Kajaria Ceramics: Expect growth revival in a few quarters
Kajaria Ceramics’ fourth quarter earnings was on expected lines. Volume and topline remained muted while operating margin slumped due to higher costs. FY18 turned out to be a challenging year for the company and the tiles industry on account of multiple disruptions. However, the management remains optimistic on growth as revival in construction activity and pan-India rollout of the e-way bill bodes well.
Revenue for the quarter gone by increased four percent year-on-year at Rs 750 crore. Revenue growth was muted as YoY volume growth of five percent in tiles was partially offset by softening of glazed vitrified tile prices (by 2-3%). Gross margin remained flat as raw material costs remained stable.
The Gross margins remained flat as the raw materials costs remained stable.
Rise in fuel costs weighed on earnings as earnings before interest, tax, depreciation and amortisation (EBITDA) declined eight percent to Rs 120 crore in Q4 FY18. Contraction in EBITDA resulted in lower net profits.
While the tile business is facing subdued demand, the bathware segment (sanitaryware and faucets) is growing at a healthy 40 percent YoY. The company is expanding its sanitaryware product manufacturing capacity to 7.2 lakh per annum (from 5.4 lakh per annum) and expects the same to come on stream by May. It has roped in actress Anushka Sharma as its brand ambassador for promoting Kerovit: the bathroom decor and fitting brand.
To further strengthen its market presence, it added around 150 dealers to its distribution network. Performance of its joint ventures (JV) have been a drag on consolidated financials. The issues hampering their execution are being corrected gradually. What is heartening is that the JVs have reached near breakeven in the last quarter. The management expects these JVs to contribute Rs 20 crore to bottomline in FY19.
The management is planning to enter the plywood business through acquisition of 50 percent stake in Kajaria Plywood for Rs 15 crore. For the first two years, it will focus only on plywood trading to understand the business dynamics, but eventually plans to manufacture over the long-term.
Valuation and outlook
Performance during the year gone by was impacted by a number of factors including demonetisation, rollout of the Goods & Service Tax, and Real Estate Regulatory Authority. Industry demand appears to be stabilising post these market disruptions.
The management expects the e-way bill to be a game-changer as it will reduce the extent of tax evasion from unorganised players and aid the market share of organised players. It has guided FY19 volume and revenue growth to be in the 12-15 percent range and EBITDA margin in the 16-18 percent range.
We initiated coverage on Kajaria in April as a strong fundamental play within the housing theme. We remain sanguine on the long-term prospects of the company as it enjoys a market leadership position and strong brand recall. We reiterate our view of a growth revival from the second half of the current fiscal.
The stock (CMP: Rs 544 per share) is currently trading at an eight percent discount to its two-year average price-earnings multiple of 40 times. We advise investors to accumulate the stock on dips for the long-term.