Kajaria Ceramics (KAJCER) 596

Transcription

1 Result Update Rating matrix Rating : Buy Target : 695 Target Period : 12 months Potential Upside : 17% What s changed? Target Unchanged EPS FY15E Changed from 2.2 to 2.3 EPS FY16E Changed from 27.6 to 27.5 Rating Unchanged Quarterly performance Q2FY15 Q2FY14 YoY (%) Q1FY14 QoQ (%) Revenue EBITDA EBITDA (%) bps bps PAT Key financials Crore FY13 FY14 FY15E FY16E Net Sales 1, ,84. 2,27.6 2,919.1 EBITDA Net Profit EPS ( ) Valuation summary FY13 FY14 FY15E FY16E P/E Target P/E EV / EBITDA P/BV RoNW (%) RoCE (%) Stock data Particular Amount Market Capitalization Crore Total Debt (FY14) Crore Cash (FY14) 6.2 Crore EV Crore 52 week H/L ( ) 686 / 228 Equity capital 15.1 Crore Face value 2 Price performance 1M 3M 6M 12M Kajaria Ceramics Somany Ceramics Lt Cera Sanitaryware Lt Research Analyst Deepak Purswani, CFA deepak,purswani@icicisecurities.com Nikunj Gala nikunj.gala@icicisecurities.com October 28, 214 Kajaria Ceramics (KAJCER) 596 Capacity expansion, strong b/s to fuel growth Kajaria Ceramics (Kajaria) reported revenue of crore (up 13.1%YoY) vs. our expectation of crore. This was led by volume growth of 7.1% YoY to 14.3 million square metre (msm) in Q2FY15 while the realisation at 376 per square metre (sm) was slightly higher than our expectation of 372 per sm The EBITDA margin came in at 15.% (improved 88 bps YoY) vs. our estimate of 15.4%. It reported a PAT of 39.8 crore (up 47.7% YoY) vs. our estimate of 38.6 crore The working capital (WC) days improved further to 22 days in Q2FY15 vs. 24 days in Q1FY15 while gross debt reduced by 2 crore sequentially to 27 crore (debt-equity:.3x) Indian tiles industry offers steady growth prospects for Kajaria With increasing disposable income and urbanisation, India has emerged as one of the fastest growing tiles markets globally (14.% CAGR in CY8-12). With per capita consumption at.54 sm/person in comparison to 3-4 sm/person in peer countries, the prospects for India are huge in catching up with its global counterparts. Also, with the government s initiatives like Swachh Bharat Abhiyan and Housing for all by 222, we believe Kajaria, being the leading player in the industry, is likely to reap the benefits either directly or indirectly. Morbi development structurally positive for organised players In November, 213, the Gujarat Pollution Control Board (GPCB) issued a closure notice to Morbi (hub for unorganised players) based ceramic units that run on coal gas furnace. This development is structurally positive for organised players like Kajaria as i) the organised pie will grow faster in the absence of cost advantage enjoyed by unorganised players due to coal gas furnace and ii) it has set the tone for consolidation in the industry. Planned capacity expansion to drive future growth Currently, Kajaria s cumulative capacity stands at 54.1 msm. Kajaria is looking to augment its capacity by 13 msm to 67.1 msm by June, 215. This will be achieved through: i) acquisition of a 51% stake in Taurus Tiles Pvt Ltd (5 msm annual capacity of polished vitrified tiles) ii) greenfield facility in Rajasthan (5 msm of polished vitrified tiles) and iii) brownfield facility at its existing location in Rajasthan (3 msm capacity of ceramic tiles). To augment this capacity, it needs to spend ~ 21 crore over the next 12 months. Consequently, its topline and bottomline are expected to grow at a CAGR of 26.1% and 32.6%, respectively, during FY14-16E. Strong balance sheet Kajaria has come a long way in the last five years in terms of reducing its leverage from a menacing 2.1x in FY8 to.3x currently. The sharp improvement in debt to equity has been possible through an improvement in net working capital, which was at 132 days in FY8 to 22 days currently. The healthy balance sheet also lends us comfort in terms of meeting the planned capex of ~ 21 crore over the next 12 months. Available at.7x PEG; positive on structural growth story We remain positive on Kajaria given the sturdy growth in the industry, favourable structural shift, its better margin and return ratio profile coupled with a strong balance sheet. Hence, we have a BUY recommendation on the stock with a target price of 695 (valuing it at.8x PEG, implying P/E of 25x FY16E). Overall, we remain optimistic on Kajaria s business prospects in the organised space and believe the robust growth trajectory will continue. ICICI Securities Ltd Retail Equity Research

2 Variance analysis Q2FY15 Q2FY15E Q2FY14 YoY (%) Q1FY14 QoQ (%) Comments Net Sales Realisation at 376/ sq metre slightly higher than our expectation while volumes grew 7.1% on a YoY basis Other Income Net Purchase of Stock in Trade Cost of Materials Consumed Staff cost Power & Fuel cost Other expenditure EBITDA EBITDA Margin (%) bps bps Increase in margin on YoY basis was mainly due to increase share of high value vitrified tiles to overall contribution Depreciation Interest PBT Taxes PAT The bottomline showed stellar growth again due to better revenue growth and EBITDA margin Key Metrics Sales Volume (in MSM) The volueme grew at 7.1% YoY Change in estimates FY15E FY16E ( Crore) Old New % Change Old New % Change Comments Revenue 2, , , , EBITDA EBITDA Margin (%) bps bps PAT EPS ( ) We marginally tweak estimates to incorporate Q2FY15 results Assumptions Current Earlier Comments Volume in MSM FY13 FY14 FY15E FY16E FY15E FY16E Production With the better visibility on capacity addition, we now expect Kajaria's production to grow at 63.7 msm in FY16E from 4.4 msm Own JV Sales Own JV Import/Outsourced ICICI Securities Ltd Retail Equity Research Page 2

3 Going ahead, Kajaria is looking to augment its capacity by ~5% over the next two years to 67.1 msm. For that, it has acquired a 51% stake in Taurus Tiles Pvt Ltd, which is in the process of setting up a plant with 5 msm annual capacity of polished vitrified tiles. Additionally, it plans to set up a greenfield facility in Rajasthan for production of 5 msm of polished vitrified tiles. Also, the company has decided to put up a brownfield facility at its existing location in Rajasthan for production of 3 msm capacity of ceramic wall tiles Company Analysis Capacity addition through organic and inorganic route Kajaria has nearly doubled its capacity from 23.4 msm in FY1 to 45.2 msm in FY14. This was driven mainly through the acquisition of a stake in Cosa, Soriso, Vennar and Jaxx and expansion/conversion of existing facilities. During Q2FY15, the production capacity of Kajaria s subsidiary companies were enhanced viz., Jaxx by 4.5 msm (from 5.7 msm per annum to 1.2 msm per annum) and Cosa by 3 msm (from 2.7 msm to 5.7 msm). With this incremental addition of 7.5 msm in Q2FY15 its capacity has reached 54.1 msm. Furthermore, Kajaria is looking to augment its capacity by ~5% over the next two years to 67.1 msm. For that, it has acquired a 51% stake in Taurus Tiles Pvt Ltd, which is in the process of setting up a plant with 5 msm annual capacity of polished vitrified tiles. The production is expected to commence by Q4FY15. Additionally, it plans to set up a greenfield facility in Rajasthan for production of 5 msm of polished vitrified tiles. The project is expected to be completed by June 215. Also, the company has decided to put up a brownfield facility at its existing location in Rajasthan for production of 3 msm capacity of ceramic wall tiles. Hence, we highlight that we have built in the additional 13 msm of capacity over the next two years, which would lead to cumulative capacity of 67.1 msm by the end of FY16. Exhibit 1: Capacity nearly doubles from FY11 to FY14 (MSM) Commissioned the 6 msm tile units (polished and glazed vitrified) at Gailpur & conversion of a part of the ceramic tile capacity to vitrified tiles (2.6 msm) Jaxx Acquisition msm & Vennar expansion 2.3 msm Cosa msm & Soriso expansion 2.3 msm FY1 FY11 FY12 FY13 FY14 FY15 FY16 Ceramic Tiles Acquisition by Jaxx msm & conversion leading to incremental 1.4 msm Vitrified Tiles Cosa expansion 3 msm,jaxx expansion 4.5 msm, new greenfield capacity 5 msm, brownfield capacity 5 msm and Taurus acquisition 5 msm ICICI Securities Ltd Retail Equity Research Page 3

4 Sales volume to be supported by incremental capacity, going ahead Over the last four years, the key driver of sales volume (19.7% CAGR over FY1-14) for Kajaria has been the capacity expansion mainly through JV (Jaxx, Cosa, Soriso acquisition and their expansion). Going ahead, we expect sales volumes of Kajaria to be supported by incremental capacity addition in the above-mentioned expansion and JVs. Consequently, we expect the sales volume of Kajaria to rise to 75.1 msm in FY16 vs. 52 msm in FY14. Exhibit 2: Quarterly sales volume trend (MSM) Q2 FY13 Q3 FY13 Q4 FY13 Q1 FY14 Q2 FY14 Q3 FY Q4 FY14 Q1 FY15 Q2 FY15 Exhibit 3: Sales volume trend (MSM) FY8 FY9 FY1 FY11 FY12 FY13 FY14 FY15E FY16E Own JV Import/Outsourced Own JV Import/Outsourced Revenues to grow at 26.1% CAGR during FY14-16E Kajaria s revenues have grown at a strong CAGR of 29.6% in FY8-14, driven mainly by its expansion of capacity (grew from 21 msm in FY8 to 45.2 msm in FY14) and increasing mix towards high value vitrified tiles. We expect net sales to witness a robust 26.1% CAGR to 2924 crore during FY14-16E driven by above-mentioned capacity expansion. We expect sales volumes to grow at 2.1% CAGR during FY14-16E to 75.1 msm. Similarly, the realisation is expected to grow at 4.9% CAGR in FY14-16E to 39/sq metre aided mainly by the increasing share of higher value vitrified sales. We expect net sales to witness a robust 26.1% CAGR to 2924 crore during FY14-16E driven by capacity expansion. We expect sales volumes to grow at 2.1% CAGR during FY14-16E to 75.1 msm. Similarly, the realisation is expected to grow at 4.9% CAGR in FY14-16E to 39/sq metre aided mainly by the increasing share of higher value vitrified sales Exhibit 4: Revenue to continue its growth momentum ( crore) ( ) 1 FY8 FY9 FY1 FY11 FY12 FY13 FY14 FY15E FY16E 1 Net Sales Realisation/sqm (RHS) ICICI Securities Ltd Retail Equity Research Page 4

5 We expect margins to remain at 15.5% in FY16E. Consequently, the EBITDA is also expected to grow at 27.% CAGR in the same period while EBITDA/sq metre is expected to grow at 65.4% CAGR to 6 in FY16E Exhibit 5: EBITDA/sq metre trend Margins to remain at 15.5% in FY16 Kajaria has been one of the very few players that has maintained its margins in the % range driven by, namely, its superior share in high value vitrified tiles and the relatively lower increase in its fuel cost on account of its long term contract with Gail for its Gailpur plant for twothird its capacity. Hence, we expect margins to remain at 15.5% in FY16E. Consequently, the EBITDA is also expected to grow at 27.% CAGR during the same period while EBITDA/sq metre is expected to grow at 5.4% CAGR to 6 in FY16E. Exhibit 6: EBITDA and EBITDA margin trend ( ) ( crore) (%) FY12 FY13 FY14E FY15E FY16E FY8 FY9 FY1 FY11 FY12 FY13 FY14 FY15E FY16E EBITDA/sqm EBITDA EBITDA Margin (RHS) PAT to grow at 32.6% CAGR during FY14-16E Kajaria has witnessed strong PAT growth of 42.2% over FY8-14 driven by its robust topline growth and muted interest expenses due to stagnant debt levels. We expect the bottomline to record a healthy CAGR of 32.6% in FY14-16E aided mainly by the strong topline show and stable margins. We expect the bottomline to post a healthy CAGR of 32.6% Exhibit 7: PAT growth trend in FY14-16E aided mainly by the strong topline show and stable margins % CAGR ( crore) % CAGR FY8 FY9 FY1 FY11 FY12 FY13 FY14 FY15E FY16E ICICI Securities Ltd Retail Equity Research Page 5

6 We expect the debt-equity to remain stable at.4x in FY15 Exhibit 8: Quarterly net debt to equity trend Debt-equity to remain stable at.4x in FY15E... The company currently has a debt to equity of.4x, which is much below debt equity levels of 2.1x in FY8. The sharp improvement in net debt to equity was possible through the improvement in net working capital from 132 days in FY8 to 22 days in Q2FY15. We expect the debt-equity to remain stable at.4x in FY15 as the capacity expansion would be funded through strong internal accruals. Exhibit 9: Net debt to equity trend (x) (x) Q2 FY13 Q3 FY13 Q4 FY13 Q1 FY14 Q2 FY14 Q3 FY14 Q4 FY14 Q1 FY15 Q2 FY15.5. FY8 FY9 FY1 FY11 FY12 FY FY14 FY15E.2 FY16E Healthy return ratios There has been a sharp improvement in Kajaria s return ratios during FY8-14 on the back of its strong bottomline show. We highlight that given the equity dilution (58.8 lakh shares issued to the WestBridge Crossover fund over FY14 and FY15), we expect return ratios to be slightly lower in FY15. However, return ratios are expected to return to healthy levels (RoE and RoCE of 25.3% and 31.8%, respectively, in FY16E) since the funds raised through equity dilution would be deployed for capex, which should lead to healthy bottomline growth, going ahead. The return ratios are expected to return to healthy levels Exhibit 1: Return on equity and return on capital employed trend (RoE and RoCE of 25.3% and 31.8%, respectively, in FY16E) since the funds raised through equity dilution would be deployed for capex, which should lead to healthy bottomline growth, going ahead. (%) (%) FY8 FY9 FY1 FY11 FY12 FY13 FY14 FY15E FY16E ROE ROCE (RHS) ICICI Securities Ltd Retail Equity Research Page 6

7 Conference call highlights The industry is expected to grow 13-14% while the management is very confident of beating the industry growth by 5-6% to 18-2% in the next two years Kajaria aims to reach a 3-crore topline by FY16. To achieve this, it plans to expand its current capacity of 54.1 msm to 67.1 msm in the next two years. The following proposals are in the pipeline to achieve that: Acquisition of a 51% stake in Taurus Tiles, which is in the process of setting up a plant with 5 msm annual capacity of polished vitrified tiles. The production is expected to commence by Q4FY15 Setting up a greenfield facility in Rajasthan for production of 5 msm annual capacity of polished vitrified tiles Setting up a brownfield facility at its existing location in Rajasthan for production of 3 msm annual capacity of ceramic wall tiles To complete the dealer s basket of offering, the company has set up new venture Kajaria Bathware (P) Ltd (KBL), which offers: a) Sanitaryware: Kajaria Sanitaryware Pvt Ltd, in which KBL holds a majority shares, has started the production of sanitary ware on April 6, 214. However, full production is expected in Q4FY15 b) Faucet: The company has initiated putting up a faucet plant of 1.5 million pieces facility at Gailpur (Rajasthan) at a cost of 5 crore. The civil work is in progress. The project is expected to commence operations in Q1FY16 Kajaria is aggressively looking to spend on advertising and promotional activities. It plans to spend ~ 6-65 crore in FY15E and more in FY16E. Also, it is looking to add ~1-15 dealers every year The management is expecting EBITDA margins to remain at % in the next few quarters. The implementation of GST and a significant reduction in gas price can lead to an expansion in margins by ~2 bps, going ahead ICICI Securities Ltd Retail Equity Research Page 7

8 Outlook and valuation Kajaria has exhibited impressive revenue and earnings growth of 29.6% and 52.6%, respectively, over FY8-14 led by its capacity expansion and by moving to the high value vitrified tiles. The RoCE and RoE also jumped to ~29.2% and 23.5%, respectively, in FY14 vs. 11.8% and 9.7%, respectively, in FY8 while the leverage has reduced sharply to.3x currently, from 2.1x in FY8. Going ahead, we expect Kajaria to remain the beneficiary of the rising organised market pie given the preference for branded products as well as consolidation in the form of JV with local players. As a result, Kajaria is expected to witness 26.1% and 32.6% CAGR in topline and earnings, respectively, over FY14-16E. Going ahead, we remain positive on Kajaria given the sturdy growth in the industry, favourable shift towards organised players post the Morbi fuel development, its better margin and return ratio profile coupled with a healthy balance sheet. Hence, we have a BUY recommendation on the stock to with a revised target price of 695 (valuing it at.8x PEG, implying P/E of 25x FY16E). Overall, we remain optimistic on Kajaria s business prospects in the organised space and believe the robust growth trajectory will continue. Exhibit 11: Valuation Sales Growth EPS Growth PE EV/EBITDA RoNW RoCE ( cr) (%) ( ) (%) (x) (x) (%) (%) FY FY FY15E FY16E ICICI Securities Ltd Retail Equity Research Page 8

9 Company snapshot 9 8 Target Price Jan-9 Apr-9 Jul-9 Oct-9 Jan-1 Apr-1 Jul-1 Oct-1 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 Oct-15 Source: Bloomberg, Company, ICICIdirect.com Research Key events Date Event Dec-9 Government of India imposes anti dumping duty of 137 per sq metre on ceramic glazed tiles imported from China May-1 Company enters into agreement with Gail for supplying RLNG to its Gailpur plant, resulting in substantial savings in fuel cost Jan-11 Forays into sanitaryware & bath fittings segment by tying up with a leading European brand VitrA Feb-11 Acquires a 51% stake in Soriso Ceramic Pvt. Ltd in Gujarat for 5.62 crore having a annual capacity of 2.3 msm Apr-12 Acquires 51% stake in Vennar Ceramics Ltd, based in Vijayawada, Andhra Pradesh with an annual capacity of 2.3 msm Feb-12 Acquires 51% stake in Jaxx Vitrified Pvt Ltd, based in Morbi, Gujarat with an annual capacity of 3.1 msm Oct-12 Acquires 51% stake in Cosa Ceramics Pvt Ltd, based in Morbi, Gujarat, with an annual production capacity of 2.7 msm Q2FY14 Outlines capex of 45 crore over the next two years Nov-13 Equity fund raising from WestBridge Crossover Fund aggregating 15 crore (equity and warrant) Nov-13 Production shutdown by Morbi tile manufacturers Dec-13 Production strike in Morbi called off Top 1 Shareholders Rank Name Latest Filing Date % O/S Position (m) Change (m) 1 Kajaria Exports, Ltd. 8-Sep Kajaria Securities Pvt. Ltd. 31-Mar HSBC Global Asset Management (India) Private Limited 3-Jun Cheri Ceramics Pvt. Ltd. 3-Jun Pearl Tile Marketing Pvt. Ltd. 3-Jun UBS Global Asset Management (Singapore) Ltd. 3-Jun Norges Bank Investment Management (NBIM) 3-Jun HDFC Asset Management Co., Ltd. 3-Jun Kajaria (Ashok Kumar) 3-Jun WestBridge Advisors Pvt. Ltd. 3-Jun Source: Reuters, ICICIdirect.com Research Shareholding Pattern (in %) Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 Promoter FII DII Others Recent Activity Buys Sells Investor name Value Shares Investor name Value Shares Norges Bank Investment Management (NBIM) 5.74m.65m HSBC Global Asset Management (India) Private Limited -8.22m -.93m William Blair & Company, L.L.C. 5.m.57m Citigroup Inc -4.74m -.54m JPMorgan Asset Management U.K. Limited 4.69m.53m Wasatch Advisors, Inc. -3.4m -.34m UBS Global Asset Management (Singapore) Ltd. 1.68m.17m Canara Robeco Asset Management Company Ltd. -.87m -.16m Tata Asset Management Limited 1.48m.16m Franklin Templeton Asset Management (India) Pvt. Ltd. -.61m -.9m Source: Reuters, ICICIdirect.com Research ICICI Securities Ltd Retail Equity Research Page 9

