We are positive on the business prospects of Kajaria Ceramics due to its leadership position in the ceramic
tiles Industry backed by complete range of products, superior design capability, high brand recall and a loyal
and strong dealer network. Our interactions with various manufacturers and intermediaries confirm our belief
in Kajaria.
The demand drivers of the tile Industry continue to be robust and we expect industry growth of 15% CAGR over
the next few years. Chinese imports are no longer a threat except in small pockets, as anti dumping duty and
other factors have made them unattractive.
We expect the top line and bottom line to grow at a CAGR of 22% & 30% respectively over the next couple of
year while the ROE is expected to remain strong at 31.8% (FY12 at 31.5%). At CMP of ` 174, the stock trades at
12x & 9.3x its FY13E & FY14E earnings of ` 14.5 & ` 18.7 respectively. We recommend Buy with a target price of
` 224 (12x FY14E EPS).
Leading player with comprehensive Product range
Kajaria Ceramics (KCL) is the second largest player in tiles industry in India
in terms of revenues. It has over the years developed a comprehensive range
of products including ceramic wall & floor, vitrified (soluble salt and double
charge) & high end designer tiles (ceramic digital & Digital Glazed Vitrified
Tiles (DGVT)). The tiles are sold in varying sizes and starting from 20x20cm
(8"x8") to 60x120cm (24"x48"). It is thus present across the entire price and
size range (value chain) ranging from affordable tiles to the upper end glaze
vitrified tiles (GVT). These are either manufactured in-house, in joint ventures,
third party outsourced or imported from overseas. Over the last 3 years, the
share of value added products has considerably increased.
Kajaria focuses on innovation in designs and concepts. We believe they
introduce new designs and variants almost every day and at any given point
in time, have more variety than any other player, making it a unique selling
point. For example, they launched “Power Line Series’ which is a concept of
matching of floor with wall tiles, ‘Solitaire Series’ in Polished Vitrified Tile
(PVT) in larger formats with natural stone finishes, etc. It is soon launching
‘Orion’ series in Vitrified Tiles (VT) & new concept in VT called microcrystal
tiles. The senior management visits Spain and Italy periodically to keep
abreast with the latest fashions.
KCL has very strong presence in North (manufacturing base) which contributed
42% to its revenues while South zone contributed 29% in FY12. On the
other hand, West & East zone comprised 17% & 12% of the overall revenues
respectively.
High brand recall
Kajaria has focused in building its brand image and more so over the last
seven years. it undertook a massive advertisement campaign in TV channels
– Star, Zee, Sony & CNBC in 2004-05 & 2005-06 to create a mind recall for
the Brand. KCL also introduced ‘Organized display product protocol’ at dealer
showrooms in 2005-06 to showcase the entire range and concepts. Apart
from this, participating in exhibitions, advertising in trade magazines and
hoardings is a continuous process.
Kajaria has developed category brands such as ‘Kajaria Vitro’ for their own
manufactured vitrified tiles, ‘Kajaria Eternity’ for GVT tiles, ‘Kajaria Eternity
HD’ for DGVT tiles ‘Kerrogres’ for tiles imported from China & ‘Kajaria World’
for imported high end tile imported from Spain and Italy.
We believe that Kajaria has been able to successfully create a PULL for its
products and currently enjoys the highest brand equity in the industry with all
three requisite pillars – quality, innovation (in designs & launching new
categories) and availability coming to the fore. Rightly so, it has been conferred
with the ‘SUPERBRAND’ status for the sixth year in a row. Superbrands is
an independent organization evaluating brands in many countries based upon
a method which considers feedback from consumers as well as set of experts.
Trend setters in pricing: With the growth of the brand has also come the
pricing power. Apart from commanding a price premium as compared to any
other brands, they are able to pass on the input cost pressures to a certain
extent. They have been able to maintain their EBIDTA margins over the last
three years despite increase in gas and other costs while their peers have
seen the margin declines in the same period.
Strong and Loyal Dealer Network
Kajaria has a strong dealer network currently comprising 825 dealers which
has grown from 600 dealers in 2002 and 700 in 2011 and are spread across
India. The strategy of adding dealers in a relatively slow manner since 2002
compared to peers has actually had a positive impact. The loyalty of the
dealers has increased as they have been allowed to grow in size along with
the company as they are able to maintain their territory. The distribution network
is distributed in such a way that it leads to lower cannabalisation thereby
limiting undercutting and thus does not lead to the dilution of the Brand.
Kajaria has the strongest distribution reach in metros & major cities. Only
over the last three years, has Kajaria started to focus on Tier II & III cities and
we believe that there are still many untapped potential markets where Kajaria
can extend its distribution reach.
The company follows transparent and consistent policies while dealing with
its dealers. They are also prompt in their payment, which adds to the loyalty
of dealers towards the company. Our channel checks suggest that the dealers
are continuously kept motivated through attractive promotion schemes apart
from being ensured of adequate stock levels or quick availability of products
across the range and designs which is an advantage over competitors.
This has resulted in Kajaria building up a financially strong set of dealers
thereby keeping working capital cycle largely under check. The Dealers’ size
along with their strong retail presence ensures better realizations and margins
for the company as compared to its peers.
Demand Drivers for Tiles
The population of India with increasing higher disposable incomes and
discretionary spend augurs well for the company. It has been noticed that the
increasing aspirations levels is leading to scaling up the value chain and there
is a growing appetite for new styles & aesthetics. India seems to be moving
on from being just a ‘Value for Money’ Market.
Tiles have replaced natural stone and old mosaic tiles due to ease in laying,
competitive costs, varying sizes & attractive designs. Like paints but with a
more time lag, there is also a shift being noticed to replace the old set of tiles
with newer ceramic (digital) & vitrified tiles such as (Double charged and digital
glaze). Further the replacement cycle has considerably shortened (once or
twice in lifetime earlier to once in ten years due to value addition.
The shift towards nuclear families from joint families is also adding to the need
for housing apart from increase in disposable incomes. In addition to housing,
the increase in construction of commercial spaces (like malls, offices, airports,
schools, hospitals, hotels, etc) has further boosted the demand for vitrified
tiles in particular.
New tiling applications which are opening up include exterior cladding, interior
walls (apart from Bathroom and Kitchen) & Paver tiles
With the demand drivers continuing to remain robust; we expect the tiles
industry to grow at CAGR of 15% (reflecting the demand pattern of other
building material segments like paints, PVC pipes, construction chemicals,
etc) for the next five years.
Threat from Chinese imports no more
Imports from China no longer pose a threat to the industry & currently accounts
for just 7-10% of sales in India. However it may be noted that the imports from
China would continue to remain due to it being more economical (over Morbi)
to import for feeding Southern India markets. Three to four years ago, imports
accounted for nearly 20%, but have gradually come down due to factors given
below.
Imposition of anti-dumping duty for imports from China in FY09 and reduction
of export subsidies by the Chinese Govt (thrust more on domestic
consumption).
The lowering of capital cost in India now with machines being imported from
China instead of Italy (cost is now 50% lower than what it was three years
back) and the increase in production costs in China due to lower natural gas
availability & higher labour cost. Needless to say that recent rupee depreciation
makes import from China further unviable
Quality of tiles, Chinese requirement for advance payment & after sales support
remains an issue except for few players from China who cater to the very highend
(VT – DC & GVT in particular).
With quality of Morbi players improving considerably, sourcing from Morbi has
become a more viable option.
Other Challenges & Threats.
Due to the fairly large number of players increasing capacity for the same
type of tile, the technology tends to becomes obsolete fairly quickly. The
realisations and margins also tend to come down over a period of time.
Therefore the focus by players like Kajaria is to always remain ahead of the
curve and go up the value chain where the realizations and margins are better.
Innovation in products or marketing strategies is the key as well as a challenge.
Forming Joint Ventures and dealing with third party sourcing is becoming a
trend with the large players as capacity become available quickly and the
overheads are lower. However maintaining good relations with the JV partners
and third party sourcing players in particular will always be a challenge.
Although quality, service & advance payments remain an issue, changes in
Policy in China could mean threat (particularly in few products). This may
however be restricted to the southern markets due to proximity to China.
Natural Gas continues to be most preferred source of fuel but availability and
prices are a concern as it forms a major portion of the costs (19% of overall
costs in FY12). Kajaria has almost 90% of his production facilities running on
Natural Gas and as long as the demand remains robust, passing on the
additional cost should not be a problem.
Channel checks
Summary of our key takeaways from our interactions:
The industry is likely to grow at a CAGR of 15% in value terms over the next
few years and the top brands would continue to outpace the industry in general.
The shift in trend towards value added tiles is likely to accelerate not only in
metro cities but also in tier II & tier III cities going forward and as a result
would incrementally benefit the top brands.
Our visits to large multiple brand outlets suggest that Kajaria has a clear
advantage over the other top brands by a fair margin in terms of all the key
parameters viz. quality, stock availability, value addition, innovation, brand
equity, pricing power, business policies, marketing strength (policies & team)
et al.
Financials
Kajaria has witnessed a revenue & EBIDTA CAGR of 25% & 30% respectively
over the last three years (FY09-12). However PAT has grown at a CAGR of
109% largely backed by better management of working capital, rising cash
flows and consequent reduction in debt (Debt to equity has improved
significantly from 2.01x in FY09 to 0.96x in FY12). ROE too has increased
significantly from 5.6% in FY09 to 31.5% in FY12 respectively.
EBIDTA margins on the other hand have moved up by 140 bps from 14.3% in
FY09 to 15.7% in FY12 despite the gas prices moving up approximately 85%
over the same period. Moving up the value chain and passing on to a certain
extent has helped company maintain its margins.
It may be noted that the company has never diluted its share capital over the
last 16 years (since 1996) and has maintained its dividend payout ratio
exceeding 20% in 12 out of last 15 years (never skipped dividend since 1992).
