Kajaria Ceramics: Navigating through choppy waters

26 Mar 2024 , 02:39 PM

In analysts of IIFL Securities recent interaction with Kajaria Ceramics (KJC), mgmt outlined the continuing weakness in demand; which is likely to persist for two to three quarters. Input costs have been favourable in Q4 with 6-7% QoQ decline in gas costs, but are likely to be passed on as higher discount/incentives. KJC is likely to focus on higher share of premium products, aggressive ramp-up A&P spends and exclusive showrooms; which will drive 5-6ppt outperformance to industry volumes. Analysts of IIFL Securities build a modest volume growth in FY24/25 of 6/8% YoY, followed by a stronger 15% growth in FY26 driven by higher real state completions. Reiterate BUY with 21% upside.

Demand weakness to persist:

Tiles demand for M9FY24 was 6% YoY — much lower than KJC’s initial guidance. The possible reasons for the weak industry demand include low real estate completions, inflationary pressures leading to downgrading by consumers, weaker renovation demand, and PVT segment facing de-growth. Mgmt also believes Morbi has been facing export pressures as well, driving down utilisation levels across the industry. But, this has not had a meaningful impact in the domestic market supply. GVT segment continues to fare better, with KJC’s share in this segment steadily rising (40% of capacity currently vs 18% in FY16).

Input costs stable:

Fuel costs have been stable over M9FY24. For Q4FY24, analysts of IIFL Securities expect gas costs to have come down by 6-7% QoQ; however, given the pressure on volumes, they gather that discounts/incentives have increased. Margins are expected to be within the 16-17% range over the near term. KJC has planned a tile capex of Rs1.7bn for >11msm of incremental capacity (largely in large format tiles).

Volume growth to outperform the industry; valuations not expensive:

KJC is likely to focus on higher share of premium products, which includes setting up a GVT slab plant at Morbi (currently ~1% share of sales), increase A&P spends (from Rs1.1bn to Rs1.4bn) and aggressively ramp up exclusive showrooms (from 400 to 650 over next four to five years) will continue to drive 5-6ppt outperformance to industry volumes. Analysts of IIFL Securities maintain muted volume growth assumptions for FY24/25, although expect H2FY25 onwards to see a pick-up in Real Estate completions driving a stronger 15% volume growth in FY26. Valuations are below 5yr average levels; re-iterate BUY.