV 27%
Own Manufacturing 53%
FII 23% Source: Company, Karvy Research
2
Feb 24, 2015
Kajaria Ceramics Ltd
Revenue growth will be driven by capacity expansion and higher realizations from value added products Kajaria 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 sanitaryware 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 improve Sales 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 5: Industry vs. Kajaria realization (per square meter)
35000 38%
28000 21000
50%
23% 21%
16%
19%
30%
23% 32975
26890
21933
0
18400
7000
15832
13130
14000
10% -10%
FY12 FY13 FY14 FY15E FY16E FY17E Revenue (In Mn) Growth rate (RHS)
6% 5%
Kajaria FY14
Kajaria H1FY15
300
0% FY14
Realisation per Sq mt
FY15E
FY16E
70 9.3 50
FY17E
Growth rate (RHS)
9.3 9.3
30
409
2% 393
2%
371
354
347
314
4%
4%
330 330
6%
5%
3%
Source: Company, Karvy Research
325
328
Exhibit 7: PVT production volume to increase (MSM) 8%
FY13
342
Source: Company, Karvy Research
420
FY12
356
Industry FY14
Exhibit 6: Sales realization per square meter & Growth rate
360
354
300
Source: Company, Karvy Research
390
367
370
11.4
16.4
28.9
25.9
28.9
28.9
FY 2014
FY 2015 E
FY 2016 E
10 Cermaic Tiles
Polished Vitrified Tiles
Glazed Vitrifed Tiles
Source: Company, Karvy Research
3
Feb 24, 2015
Kajaria Ceramics Ltd Exhibit 8: Consistent capacity addition
Capacity Expansion of 20.5 MSM by FY16
75
Kajaria 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.
67.1
50 46.6 36
25 0
FY12
FY14
FY16E
Capacity in MSM Source: Company, Karvy Research
Exhibit 9: Kajaria Manufacturing plants presence and expected capacity as of March 2016 (Units MSM) Plants
Ceramic Tiles
Sikandrabad (UP)
3.5
Gailpur (Rajasthan)
PVT
GVT
Total
0
6.3
9.8
18.5
8.0
3.0
29.5
Morbi (Gujarat)
4.6
20.9
0
25.5
Vijayawada (AP)
2.3
0
0
2.3
Source: Company, Karvy Research
Exhibit 10: Related Diversification 100%
4%
6%
96%
94%
FY16E
FY17E
95% 90%
100%
85% 80% 75%
FY15E Tiles Business
Faucet & Saniatary-ware Business
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.
Source: Company, Karvy Research
Exhibit 11: Urban Housing shortage - Top 6 states 3.2
3.1
2.4
1.9
1.6
1.3
1.3
1.3
1.2
WB
AP
TN
RJ
0.8 UP
MH
Housing shortage in Million Units
Source: Ministry of Housing, Karvy Research
Housing shortage to boost demand for ceramics industry According 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 12: Tiles demand break up
Residential 70%
Replacement 15% Commercial 15%
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.
Source: Ministry of Housing, Karvy Research
4
Feb 24, 2015
Kajaria Ceramics Ltd
Manufacturing plants spread across India Kajaria 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. Exhibit 13: Kajaria manufacturing plants presence and capacity as of September 2014 (Units MSM) Plants
Ceramic Tiles
Sikandrabad (UP)
PVT
GVT
Total
3.5
0
6.3
9.8
15.5
3.0
3.0
21.5
Morbi (Gujarat)
4.6
15.9
0
20.5
Vijayawada (AP)
2.3
0
0
2.3
Gailpur (Rajasthan)
Source: Company, Karvy Research
Market leader Kajaria 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 14: Kajaria gaining market share 10% 8%
6.7%
6.6%
7.7%
Exhibit 15: Kajaria out performing industry’s growth rate 8.0%
9.1%
30%
20%
5% 10%
3% 0% FY10
FY11
FY12
FY13
21% 16% 15%
19%
12%
12%
FY14
FY15E
23%
23%
14%
14%
FY16E
FY17E
0%
FY14
FY13
Kajaria's market share in Industry
Indian Tiles Industry
Source: Company, Karvy Research
Kajaria
Source: Company, Karvy Research
Exhibit 16: Organized sector market share as of March 2014 22% 17%
20%
19%
12%
13%
7%
8%
7%
7%
6%
Asian Granito
RAK Ceramics
Orient Bell Ceramics
2% H &R Johnson
Kajaria Cermaics
Somany Cermaics
Nitco Tiles
4%
5%
4%
Varmora
Simpolo
Sun heart
6% Others
Source: Company, Karvy Research
5
Feb 24, 2015
Kajaria Ceramics Ltd
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.
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.
Exhibit 17: Segment Market Share (%)
Exhibit 18: Industry Segment growth rate (%)
30%
24.5%
25%
20
20% 15% 10%
30
5%
0
0% Ceramic wall & floor tiles
Polished Vitrified tiles
20 13
10
7.3%
5.8%
26
Glazed Vitrified tiles
Source: Company, Karvy Research
Ceramic tiles
Polished vitrified Glazed vitrified tiles tiles CAGR Growth 2009-2013
Source: Company, Karvy Research
Strong Distribution Channel The 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 share Towards 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 19: Industry scenario - 2008
Unorganized players 60%
Source: Company, Karvy Research
Exhibit 20: Industry scenario - 2014
Unorganized players 51%
Organized players 40%
Organized players 49%
Source: Company, Karvy Research
6
Feb 24, 2015
Kajaria Ceramics Ltd 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.
Implementation of Goods and Service Tax (GST) would be beneficiary to organized players such as Kajaria By 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 floor Ceramics 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. Exhibit 21: Percentage of Households by material of floor (%) INDIA
RURAL
URBAN
1991
2001
2011
2001
2011
2001
2011
Mud
67
57
47
72
63
18
12
Stone
-
6
8
5
6
9
12
21
27
31
18
24
48
46
Mosaic/ Floor tiles
4
7
11
2
4
21
26
Others
8
3
4
3
3
4
4
Cement
Source: Company, Karvy Research
Government providing fillip to the Ceramic Industry Smart 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.
7
Feb 24, 2015
Kajaria Ceramics Ltd Exhibit 22: Business Assumptions Y/E Mar (Rs. Mn)
FY14
FY15E
FY16E
FY17E Comments
18400
21933
26890
32975
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 &
EBITDA Margins (%)
15.5
15.6
15.8
15.8 power costs.
1242.5
1656.7
2110.2
2717.7
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
3250
Net Debt
2303
1928
1547
50
287
604
India Business (Consolidated) Revenue
PAT
Free Cash Flow
Capacity addition to drive sales growth.
Expected to be strong on decline in finance costs.
Strong cash flows on improving RoAs and reduction in working capital days.
879 Debt is expected to decline going forward 1088
Source: Company, Karvy Research
Exhibit 23: Karvy vs. Consensus Karvy
Consensus Divergence (%) Comments
Revenues (Rs.mn) FY15E
21933
22190
(1.2)
FY16E
26890
27353
(1.7)
FY17E
32975
32684
0.9
FY15E
3424
3440
(0.5)
FY16E
4265
4294
(0.7)
FY17E
5230
5213
0.3
Sales driven by capacity expansion and higher value products
EBITDA (Rs.mn) EBITDA to improve on lower fuel costs and higher contribution from higher margin products
EPS (Rs.) FY15E
21
21
(2.6)
FY16E
27
27
(2.9)
FY17E
34
34
0.8
EPS to grow on the back of decline in finance costs
Source: Bloomberg, Karvy Research
Realizations to improve on back of increase in value added products Exhibit 24: Sales realization per square meter (Rs.) 430
409 393
405 371
380 355
346
354
330 FY13
FY14
FY15E
FY16E
FY17E
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.
Source: Company, Karvy Research
8
Feb 24, 2015
Kajaria Ceramics Ltd
Operating Margins to Stabilize (%) Exhibit 25 15.9%
15.9%
15.8%
15.8% 15.7%
15.6%
15.6%
15.5%
15.6%
15.5% FY13
FY14
FY15
FY16
FY17
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.
Source: Company, Karvy Research
Exhibit 26: Expense break up for square meter Raw material costs
FY12
FY13
FY14
FY15E
FY16E
FY17E
163
157
158
169
176
183
Employee costs
27
30
33
35
37
38
Power & fuel costs
53
67
72
78
79
82
Selling & distribution
12
13
12
13
13
14
Other expenses
22
26
25
26
28
29
EBITDA
52
54
55
58
61
64
Source: Company, Karvy Research
Fall in Interest costs to boost PAT margins Exhibit 27 500
9% 454
400
408
6.6%
300
7.5%
6.7%
280
8.2%
7.8%
7% 6%
317
5% 232
200 FY13
FY14
FY15E
Finance Costs
FY16E
8%
4%
FY17E
PAT Margins (RHS)
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.
