Kajaria, Somany Ceramics - Industry Tailwinds To Aid Growth: Nirmal Bang Initiates Coverage With A 'Buy'

Nirmal Bang Report

We expect the tiles sector in India to grow at a healthy rate of 12-13% over FY24E-FY25E, aided by well-established brands, rising demand in export markets and domestic market tailwinds. We initiate coverage on Kajaria Ceramics Ltd. and Somany Ceramics Ltd. with a 'Buy' rating.

Kajaria Ceramics - Capable and scalable

Kajaria Ceramics continues to maintain its margin leadership position within the tiles industry, consistently outperforming its peers. Over the past half-decade, Kajaria has maintained an impressive Ebitda margin average of 16%, whereas, in contrast to the industry's average of 10.7%.

Several key factors underpin Kajaria’s superior margin performance, including a well-calibrated product mix, rural market reach, major supplier 60% plus of its production caters to key commercial and residential projects, high proportion of in-house produced tiles and technologically advanced manufacturing process.

Consistently operating at more than 90% plus capacity utilisation levels, strong retail presence in the domestic market (exports account for only 2% of total volume), cost efficient operations and a robust balance sheet are key positives for Kajaria.

With over 2800 plus stock keeping units and 1,840-strong dealer network, direct sales and setting up of exclusive showrooms will only result in better margins. We expect healthy revenue growth during CY24-CY26E despite a high base. We estimate 13-15% volume growth during FY24-FY26E, revenue growth of 16% and Ebitda growth of 30%.

The company has historically traded at a five-year median price-earning multiple of 41. Therefore, we initiate 'Buy' rating on Kajaria with a target price of Rs 1,885 based on 40 times on September-25E earnings per share.

Key Risks:

• Volatility in prices of raw materials.

• The company is not insulated to changes in global commodity prices, specifically fuel.

Somany Ceramics - Tiles ahead of competition

Improving capacity utilisation level to ~100% from ~70% in FY23, strong brand equity with an expanding export presence (exports account for only 4-5% of total volume), cost efficient operations and a stable balance sheet are key positives for Somany Ceramics.

With over 3,000 plus strong dealer network, direct sales and setting up of exclusive showrooms will only result in better margins. We expect healthy revenue growth during CY24-CY26E despite a high base.

We expect revenue to grow at 13.9% compound annual growth rate over FY23-FY26E, with Ebitda/profit after tax of 26.4%/47.4%. Ebitda margin is expected to remain in the vicinity of 9-11%. We expect return on equity/return on capital employed of 17.5%/ 19.2% in FY26E.

We initiate coverage on Somany Ceramics with a 'Buy' rating and target price of Rs 1,072 based on 22 times Sep-25E EPS (five-year median PE – 35.6 times).

Key Risks:

• Volatility in price of raw materials.

• The company is not insulated to changes in global commodity prices, specifically fuel.

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