Kajaria Ceramics - Strong revenue growth offsets margin pressure ::Credit Suisse

● In-line 1Q results: Kajaria's Jun-13 consolidated revenue rose a
strong 23% YoY, driven by 18% volume growth. EBITDA margins
were compressed on higher fuel prices due to the INR
depreciation. Net income was in line with expectations.
● Demand growth is strong despite the weak overall environment:
Revenue growth picked up in 1Q to 23% YoY and the
management appears comfortable with its earlier expectations of
a 20% growth for FY14. Revenue is being driven by increased
contribution from its joint ventures.
● Cost pressures exist: EBITDA margins compressed by about 100
bp YoY due to a depreciating INR. The pressure on this front
could be higher in 2Q given the full impact of the INR depreciation
then. Increasing contribution from JVs offset this to some extent—
the company also seems undecided on price hikes.
● Revenue growth should remain strong and valuations are
attractive: We expect Kajaria to gain market share given its strong
brand, distribution network and increasing capacity in southern
India. Valuations remain attractive in our view

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In-line 1Q results
Kajaria reported strong YoY revenue growth of 23%, primarily driven
by uptick in sales volume. The share from joint ventures in the overall
revenue mix is increasing—it was 28% in 1Q FY14 vs 10% a year ago.
The INR depreciation impacted gas prices and pressured margins.
After testing the sanitaryware market for a while, Kajaria has decided
to foray into manufacturing through a 64% greenfield JV at Morbi at a
total project cost of Rs340 mn. This is likely to take revenue from
Rs150 mn to about Rs500-600 mn over the next year. Success for
Kajaria is this product segment is yet to be tested but, at least, this
seems to be a calibrated approach.
In addition, it has decided to convert 2.0 msm of polished vitrified to
higher-realization 3.4 msm glazed vitrified at Sikandarabad facility.

Cost pressures exist
Consolidated EBITDA margins have compressed by 100 bp YoY due
to pressure on power and fuel cost, both due to a depreciating INR
and steadily increasing gas price. This is despite the benefits of
increasing contribution from JVs. The full impact of the recent INR
depreciation will be felt in the Sep-13 quarter. However, it is possible
that the company (and other leading players) could take price
increases; however, this is uncertain at present.