10 Financial summary Profit and loss statement Crore ( Crore) FY13 FY14 FY15E FY16E Net Sales 1, ,84. 2, ,924.3 Other Income Total Revenue 1, , , ,931.4 Raw Material Expenses Employee Expenses Net Purchases of Stock in Trade Total Operating Expenditure 1, , , ,471.3 EBITDA Interest PBDT Depreciation PBT Total Tax PAT before MI Minority Interest PAT EPS - Diluted ( ) EPS ( ) Cash flow statement Crore ( Crore) FY13 FY14 FY15E FY16E Profit after Tax Depreciation Interest Cash Flow before wc changes Net Increase in Current Assets (53.8) (23.1) (14.7) (154.9) Net Increase in Current Liabilities Net CF from operating activities Deferred Tax Liability (Purchase)/Sale of Fixed Assets (149.1) (151.3) (24.) (119.5) (Purchase)/Sale of Investments Net CF from Investing activities (127.6) (132.3) (23.8) (16.9) Inc / (Dec) in Equity Capital Dividend (25.7) (31.) (4.2) (54.6) Interest (45.4) (4.8) (39.4) (46.) Other Adjustments in Networth Inc / (Dec) in Secured Loans 15.9 (65.4) 6. - Inc / (Dec) in Unsecured Loans 26.1 (18.4) - - Net CF from Financing activities (27.9) (8.1) 3. (1.6) Net Cash flow (1.6) Opening Cash Closing Cash/ Cash Equivalent Balance sheet Crore ( Crore) FY13 FY14 FY15E FY16E Equity Capital Reserve and Surplus Total Shareholders funds Minority Interest Total Debt Deferred Tax Liability Total Liabilities , ,294.2 Gross Block ,23.5 1, ,438.5 Less Acc. Dep Net Block Capital WIP Total Fixed Assets Investments Inventory Debtors Loans and Advances Cash Other Current Assets Total Current Assets Creditors Other Current Liabilities Provisions Net Current Assets Total Assets , ,294.2 Key ratios FY13 FY14 FY15E FY16E Per Share Data ( ) EPS (Diluted) Cash EPS BV Operating profit per share Operating Ratios (%) EBITDA / Total Operating Income PAT / Total Operating Income Return Ratios (%) RoE RoCE RoIC Valuation Ratios (x) EV / EBITDA P/E EV / Net Sales Sales / Equity Market Cap / Sales Price to Book Value Turnover Ratios (%) Asset turnover Debtors Turnover Ratio Creditors Turnover Ratio Solvency Ratios (x) Net Debt / Equity Current Ratio Quick Ratio ICICI Securities Ltd Retail Equity Research Page 1

11 RATING RATIONALE ICICIdirect.com endeavours to provide objective opinions and recommendations. ICICIdirect.com assigns ratings to its stocks according to their notional target price vs. current market price and then categorises them as Strong Buy, Buy, Hold and Sell. The performance horizon is two years unless specified and the notional target price is defined as the analysts' valuation for a stock. Strong Buy: >15%/2% for large caps/midcaps, respectively, with high conviction; Buy: >1%/15% for large caps/midcaps, respectively; Hold: Up to +/-1%; Sell: -1% or more; Pankaj Pandey Head Research pankaj.pandey@icicisecurities.com ICICIdirect.com Research Desk, ICICI Securities Limited, 1st Floor, Akruti Trade Centre, Road No 7, MIDC, Andheri (East) Mumbai 4 93 research@icicidirect.com ANALYST CERTIFICATION We /I, Deepak Purswani, CFA, PGDM (Finance); Nikunj Gala, MBA (CM) research analysts, authors and the names subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect our personal views about any and all of the subject issuer(s) or securities. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report. Analysts aren't registered as research analysts by FINRA and might not be an associated person of the ICICI Securities Inc. 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