Kajaria Ceramics Ltd - Karvy Online

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


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



Exhibit 2: Shareholding Pattern (%)

Exhibit 3: Revenue Segmentation (%) Import / Outsourced 20%

Promoter 50%

Others 23%


DII 4%

JV 27%

Own Manufacturing 53%

FII 23% Source: Company, Karvy Research

2

Feb 24, 2015


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%


325

328

Exhibit 7: PVT production volume to increase (MSM) 8%

FY13

342


420

FY12

356

Industry FY14

Exhibit 6: Sales realization per square meter & Growth rate

360

354

300


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


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


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.


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


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)


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


Kajaria


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


5

Feb 24, 2015


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


Ceramic tiles

Polished vitrified Glazed vitrified tiles tiles CAGR Growth 2009-2013


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%


Exhibit 20: Industry scenario - 2014

Unorganized players 51%

Organized players 40%

Organized players 49%


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


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


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.


8

Feb 24, 2015


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.


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


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.


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


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


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.


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.


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.


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


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


Jun-13 PB

Oct-13 Feb-14 Avg

Jun-14 Highest

Oct-14

Feb-15 Lowest


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


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



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)


1.6

1.3

FY12

FY13

Somany

FY14 kajaria (RHS)


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


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


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


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


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

: