Page 1

Kajaria Ceramics CMP

Rs. 1,250

Target

Rs.1,390

Rating

BUY

GIRISH CHOUDHARY girish@sparkcapital.in +91 44 4344 0021

GAURAV NAGORI CFA gaurav@sparkcapital.in +91 44 4344 0072 Find Spark Research on Bloomberg (SPAK <go>),

Thomson First Call, Reuters Knowledge and Factset

Rating: ◄► Target price: ▲ EPS: ▲

How does our one year outlook change? Kajaria Ceramics (KJC) reported a revenue growth of 8% led by volume

growth of 6%. Higher than industry volume growth, re-iterates our view of

organised players gaining market share.

EBITDA margins came in at 21.4% vs. 16.8% last year. Combination of

higher proportion of polished/glazed vitrified tiles, lower outsourcing sales

and power & fuel costs aided gross margin expansion to the tune of 800

basis points. We expect KJC to deliver margins of 20-21% heading into

FY17-18 on improving product mix and lower outsourcing sales.

Imposition of Anti-dumping duty on Chinese vitrified tiles will aid market

share gains and stable pricing regime. Management expects ~40msm or

5% of industry volume to shift back to domestic producers.

KJC has incurred cumulative capex of ~Rs. 7bn in F14-FY16, increasing

its capacity by ~67% to ~69msm. Heading into FY17, KJC has planned

expansions to the tune of 5.7msm, as a result expect company to

generate free cash flows of Rs. 2.5bn over FY17-FY18E.

Kajaria Ceramics is India’s largest tile manufacturer in terms of installed

capacity and enjoys a strong brand image resulting in premium pricing

across most markets/products. We expect KJC to post a revenue and PAT

CAGR of 15% and 21% respectively over FY16E-FY18E. Given

impressive track record of market share gains, expansion in margins and

return ratios and healthy balance sheet, we ascribe valuation of 30x

FY18E EPS(three year average of 27x). Maintain BUY with a target price

of Rs. 1,390/share.

How does our 3 year Outlook change?

We remain positive on the demand prospects of tiles industry over a three

year outlook. Demand will be led by continued increase in urbanization,

nuclear families, and replacement demand. Increase in penetration,

especially in Rural India (~currently only 3.7% of rural households have

tiles as a flooring material) will further drive demand.

We see a structural shift in market share gain to organized players led by

(a) increasing brand awareness/perception; (b) strong distribution

network; and (c) better range of designs/sizes. As a result, we expect KJC

to be one of the biggest beneficiaries of this trend. We remain positive on

KJC’s long term prospects due to (1) strong brand image; (2) industry

leading growth will result in consistent market share gains; and (3) strong

balance sheet/return metrics.

Financial summary

Year Revenues

(Rs. mn)

EBITDA

(Rs. mn)

PAT

(Rs. mn) EPS P/E (X) RoE%

FY15 21,869 3,541 1,756 22.1 56.6 27.6%

FY16E 24,185 4,634 2,292 28.8 43.3 27.5%

FY17E 27,133 5,724 2,925 36.8 34.0 28.2%

FY18E 31,721 6,766 3,620 45.6 27.4 28.0%

Key estimate revision

FY17E FY18E

Old New Change Old New Change

Revenues 27,766 27,133 -2.3% 32,675 31,721 -2.9%

EBITDA 5,779 5,724 -1.0% 6,658 6,766 1.6%

Margin % 20.8% 21.1% 20.4% 21.3%

PAT 2,977 2,925 -1.8% 3,491 3,620 3.7%

PAT margin % 10.7% 10.8% 10.7% 11.4%

EPS 37.5 36.8 -1.8% 43.9 45.6 3.8%

All figures in Rs. mn, except EPS, which is in Rs.

