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Kajaria Ceramics, a quality play, can accumulate on every correction
Sachin Pal

Moneycontrol Research

Kajaria Ceramics is the largest tile manufacturer in India. Post the disruptions in FY18, mostly on account of GST, the company is staring
at an optimistic future and is expanding capacity to take advantage of the same. Kajaria has successfully transitioned itself from a
commoditised player to a well-known brand. The superior fundamentals stand testimony to the same. We feel, should the stock correct
on near-term headwinds, it will provide a good opportunity to invest in a high quality business with a secular growth trajectory ahead.

The company has an annual capacity of 68.4 MSM (Million Square Meter) spread across eight plants. Over the past 3 decades, Kajaria
has built a strong distribution network of 1,400 dealers and 5,000 sales points across the country. Kajaria offers ceramic wall & floor tiles
(37Â percent of turnover), polished vitrified tiles (33 percent of turnover), glazed vitrified tiles (25 percent of turnover) and Sanitaryware &
fittings (5 percent).

The company boasts of excellent fundamentals and has gained in terms of scale and efficiency. The topline has almost doubled in the
past 5 years (from Rs 1,409 crore in FY12 to Rs 2,857 crore in FY17). The net profit surged more than 3x over the same period to reach
Rs 253 crore in FY17. It enjoys a leadership position in the tile industry with a market share of around 9Â percent.

Capacity expansion with prudent capital allocation

Kajaria has been consistently increasing its capacity and gaining market share from its competitors. The capacity has increased from
36.0 MSM in FY12 to 68.4 MSM in FY18 (CAGR of 11.3 percent). The company has primarily focused on the adding new capacities in
the vitrified tiles segment as the realisations and margins are much higher. The ceramic tiles capacity has remained stagnant in the past
3-4 years.

Despite the expansion, Kajaria has been able to de-leverage its balance sheet in a steady manner. Its healthy cash generation from
operations has resulted in reduction of D/E ratio from 0.9x in FY13 to 0.2x in FY18.

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Kajaria’s capacities are mainly spread across the northern and western region where it has strong network of dealers and associates.
After solidifying its presence in the North by following a cluster-focused approach, the company plans to expand its presence in the
South.

Currently, it has a small presence in South through its 2.9MSM ceramic plant in Andhra Pradesh and it is building another manufacturing
facility of glazed vitrified tiles with a capacity of 5 MSM in Andhra Pradesh. Besides, this expansion, the company also plans to set up a
new plant at Tirupati with 4 MSM capacity in FY19 by incurring a capex of Rs 125 crore. Also, the company has recently announced
the expansion of its Malootana plant (Rajasthan) and plans to invest Rs 80 crores to raise the plant capacity by 5.6 MSM.

Having gained the leadership position in the tile segment, Kajaria has forayed into the bathroom segment with the launch of faucets and
sanitaryware products. The company has set up a 5.4-lakh pieces sanitaryware manufacturing facility at Morbi (Gujarat) along with 10.0
lakh pieces faucet manufacturing facility at Gailpur (Rajasthan).

Although this segment is relatively small (5% of revenues), it is growing at a rapid pace (40-50 percent, YoY). Â The sanitaryware facility
is also being scaled up to 7.2-lakh pieces to cater to the growing demand.

Peer review - best in class operating metrics for Kajaria

Kajaria has a strong retail presence and enjoys a good relationship with its business partners which results in cash conversion cycle of
just 35 days compared to Somany Ceramics (47 days) and Asian Granito (91 days). The company has positioned itself as a premium
brand and is able to generate higher realisations (12-15 percent) compared to peers. The higher realisations also provide cushion to its
EBITDA margins and net profit margins.

Besides in-house manufacturing, it has also entered into joint ventures and outsourcing contracts with other companies which allows it to
maintain asset-light model and generate healthy return ratios (RoE of 24 percent and RoCE of 32 percent in FY17).

Near-term headwinds to persist; long term story intact

In the first nine months of FY18, Kajaria has witnessed a moderate volume growth on account of disruptions in the market. The company
has been impacted by removal of octroi barriers ahead of the e-way bill implementation (rolled out in April 2018) that has led to increased
competition from unorganised players. Additionally, the industry is also seeing some pressure on the GVT prices (decline by 1-2 percent)
and margins have been impacted by surge in natural gas prices and diesel costs.

The unique moats

Kajaria is a market leader in the tiles segment with proven track record of execution and best in class operating metrics.

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Being an established player with strong brand recall, it should be able to pass on the increase in raw material, power & fuel costs to its
consumers (with a lag of 3-6 months) and will continue to gain market share from un-organised players in the post GST regime.

Despite the recent challenges, the company is currently operating at a capacity utilization of 85-90 percent and is planning further
capacity expansion on account of revival in demand prospects.

We see Kajaria as a big beneficiary of Housing for All Project (60 million new houses by 2022) and Smart City Mission (development of
100 smart cities) and Swachh Bharat Abhiyaan. Anti-dumping duty of upto Rs 120 per sq mt (USD 1.87) on Chinese vitrified tiles (valid
up to 2022) would further aid the organised players like Kajaria.

In our view, near term challenges present an attractive opportunity to accumulate the stock. We anticipate a gradual pick up in both
volumes and margins over the next 2 quarters. Kajaria remains a long-term buy with strong growth prospects and one of the best stocks
to play the housing theme.

For more research articles, visit our Moneycontrol Research Page.

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