Source: Company, Karvy Research
Reduction in working capital cycle days Exhibit 28 80 65
73 62
50
40
37
30
35
37
38 39
38 FY17E
FY16E
FY15E
FY14
FY13
FY12
FY11
FY10
FY09
20
Payable days
Inventory days
Debtors Days
WC days
Source: Company, Karvy Research
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. 9
Feb 24, 2015
Kajaria Ceramics Ltd
Strengthening Balance sheet Exhibit 29: Decline in Debt Equity ratio 1.0
1.0
0.9
0.8 0.5
0.4
0.3
0.2
0.3
0.1
0.0 FY12
FY13
FY14
FY15E
FY16E
FY17E
Debt Equity (x)
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.
Source: Company, Karvy Research
Stable return ratios (%) Exhibit 30:
25.3%
33.1%
14.7%
24.2%
30.7%
13.2%
5%
12.4%
15%
23.2%
25%
34.6%
35%
FY15E RoE
FY16E RoCE
FY17E RoA
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.
Source: Company, Karvy Research
Kajaria expected to generate strong operating cash flows Exhibit 31: (Rs. mn) 3300 2200
976
1662
1804
2701
3250
1100
FY13
FY14
FY15E
FY16E
FY17E
0 Operating cash flow
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.
Source: Company, Karvy Research
10
Feb 24, 2015
Kajaria Ceramics Ltd Exhibit 32: Company Snapshot (Ratings)
Low
High
1
2
3
4
5
99
Quality of Earnings
99
Domestic Sales
99
Exports Net Debt/Equity
99
Working Capital req
99
Quality of Management
99
Depth of Management
99
Promoter
99
Corporate Governance
99
Source: Company, Karvy Research
Valuation & Outlook We 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)
Exhibit 34: P/B Band (x)
45
10
35
8
25
6
15
4
5 Feb-13
Jun-13
Oct-13
PE
Avg
Feb-14
Jun-14
Oct-14
Highest
2 Feb-13
Feb-15 Lowest
Source: Bloomberg, Karvy Research
Jun-13 PB
Oct-13 Feb-14 Avg
Jun-14 Highest
Oct-14
Feb-15 Lowest
Source: Bloomberg, Karvy Research
Exhibit 35: Comparative valuation summary CMP
Kajaria Ceramics
Somany Ceramics
EPS (Rs.)
M-cap
P/E (x)
RoE (%)
(Rs. mn)
FY15E
FY16E
FY17E
FY15E
FY16E
FY17E
FY15E
FY16E
FY17E
747
60392
20.8
26.6
34.2
35.8
28.1
21.8
23.2
24.2
25.3
361
14518
11.4
16.5
22.6
31.6
21.9
16.0
18.3
22.3
24.9
Source: Company, Bloomberg, Karvy Research
11
Feb 24, 2015
Kajaria Ceramics Ltd
Peers Group Comparison Exhibit 36: Trend in EBITDA margins
Exhibit 37: Sales Growth Rate (%)
15
16.1
40%
15.8
30%
15.6
20%
37.6%
15.8 15.7
15.6
10
15.5
5
16.2%
15.3 FY11
FY12
FY13
10%
FY14
Somany
20.6%
FY12
FY13
Kajaria (RHS)
FY14
Somany
Kajaria
Source: Company, Karvy Research
Source: Company, Karvy Research
Exhibit 38: Trend in RoE
Exhibit 39: Debt Equity Ratio Trend (%)
30
35
2.1
30
1.6
20
25
1.1
15
20
0.6
10
15
0.1
30.5
29.5 25
27.1
26.1
FY11
FY12
FY13
Somany
1.0
1.1
0.4 0.1 FY11
FY14
0.9
0.6
kajaria (RHS)
Source: Company, Karvy Research
1.6
1.3
FY12
FY13
Somany
FY14 kajaria (RHS)
Source: Company, Karvy Research
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
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
-
(10.5)
(7.0)
(3.5)
7.6
11.1
14.7
EPS (Rs.)
