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Systematix Research Report
Kajaria Ceramics Ltd. continued to benefit from softening fuel costs in Q1 (down 28% YoY and 20% QoQ, 18.2% of revenue) elevated its Ebitda margin (15.9%, up 130 basis points YoY), despite subdued 7% YoY volume growth in tiles (flattish for the industry).
Management expects strong demand revival in H2, whereby it has maintained its guidance of 13-15% volume growth and 14-16% revenue growth for FY24.
Normalisation of fuel costs could save Kajaria Ceramics Rs 1.7 billion in FY24, which it intends to partially share with dealers in the form of discounts and incentives to push sales. It has also planned a big bang ad campaign to drive volumes.
We broadly maintain our estimates post Q1, and expect Kajaria Ceramics to record 14%/ 26%/ 30% compound annual growth rate in revenue/ Ebitda/ profit after tax over FY23-25E (post low 10%/ 5%/ 8% CAGR over FY18-23).
Despite ongoing capex, the company should sustain healthy ~20% return on equity and free cash flow of over Rs 2 billion (annually).
While we like Kajaria Ceramics for its leading position in tiles, execution capabilities and regular market-share gains, we see low margin of safety post ~35% rally in the scrip in last three-four months at 38 times FY25E price/earnings.
Thus, we reiterate 'Hold' with a revised target price of Rs 1,288 at 35 times FY25E P/E (Rs 1,249 earlier). Strong volume growth and margin trajectory are key to drive performance in the stock hereon.
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