PL Stock Report: Kajaria Ceramics (KJC IN) - Q2FY24 Result Update – Lower volume guidance, margin improved - ACCUMULATE

Kajaria Ceramics (KJC IN) - Praveen Sahay - Research Analyst, Prabhudas Lilladher Pvt Ltd.

Rating: ACCUMULATE | CMP: Rs1,230 | TP: Rs1,368

Q2FY24 Result Update – Lower volume guidance, margin improved

Quick pointers:

§ KJC reported tiles volume growth of 6.3% YoY in Q2FY24.

§ EBITDA margin improved by 400bps YoY, with fuel cost correction as % rev.

Kajaria Ceramics (KJC) downward revised its volume growth guidance between 9-10% (earlier 13-15%) and maintained higher EBITDA margin (around 16.0%) with lower power and fuel costs for FY24, while expecting sequential improvement in volume growth in coming quarters. Management indicated gradual pick-up in volumes post Sep-23 and expected improvement in demand environment emanating from rub-off of strong growth in real estate sector to drive better volume growth in H2FY24. The company reported improvement in EBITDA margin (+400bps YoY) with reduction in fuel expenses through decrease in gas prices and use of alternate fuel. KJC reiterated that off gas price reduction benefits will be used for a) promotions/discounts to drive volume, b) passing it on to JV partners, and c) margin improvement.

We are cautiously optimistic on the company for long term given 1) its largest player positioning in domestic tiles market, 2) focus on brand building (adv. spends at 3% sales), 3) expanding distribution network (1,840 active dealers in FY23 & expected to touch 2000 in FY24), 4) reduction in fuel expenses with gas price correction & alternate fuel uses, and 5) exponential growth in Bathware/Plywood/Adhesive businesses. We expect Revenue/EBITDA/PAT CAGR of 12.0%/20.0%/24.3% over FY23-26E and downward revise our FY24/FY25E/FY26E earnings estimate by 5.8%/5.3%/5.3%. Maintain ‘Accumulate’ rating, as we value the stock at 35x FY25 EPS to arrive at revised TP of Rs1,368 (earlier Rs 1,445).

Revenues grew by 4.1%, PAT up by 52.9%: Revenues grew by 4.1% YoY to Rs11.2bn (PLe:Rs11.4bn), on back of 6.3% YoY tiles volume growth. Tiles segment revenues grew by 2.6% YoY (contributes 89%sales) and other segment revenues grew by 17.9% YoY. Bathware (cont. 8%rev.) grew by 12.0% YoY. Gross margin expanded by 110bps YoY to 59.2%. EBITDA grew by 38.9% YoY to Rs1.8bn (PLe: Rs1.9bn). EBITDA margin improved by 400bps YoY to 16.0% (PLe: 16.6%). Fuel expenses % sales reported 19.7% in Q2FY24 from 24.8% in Q2FY23. PBT grew 47.3% YoY to Rs1.5bn (PLe: Rs1.6bn). PAT grew 52.9% YoY to Rs1.1bn (PLe: Rs1.2bn). Reported working capital of 53days by Sep-23 vs 62days in Jun-23.

Con-Call highlights: 1) Mgmt lowered down its guidance for volume growth to 9-10% from 13%-15% and EBITDA margins of around 16% for FY24, 2) Mgmt guided sequential improvement in volume in coming quarters, which was visible with pick-up in volumes since Sep-23, 3) Mgmt indicated that the recent commissioning of Sikandrabad and Gailpur modernization/expansion projects augurs well for its future growth, 4) Mgmt. also communicated that KJC remain committed to its growth strategy, which entails continued emphasis on expanding reach in smaller towns and introducing innovative products, 5) Avg. fuel prices were at Rs38/SCM with North/South/West at Rs40/38/33 per SCM, 6) Capex will be around Rs6.7bn for FY24 and Rs 2.0-2.5bn per year for next couple of years.

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