Q2FY24 Review: Kajaria Ceramics: Muted performance in a tough milieu

23 Oct 2023 , 02:29 PM

Kajaria Ceramics (KJC) reported a miss across revenue/Ebitda/ PAT for Q2, amidst a weak demand environment. Mgmt said that there are some signs of volume pick-up Q3 onwards; and remains hopeful of clocking in 9-10% growth for FY24, despite a weak H1 at 7% YoY. Fuel costs were flat QoQ and are likely to be stable in the near term; aiding Ebitda margins which came in at higher end of 14-16% guidance. Morbi cluster continues to focus on exports with >33% YoY growth for H1FY24. Strong Real Estate sales over the last two years are expected to drive demand growth for Ceramics over the medium term. We build ~26% PAT Cagr over FY23-26 and upgrade to BUY (~19% upside), post the recent weakness. 

Q2 demand weak; but Q3 shows signs of a pickup: KJC reported a muted revenue growth of 4% YoY for Q2FY24 (5% in H1FY24), with volume growth of 6% YoY (7% for H1) due to weak demand. The month of September witnessed a pickup in demand with 9% YoY growth; October has fared even better. With weak H1FY24 growth at 7%, mgmt revised volume growth guidance downwards to 9-10% from 13-15%. For H1FY24, the Bathware segment grew 16% YoY; for FY24, mgmt is guiding for 20%. KJC aims to achieve a revenue of Rs1bn from Plywood in FY24; though currently, the segment is clocking in negative margins. 

Margin outlook healthy: Ebitda margins came in at 16% (+10bps QoQ), on the back of marginally lower fuel cost. So far, gas cost savings have been Rs0.8-0.85bn; in line with the mgmt guidance of Rs1.5bn for FY24. Despite the recent increase in crude prices, fuel cost is expected to remain range-bound due to the use of bio-fuels. Mgmt reiterated 14-16% margin guidance for FY24, while highlighting that they will be near the higher end of the guidance. Net cash increased Rs0.8bn QoQ to Rs3.9bn, working capital days improved to 53 (vs 62 in Q1). 

Ceramic exports encouraging; upgrade to BUY: Exports continue to be robust with H1FY24 at ~Rs100bn (up 33% YoY); mgmt expects Rs200- 210bn of exports for FY24. ~25-30 new units are coming up at Morbi, but are mostly geared towards exports. The stock trades at 34x FY25 EPS (in line with 5yr avg); we believe volume pickup in 2H is critical for achieving guidance. KJC continues to maintain its leadership position with a high focus on Tier 2/3 markets; upgrade to BUY with a TP of Rs1,460.