Change in TP (%) Source: Company, Karvy Research, NA: Not Applicable
Key Risks • Slower than expected growth in housing sector • Imports from China; Competition from foreign players • Surge in natural gas prices 12
Feb 24, 2015
Kajaria Ceramics Ltd
Financials Exhibit 41: Income Statement YE Mar (Rs. Million)
FY13
FY14
FY15E
FY16E
FY17E
Revenue
15832
18400
21933
26890
32975
20.6
16.2
19.2
22.6
22.6
Growth (%) Operating Expenses
13386
15593
18556
22681
27815
EBITDA
2477
2870
3424
4265
5230
Growth (%)
19.3
15.9
19.3
24.6
22.6
Depreciation & Amortization
446
470
538
621
704
Other Income
30.4
62.9
46.2
56.6
69.4
EBIT
2030
2400
2885
3644
4526
Interest Expenses PBT Tax
454
408
280
317
232
1576
1992
2605
3327
4294
499
678
860
1098
1417
Adjusted PAT
1044
1242
1657
2110
2718
Growth (%)
29.1
19.0
33.3
27.4
28.8
FY13
FY14
FY15E
FY16E
FY17E
55
61
236
317
485
Sundry Debtors
1436
1648
1968
2413
2959
Inventory
2197
1931
2582
3166
3981
329
510
609
747
916
Gross Block
9113
10180
11980
13580
15380
Net Block
6125
6861
8110
9194
10412
10476
11756
14619
16914
19706
Current Liabilities & Provisions
2684
2945
3835
4721
5761
Debt
Source: Company, Karvy Research
Exhibit 42: Balance Sheet YE Mar (Rs. Million) Cash & Cash Equivalents
Loans & Advances
Total Assets
3202
2364
2164
1864
1364
Other Liabilities
706
744
802
833
872
Total Liabilities
6592
6052
6801
7419
7997
Shareholders Equity
147
151
159
159
159
Reserves & Surplus
3462
4890
7127
8715
10759
Total Networth
3609
5291
7286
8874
10918
Minority Interest Total Networth & Liabilities
275
409
531
621
791
10476
11756
14619
16914
19706
Source: Company, Karvy Research, NA: Not Applicable
13
Feb 24, 2015
Kajaria Ceramics Ltd
Exhibit 43: Cash Flow Statement YE Mar (Rs. Million)
FY13
FY14
FY15E
FY16E
FY17E
1576
1992
2605
3327
4294
Depreciation
446
470
538
621
704
Interest
454
408
280
317
232
PBT
Tax Paid (Inc)/dec in Net WC Other Income Cash flow from operating activities (Inc)/dec in capital expenditure (Inc)/dec in investments Others
499
678
860
1098
1417
(595)
148
(480)
(149)
(331)
30
63
46
57
69
976
1662
1804
2701
3250
(1543)
(1568)
(1800)
(1700)
(1800)
0
0
0
0
0
8
9
4
20
48
(1535)
(1559)
(1796)
(1680)
(1752)
568
(690)
(200)
(300)
(500)
754
750
(214)
(257)
(411)
(523)
(673)
Others
170
62
89
119
160
Cash flow from financing activities
524
(131)
228
(704)
(1014)
(1)
17
236
317
485
Cash flow from investing activities Inc/(dec) in borrowings Issuance of equity/ Warrants Dividend paid
Net change in cash Source: Company, Karvy Research
Exhibit 44: Key Ratios YE Mar (%)
FY13
FY14
FY15E
FY16E
FY17E
EBITDA Margin (%)
15.6
15.5
15.6
15.8
15.8
EBIT Margin (%)
12.8
13.0
13.1
13.5
13.7
Net Profit Margin (%)
6.6
6.7
7.5
7.8
8.2
Dividend Payout ratio
21.1
21.3
21.2
21.2
21.2
0.5
0.3
0.2
0.2
0.1
RoE (%)
30.2
25.4
23.2
24.2
25.3
RoCE (%)
36.8
32.6
30.7
33.1
34.6
YE Mar
FY13
FY14
FY15E
FY16E
FY17E
EPS (Rs.)
14.2
16.4
20.8
26.6
34.2
Net Debt/Equity
Source: Company, Karvy Research
Exhibit 45: Valuation Parameters
DPS (Rs.)
3.0
3.5
4.4
5.6
7.3
BV (Rs.)
49.0
66.7
91.7
111.7
137.4
PE (x)*
14.2
24.8
35.8
28.1
21.8
P/BV (x)*
3.9
5.5
8.1
6.7
5.4
EV/EBITDA (x)*
9.0
12.9
18.0
14.5
11.8
EV/Sales (x)
3.9
3.4
2.8
2.3
1.9
Source: Company, Karvy Research, * P/E, P/BV and EV/EBITDA for FY13, FY14 are on historic basis.
14
Feb 24, 2015
Kajaria Ceramics Ltd Stock Ratings
Absolute Returns
Buy
:
> 15%
Hold
:
5-15%
Sell
: