initiating coverage building products kajaria ceramics ltd. · initiating coverage religare...

Incorporated in 1988, Kajaria Ceramics Ltd. (KCL) is the largest player in domestic tiles industry. The company has a market share of 10% of overall industry and 20% of organised industry. KCL's advertising and marketing strategy over the years has paved the way for the company's strong brand recall. Asset light business model, strengthening distribution network and innovative design offerings would be key growth drivers for KCL in future. We initiate coverage on KCL with a BUY.

Indian tiles industry, with an estimated size of Rs 27,000crs, stands at number 3 globally, in terms of production and consumption of tiles. The industry showed consistent higher single digit growth over FY12-16, however, slowdown in real estate industry (the largest consumer of tiles) in FY17 impacted sales and the industry growth shrank to 3%. The government's demonetisation move in November, 2016 and GST implementation from July, 2017 significantly weighed on tiles sales volume. We believe, the worst is over for tiles industry and various reforms in housing and infrastructure space by the government will propel higher demand for tiles. KCL, being the largest player, would be a key beneficiary of the industry growth.

In order to cater to growing demand, the company formed various joint ventures (JVs) with unorganised players. These JVs aided KCL to diversify operational locations and led to margins expansion, helping the company maintain its asset light business model. To strengthen high value products portfolio, the company plans a brown field expansion at its Gailpur, Rajasthan plant with a line of 3.5MSM/ annum to manufacture ceramic walls and floor tiles.

KCL forayed into bathware segment in 2014/15 by introducing a range of sanitaryware and faucets products. The company's new venture will benefit from Kajaria's strong brand equity and nationwide dealership network. Though bathware segment contributed only ~4% of total sales in FY17, we expect revenue contribution from this segment to increase gradually over FY18E-20E.

The government's push to housing and infrastructure development, consolidation in tiles industry post GST implementation, increasing urbanisation and improvement in discretionary spends would be key drivers of tiles industry growth. KCL has well penetrated distribution reach across the country, strong brand equity and extensive product folio. The company's market leadership in tiles and foray in bathware products, asset light business model would be key catalysts for future earnings growth. We estimate Net sales, EBITDA and PAT to grow at a CAGR of 10.3%, 15.1% and 17.3% over FY17-20E. We initiate coverage on Kajaria Ceramic with a BUY rating and price target of Rs 900.

Financial Summary

Religare Investment Call

October 6, 2017

Building Products

CMP (Rs)

Target Price (Rs)

Potential Upside

Sensex

Nifty

Key Stock data

BSE Code

NSE Code

Bloomberg

Shares o/s, Cr (FV 1)

Market Cap (Rs Cr)

3M Avg Volume

52 week H/L

Shareholding Pattern

(%)

Promoter

FII

DII

Others

1 Year relative price performance

732

900

22.9%

31,779

9,958

500233

KAJARIACER

KJC:IN

15.8

11,565

2,70,090

787/437

Dec-16

47.3

27.1

3.1

52.6

Mar-17

47.3

23.3

5.6

52.6

Jun-17

47.3

23.9

5.2

52.6

Research Analyst

Archana Gude [email protected]

Investment rationale

Outlook & Valuation

Initiating Coverage Kajaria Ceramics Ltd.

Multiple growth levers at workBUY

Particulars, Rs cr FY17 FY18 FY19E

Net revenue

EBITDA

EBITDAM (%)

APAT

APATM (%)

EPS (Rs)

PE (x)

RoE (%)

2,549.6

496.3

19.5

252.8

9.9

16.0

45.8

23.6

2,774.6

560.1

20.2

293.8

10.6

18.5

39.6

22.8

3,052.0

637.2

20.9

338.3

11.1

21.3

34.4

22.1

3,418.3

757.3

22.2

408.4

11.9

25.7

28.5

22.4 Source : Company; RSL Research

FY20E

55

85

115

145

Oct

-16

No

v-1

6

Jan

-17

Feb

-17

Ap

r-1

7

May

-17

Jun

-17

Au

g-1

7

Sep

-17

Kajaria Ni�y

Initiating Coverage Building Products


Kajaria Ceramics Ltd.

Investment rationale

Indian tiles industry: FY17 only a temporary setback

India accounts for ~7% of total global production of tiles (China 48%, Brazil 8%), while it is the third largest country with consumption of 6% of total production. Indian tiles industry has an installed capacity of 785MSM/annum and the industry size was of Rs 27,00crs as on March, 2017. The industry witnessed healthy growth of 8-9% over FY12-FY16; however, the growth was subdued in FY17 at 3%. Real estate industry witnessed poor demand post ban on higher currency notes. Since tiles industry growth is directly linked with real estate industry, slowdown was imminent for major ceramic companies.