05th Aug, 2016

Bloomberg KJC IN

Shares o/s 79mn

Market Cap Rs. 99bn

52-wk High-Low Rs. 1280-607

3m Avg. Daily Vol Rs. 123mn

Index BSE 500

1QFY17 Update

Promoters 47.2

Institutions 33.0

Public 20.8

(%) 1m 3m 12m

KJC 4 18 67

Sensex 2 11 -1

Page 2

Kajaria Ceramics CMP

Rs. 1,250

Target

Rs.1,390

Rating

BUY Quarterly Financial Statements

Volume growth trends

Revenue growth trends

EBITDA margin trends

Source: KJC Company data, Spark Capital Research

16% 16% 15% 16% 18% 17%

20% 19% 20% 21%

10%

15%

20%

25%

4Q

FY

14

1Q

FY

15

2Q

FY

15

3Q

FY

15

4Q

FY

15

1Q

FY

16

2Q

FY

16

3Q

FY

16

4Q

FY

16

1Q

FY

17

EBITDA margins %

20% 18% 16%

31%

12% 9%

13% 8%

12% 8%

0%

10%

20%

30%

40%

4Q

FY

14

1Q

FY

15

2Q

FY

15

3Q

FY

15

4Q

FY

15

1Q

FY

16

2Q

FY

16

3Q

FY

16

4Q

FY

16

1Q

FY

17

Revenue growth yoy %

16% 15%

8%

24%

6% 6% 12%

8% 12%

6%

0%

10%

20%

30%

4Q

FY

14

1Q

FY

15

2Q

FY

15

3Q

FY

15

4Q

FY

15

1Q

FY

16

2Q

FY

16

3Q

FY

16

4Q

FY

16

1Q

FY

17

% Volume growth

Financial results

Rs. mn \ Period 1QFY17 1QFY16 yoy % 4QFY16 qoq %

Revenues 5,930 5,479 8.2% 6,564 -9.7%

Raw material 1,525 1,377 10.7% 1,898 -19.6%

Purchased goods 378 701 -46.1% 505 -25.1%

Power & Fuel 1,073 1,124 -4.6% 1,209 -11.3%

Employee costs 712 584 21.9% 661 7.7%

Other expenditure 972 770 26.3% 963 0.8%

EBITDA 1,271 923 37.7% 1,328 -4.3%

Margins% 21.4% 16.8% 20.2%

Other income 17 14 27.4% 46 -62.7%

Interest 92 66 39.6% 100 -7.6%

Depreciation 199 165 20.9% 199 -0.1%

PBT 996 706 41.2% 1,074.40 -7.3%

PBT margins % 16.8% 12.9% 16.4%

Exceptionals - - -

Tax 351 219 388

Effective tax rate 35.2% 31.0% 36.1%

Share of minoritiy (12) (21) 1

PAT 634 466 36.2% 688 -7.8%

Margins 10.7% 8.5% 10.5%

EPS (Rs.) 8.0 5.9 36.2% 8.7 -7.8%

Page 3

Kajaria Ceramics CMP

Rs. 1,250

Target

Rs.1,390

Rating

BUY Financial Summary

Page 4

Kajaria Ceramics – Crystal Gazing

Expect KJC to

continue to outpace

industry growth.

This will be driven

by aggressive

capacity additions,

new product

launches, and

better product mix.

Further, we expect

KJC’s foray in to

new verticals

(Faucets,

Sanitaryware) will

succeed driven by

brand image and

dealer network.

Market share gain to

continue. Expect the

current peak margins

to sustain led by

product mix and

anti-dumping duty

Consistent

revenue

growth of 17%

Increasing

operational

efficiency

result in

Consistent

growth in

business to be

rewarded by

P/E multiple FY20E EPS Price target

25x 69.3 1,872

27x 69.3 2,080

Entry = Rs. 1250 @ 27x

FY18E

Cumulative Dividends of

Rs. 40

EPS CAGR of 25%, exit

multiple of 30x FY20E

TOTAL RETURN OF

1.7x

FY11 FY15 FY16E FY17E FY18E FY19E FY20E

Revenue 9,533 21,869 24,185 27,133 31,721 37,641 45,311

Ebitda 1,487 3,541 4,634 5,724 6,766 7,893 9,403

Margins 15.6% 16.2% 19.2% 21.1% 21.3% 21.0% 20.8%

PAT 607 1,756 2,292 2,925 3,620 4,528 5,509

Market

share % 11% 15%

FY11 FY15 FY16E FY17E FY18E FY19E FY20E

RoE 29.5% 27.6% 27.5% 28.2% 28.0% 28.0% 27.1%

Leverage 1.28 0.31 0.30 0.22 0.12 -0.02 -0.12

Working

capital days 28 30 36 36 35 31 31

CFO (Rs nm) 1,304 2,098 3,037 3,771 4,345 5,552 6,098

Expect the stretched

(FY16) working

capital days to

continue. However,

in case of strong

pick up in demand,

working capital can

come down

Expect multiple to re-

rate

FY11-16E CAGR %

Revenue EBITDA PAT Price

21% 26% 31% 65%

Trading History – % of times stock traded

Fwd PE

range

<16x 16x-20x 20x-24x 24x-28x >28x

16% 9% 14% 47% 14%

Page 5

Kajaria Ceramics CMP

Rs. 1,250

Target

Rs.1,390

Rating

BUY Spark Disclaimer

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registration been cancelled by SEBI at any point of time.

Absolute Rating Interpretation

BUY Stock expected to provide positive returns of >15% over a 1-year horizon

ADD Stock expected to provide positive returns of >5% – <15% over a 1-year horizon

REDUCE Stock expected to provide returns of <5% – -10% over a 1-year horizon

SELL Stock expected to fall >10% over a 1-year horizon

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0

200

400

600

800

1000

1200

1400

Aug-13 Feb-14 Aug-14 Jan-15 Jul-15 Jan-16 Jul-16

Rs.

Price Target

Kajaria Ceramics Ltd – 3 Year Price and Rating History Report Date Price Target Reco.

09/May/16 1,035 1,200 Buy

22/Mar/16 945 1,125 BUY

02/Feb/16 965 1,125 Buy

23/Oct/15 880 910 Add

22/Jul/15 780 795 Add

06/May/15 790 805 Add

14/Jan/15 635 725 Buy

05/Jan/15 615 705 Buy

27/Oct/14 600 710 Buy

22/Sep/14 625 750 Buy

01/Aug/14 630 715 Buy

09/May/14 490 560 Buy

10/Apr/14 375 470 Buy

Page 6

Kajaria Ceramics CMP

Rs. 1,250

Target

Rs.1,390

Rating

BUY Disclaimer (Cont’d)

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