We expect the company to report revenues & PAT CAGR of 22% & 30% over
the next two years with ROE expected to remain strong at 31.6%. However
we expect the margins to soften from 15.7% in FY12 to 15.1% in FY14E as
the company would be focusing more on outsourcing model. At CMP of ` 174,
the stock trades at 12.0x & 9.3x its FY13E & FY14E earnings of ` 14.5 & `
18.7 respectively. We value Kajaria at 12x FY14E earnings thus arriving at a
target price of ` 224, an upside potential of 29% from the current levels.
Tile Industry in India
Currently the Indian tiles industry is estimated to be worth ~ ` 17bn and grew at
a CAGR of 18% over the last 5 years. The top 10 players which include so called
unorganized players account for 45% of the industry. The organized industry
currently accounts for 50% of the industry while as the players in Morbi (Tile
manufacturer’s hub) players account for nearly 70% of the total production volumes
& 50% of the total sales.
Evolution of India Tiles Industry
Phase II: 1997 – 2002
The reduction in excise duty structure (from 55% in 1994 to 25% in 1998 & further
to 16% in 2001) in ceramic tiles resulted in strong replacement demand (replacing
mosaic tiles as the pricing differential between the both considerably reduced). In
March 2000, the Government lifted the quantitative restrictions on imports of tiles
which marked the entry/import of vitrified tiles into India. The ceramic industry
(ceramic wall, floor & vitrified floor) as a result grew at 18% CAGR from 1997 to
2002.
Phase III: 2002 – 2007
However with the flood of imports from China, the prices of ceramic & vitrified tiles
started decelerating resulting in lower margins & profitability of the domestic
players. The industry grew stronger in volumes (more than 18%) but in value
terms grew by 14% during the period. From 2006, the domestic industry got a
strong push from better availability of natural gas which reduced their cost of
production. Domestic players started concentrating more on the larger format
tiles (value addition) & in-house manufacturing of vitrified tiles (hitherto Imported)
which revolutionized the industry. It may be noted that the mosaic tiles almost
lost its relevance with the Government imposing 8% excise duty in 2006 and
further increasing it to 16% in 2007.
Phase IV: 2007 – 2012
Domestic manufacturers also got a big fillip from lower capital costs of equipments
which were now imported from China instead of Italy bringing the cost down by
almost 50%. This along with increasing natural gas availability resulted in domestic
industry becoming far more competitive compared to Chinese imports. The
imposition of anti-dumping duty (` 137 per sq. mtr. for ceramic wall & floor tiles &
` 155 per sq. mtr. for vitrified tiles) in 2008-09 and entering into manufacturing of
high-end tiles like Ceramic digital, double charged VT, GVT, etc boosted the
domestic industry in a big way. All these developments resulted in strong industry
growth of 18% from 2007 to 2012.
Competitive scenario
The Unorganized sector is growing along with the industry but does not pose a
major threat to organized brands as the potential & growth of the industry enables
quality players to compete without cutthroat competition. As indicate earlier no
company has shut down due to competition and no player has shut down in
Morbi.
Due to lack of marketing strength some of the unorganized players have aligned
with the organized ones either through the JV / third party outsourcing route.
Needless to say, few strong Morbi brands would keep on doing well (in terms of
quality, range and designs)
The demand side too is shifting from unorganized to organized particularly in Tier
II & Tier III cities on gradual basis (H&R Johnson the biggest beneficiary) and the
trend is only likely to increase. The main reason is due to the range and selling
strength.
Production facilities
The production mix in FY12 was Manufacturing (60%), JV outsourcing (5%),
TPO (5%) & Imports (28%). Going forward, the strategy is to reduce dependence
on imports and focus more on outsourcing.
Kajaria has its two own manufacturing factories located at Gailpur – Rajasthan
(20.1 MSM) & Secunderabad –UP (8.2 MSM) and both of them are running full
capacities.
It has 51% JV with three companies
Soriso - Morbi (Feb 2011)
Jaxx - Morbi (Feb 2012)
Vennar – AP (Apr 2012)
These JVs are for outsourcing of ceramic & vitrified tiles. While Soriso will cater
to the West & South markets, Jaxx would cater to the West market in particular.
Vennar on the other hand will be feeding the southern market. These JVs would
not only reduce dependency on imports but would also help reduce the freight
component.
Kajaria also has third party outsourcing arrangements with six Morbi factories
(Delta, Deco Gold, Face, Fabula, Coral & Coral Plus) for the commodity range of
ceramic & paver tiles.
Benefits of JVs:
Minimize gestation period for revenue generation
Efficient operations run by promoters (technicians)
Leverage efficient manufacturing with brand equity and distribution
Complementing the range of products
Low cost of production
Superior return on investment
Management Bandwidth
Kajaria was incorporated way back in 1988 and is currently into its 24th year of
operations.
Mr. Ashok Kajaria (Age 65, Exp 37 yrs) is the CMD of the company, lays down
the vision & is overall in charge of operations.
His elder son Chetan (Age 38, Exp 13 yrs) is a Joint Managing Director and in
charge of Ceramic Tiles.
His younger son Rishi (Age 34, Exp 9 yrs) is also a Joint Managing Directors and
entrusted with Vitrified & World tiles segment.
The company has a strong & dedicated professional marketing team with each
segment (Ceramic, Vitrified, World) having zonal and regional managers unlike
peers.
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