Further, implementation of GST (Goods and Service Tax) from July 1, 2017 came in as another blow, as sales further declined. Domestic tiles industry, which is skewed towards non-branded unorganised players, has only 40% sales contribution from national brands (organised players). Though GST implementation has taken a toll on sales of organised players due to de-stocking by dealers, we believe long term outlook is promising, as it will bring in consolidation in the sector. The Government's various reforms like Housing for All, Smart City Mission and Swachh Bharat Abhiyaan would drive higher demand for building products in future. Domestic tiles industry witnessed stiff competition from low cost Chinese imports. The government has imposed anti dumping duty on Chinese ceramic tiles for 5 years with effect from February, 2017 to ease competitive pricing pressure for domestic players.

Scope for improvement in per capita consumption

As per Ceramic World Review report, India's per capita consumption of tiles is minimal at 0.6 Sq Mtr as compared to 9.5 Sq Mtr of Saudi Arabia and 3.6 Sq Mtr of China. Though the country stands at number 3 in terms of production of tiles, per capita consumption of tiles is way below other developing countries. Thrust on infrastructure development, growing economy, higher per capita income and ability to spend on better life style would bring in incremental demand for branded tiles going forward. We expect industry to grow in tandem with GDP growth and achieve healthy single digit sales growth.

The Government's various reforms like Housing for All, Smart City Mission and Swachh Bharat Abhiyaan would drive higher demand for building products in future

Thrust on infrastructure development, growing economy, higher per capita income and ability to spend on better life style could bring in incremental demand for branded tiles going forward

India's current lower per capita consumption of tiles-Another growth catalyst

Source : Ceramic World Review

3.64.0

0.6

4.2

1.4

9.5

0

2

4

6

8

10

China Brazil India Vietnam Indonesia Saudi Arabia

Per capita consump�on of �le (Sq Mtr)

74.3 110.0 148.5 196.0 250.9

3.1%

4.3%

5.4%

6.4%

7.3%

1%

3%

4%

6%

7%

9%

50

100

150

200

250

300

FY16 FY17 FY18E FY19E FY20E

LHS- Net sales (Rs Crs) RHS- % Contribu�on to Net Sales

Asset light business model aids margins improvement

KCL started operations in August, 1988 at Sikandrabad, Uttar Pradesh with 1 MSM/annum. The company commissioned its second plant in March, 1998 at Gailpur, Rajasthan with a capacity of 6 MSM/annum and further increased the capacity in phased manner. It commenced production at Malutana, Rajasthan in January, 2016 with a capacity of 6.5 MSM/annum. Since tiles manufacturing is a capital intensive business, the company adopted Joint Venture (JV) method for capacity expansion. Also, JV's give easy access to ready made capacity and helps to diversify operational locations with minimal burden on balance sheet and improved operating leverage, which aids margins expansion. KCL ensures quality of the product are in line with what consumers expect from the brand Kajaria. The company's various JVs are listed below.

Further, the company has acquired 51% stake (increased to 70%) in Florea Ceramics, which is putting up a manufacturing facility of glazed vitrified tiles with a capacity of 5 MSM/ annum in Andhra Pradesh. The plant is expected to be commissioned by September, 2018. In order to cater to high value products demand, KCL is adding a line of 3.5 MSM/annum to manufacture ceramic walls and floor tiles at its Gailpur Rajasthan plant. The company's focus on increasing capacity by brown field expansion and JVs will support higher demand in future.

Diversification in bathware compliments current business portfolio

In order to benefit from Kajaria's brand recall and extensive reach through a vast dealership network, the company forayed into Rs 10,000cr bathware industry. Kajaria Sanitaryware (Pvt) Ltd commissioned 0.7mn pieces sanitaryware capacity in Morbi, Gujarat in 2014-15. KCL holds 82% stake in the company. In 2015, KCL commenced commercial production of 1 mn faucets pieces at Gailpur, Rajasthan. Currently, bathware products are sold through ~70% of existing dealer network. The company's foray in bathware segment compliments its current product portfolio and aids sales growth. We estimate revenue contribution from bathware segment to grow from ~4% in FY17 to 7.3% in FY20E.

Initiating Coverage


JV's give easy access to ready made capacity and helps to d ivers if y operational locations with minimal burden on balance sheet and improved operating leverage, which aids margins expansion

The company's foray in bathware segment compliments its current product portfolio and aids sales growth

Building Products Kajaria Ceramics Ltd.

