Q1FY24 Review: Kajaria Ceramics: Soft quarter; H2 likely to fare better

27 Jul 2023 , 02:19 PM

Kajaria Ceramics (KJC) reported a soft quarter overall; volume growth was muted, while Ebitda margins improved sequentially. Demand continues to be muted for Q2 till date, although mgmt is hopeful of a recovery in the H2. Lower gas prices have aided margins, despite some pass-on of the benefit to dealers. Exports from Morbi continue to be strong, which offers hope for volume pickup. However, achieving mgmt guidance of 13-15% for FY24 looks like a big ask. Analysts of IIFL Capital Services upgrade their estimates by 7-8% to reflect higher margins, but downgrade recommendation to ADD.

Margins improvement continues: 

KJC reported largely in-line revenue/ Ebitda, but PAT came in above analysts of IIFL Capital Services estimates due to lower-than-expected depreciation charge. At 7.2%, volume growth was muted due to weak demand in April/May. Ebitda margins came in at 15.9% (+129bps QoQ), on the back of reduction in KJC’s fuel costs (14% QoQ). While blended gas prices declined QoQ, some benefit (~3% of revenues) seems to have been passed on as discounts to improve volume offtake. Net cash increased Rs0.7bn QoQ to Rs3.1bn, working capital days increased to 62 (vs 59 in Q4).

Subdued demand environment; exports encouraging: 

Mgmt highlighted that demand continues to remain soft in 2Q, so far. Despite this, KJC is hopeful of an improvement in September, and reiterated its 13-15% volume growth guidance for FY24. Exports from Morbi have been encouraging, growing in line with mgmt guidance of >20% YoY growth in FY24. KJC expects to achieve strong growth (>30%) in Non-tile (Sanitaryware, Plywood and Adhesives) segments, while expanding its value-added portfolio in the Tiles segment.

Strong pickup in H2 key to achieving mgmt guidance; downgrade to ADD: 

Given the benign outlook on gas prices, analysts of IIFL Capital Services revise their Ebitda margins upwards for FY24/25 to 15.5/16.5%, in line with the long-term average. This is driving 7-8% upgrade in their FY24/25 estimates. They build in revenue Cagr of 14% over FY23-25, and PAT Cagr of 30% over FY23/25. However, the stock trades at 37x FY25 EPS. Analysts of IIFL Capital Services believe volume pickup in H2 is critical to achieving management guidance. They downgrade to ADD on expensive valuations.