JV Company KCL % Stake Location Capacity (MSM)

Soriso Ceramics

Jaxx Vitrified

Vennar Ceramics

Cosa Ceramics

Taurus Tiles*

51%

61%

51%

51%

51%

Morbi, Gujarat

Morbi, Gujarat

Vijayawada, Andhra Pradesh

Morbi, Gujarat

Morbi, Gujarat

3.6

10.2

2.9

5.7

5

*KCL divested 46% stake on 30th June, 2017

Contribution from bathware segment to improve gradually

Source : Company; RSL Research

Initiating Coverage


Kajaria Ceramics Ltd, incorporated in 1988, is the largest manufacturer of ceramic/vitrified tiles in India. Started with 1 mn sq. mtrs, the company has increased capacity to 63.9mn sq mtrs and offers more than 2,000 options in ceramic wall and floor tiles, vitrified tiles, designer tiles. It has adopted cutting edge technology and intense automation, which helped to differentiate from the competition. The company's 8 plants are located at Sikandrabad in Uttar Pradesh, Gailpur & Malootana in Rajasthan, Vijayawada in Andhra Pradesh and 4 plants in Gujarat. Kajaria has received many awards like-Superbrand of the year-2016/17, Asia's most promising brand of the year 2016, emphasizing its strong brand recall amongst customers. The company is also certified by ISO - 9001:2008 for its commitment to quality and service.

Ceramic industry growth depends on growth of real estate industry. Post demonetisation, real estate industry has been stagnant with little growth in demand. Delay in pick up in demand will impact building material products segments like tiles and sanitaryware companies.

Thought we expect ceramic industry to benefit due to implementation of GST on a longer run, the oraganised players may feel the pinch in terms of business slowdown on account of trade disruption at dealer level due to de-stocking in initial months. Kajaria's Q1FY18 results were subdued, on expected lines. However, the growth depends on how quickly the company recoups the lost momentum.

We have considered growth of tiles industry to get a push from higher spend on life style products, in line with increase in per capita incomes. Economic slowdown could affect demand for tiles.

Company background

Risks

Board of directors

Name

Designation

Ashok Kajaria

Chairman & Managing Director

Chetan Kajaria

Joint Managing Director

Rishi Kajaria

Joint Managing Director

D P Bagchi

Independent Director

R K Bhargava


R R Bagri


B K Sinha Director (Technical)

D D Rishi Director (Technical)


Net sales

Expenditure

Employee cost

Raw material consumed

Purchase of stock in trade

Other expenses

Total expenditure

EBITDA

EBITDAM (%)

Other income

Depreciation

PBIT

Interest expenses

PBT

Tax

Reported profit

PATM (%)

Particulars, Rs cr FY18E FY19E

FY17


2,549.6

288.7

906.8

229.7

845.2

2,053.3

496.3

19.5

15.4

81.4

430.3

34.0

396.3

142.5

253.8

10.0

3,052.0

338.3

1,102.4

270.4

958.6

2,414.8

637.2

20.9

23.4

100.6

560.1

39.7

520.4

182.1

338.3

11.1

3,418.3

370.4

1,237.6

297.4

1,035.3

2,661.0

757.3

22.2

26.9

113.1

671.1

42.8

628.3

219.9

408.4

11.9

2,774.6

311.8

992.9

248.0

895.9

2,214.5

560.1

20.2

19.2

90.6

488.7

36.7

452.0

158.2

293.8

10.6

P&L Account


Initiating Coverage

FY20E

Share Capital

Reserves & Surplus

Total Shareholder's Fund

Minority Interest

Non-Current Liabilities

Long term borrowing

Other long term liabilities

Deferred tax liabilities

Long term provision

Current Liabilities

Trade payables

Short term provisions

Other current liabilities

Short term borrowing

Total liabilities

Fixed Assets

Current work in process

Goodwill on consolidation

Non current investment

Other non-current assets

Long term loans and advances

Current Assets

Current investments

Inventories

Trade receivables

Cash & Cash equivalents

Short term loans and advances

Other current assets

Total assets


FY17P


15.9

1,386.1

1,402.0

76.0

121.3

0.0

110.6

10.8

321.3

22.5

221.9

55.1

2,341.5

1,236.7

9.5

0.0

0.1

15.1

19.6

0.0

401.8

380.1

206.3

5.4

64.8

2,341.5

15.9

1,647.8

1,663.7

76.0

127.3

0.0

110.6

11.4

359.9

25.2

266.3

55.1

2,695.5

1,336.1

11.4

0.0

0.1

18.9

20.5

0.0

442.0

393.0

390.9

6.0

74.5

2,695.5

15.9

1,159.2

1,175.1

76.0

115.5

0.0

110.6

10.3

292.1

20.5

184.9

55.1

2,040.1

1,177.3

8.3

0.0

0.1

12.1

18.6

0.0

372.0

338.9

49.8

4.5

56.3

2,040.1

Balance sheet

15.9

1,970.1

1,986.0

76.0

133.7

0.0

110.6

11.9

403.1

27.7

314.2

55.1

3,118.4

1,473.0

13.7

0.0

0.2

23.6

22.0

0.0

495.0

449.5

548.7

7.2

83.5

3,118.5

FY20E



Initiating Coverage

Profit before tax

Add: Depreciation

Add: Interest cost

Others

Operating profit before working

capital changes

Changes in working capital

Direct taxes

Cash flow from operating

activities

Net cash used in Investing

Activities

Purchase of fixed assets

Others

Cash flow from investing

activities

Cash flow from Financing

Activities

Proceeds from issuance of shares

Net proceeds from borrowing

Dividend (Incl dividend tax)

Interest cost

Others

Cash flow from Financing

Activities

Net cash Inflow/Outflow

Opening Cash & Cash Equivalents

Closing Cash & Cash Equivalents


FY17P


396.3

81.4

31.2

5.8

514.7

-48.1

-128.9

337.7

-147.0

7.2

-139.7

0.0

-82.0

-48.9

-34.0

-0.2

-167.9

30.1

19.8

49.8

520.4

100.6

39.7

-

660.7

18.1

-182.1

496.6

-200.0

-1.9

-201.9

0.0

6.1

-76.5

-39.7

0.0

-110.1

184.6

206.3

390.9

628.3

113.1

42.8

-

784.2

-31.7

-219.9

532.7

-250.0

-2.3

-252.3

0.0

6.4

-86.1

-42.8

0.0

-122.6

157.8

390.9

548.7

452.0

90.6

36.7

-

579.3

-15.5

-158.2

405.6

-150.0

-1.2

-151.2

0.0

5.8

-67.0

-36.7

0.0

-97.9

156.5

49.8

206.3

Cash Flow statement

FY20E

Dividend per share Rs

Dividend Yield (%)

Payout (%)

EPS Rs

Book value per share Rs

Profitability Ratios

EBITDA/Total Income (%)

PBT/ Total Income (%)

NPM/ Total Income (%)

RoCE (%)

RoE (%)

Liquidity Ratios

Debt-Equity Ratio

Current ratio

Interest Cover Ratio

Turnover Ratios

Total Asset Ratio

Fixed Asset Ratio

Debotors Velocity (Days)

Inventory (Days)


FY17P


0.4

19.3

16.0

74.0

19.5

15.5

10.0

31.0

23.6

0.1

1.5

12.2

1.3

2.2

48.5

66.1

0.6

22.6

21.3

104.7

20.9

17.1

11.1

30.7

22.1

0.1

1.9

13.5

1.2

2.4

47.0

66.8

0.6

21.1

25.7

125.0

22.2

18.4

11.9

31.6

22.4

0.1

2.0

15.0

1.2

2.4

48.0

67.9

0.5

22.8

18.5

88.2

20.2

16.3

10.6

31.1

22.8

0.1

1.7

12.8

1.3

2.3

50.0

66.2

Key Financial ratios

FY20E



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S. No. Statement Answer

Tick appropriate

I/we or any of my/our relative has any financial interest in the subject company? [If answer is yes, nature of Interestis given below this table]

I/we or any of my/our relatives, have actual/beneficial ownership of one per cent. or more securities of the subject company, at the end of the month immediately preceding the date of publication of the research report or date of the public appearance?

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I/we have served as an officer, director or employee of the subject company?

I/we have been engaged in market making activity for the subject company?

YES NO

NO

NO

NO

NO

NO

NO

NO

NO

NO

NO

Nature of Interest ( if answer to F (a) aboveis Yes : …………………………………………………………………………………………………………………………………………………............................................Name(s)with Signature(s)of RA(s).[Please note that only in case of multiple RAs andif the answers differ inter-se between the RAs, then RA specific answer with respect to questions under F (a) to F(j) above , are given below]

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Initiating Coverage Building Products Kajaria Ceramics Ltd.

initiating coverage building products kajaria ceramics ltd. · initiating coverage religare...

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