OPM surprises positively, valuations stretched
We maintain Hold rating on Kajaria Ceramics as we believe that valuations look
expensive after sharp run up in the stock post Q2 results. We believe further rerating of the stock will be restricted (it is trading near to mean+sd1) as we expect
RoE to decline to 24.1% in FY15E against 32.5% in FY13. However, we continue to
like the company due to a) its leadership position and strong brand equity b)
consistent better-than-industry growth rate, which is expected to continue over
the next few years on the back of aggressive capex plans and c) declining leverage
(0.3x in FY16E vs. 0.9x in FY13). In the quarter, Revenue was below our estimates,
however, positive surprise in the operating margin led to in-line profits.
Revenue impacted by strikes, expect recovery from Q4FY14E: Led by a mere
1.9% YoY volume growth due to strikes at Morbi, Gujarat for 24days, the company
reported Revenue of Rs4,400mn (vs. estimated Rs4,974mn, up 5.4% YoY). Blended
realization increased 3.5% YoY during the quarter. The management indicated that
sales volume growth will be maintained from Q4FY14E and believes volume growth
will be in the range of 14-15%.
OPM improves led by lower trading revenues and energy costs: EBITDA margin
improved 58bps YoY (and 134bps QoQ) led by higher realization (up 3.5% YoY),
lower contribution from trading revenues and moderation in energy costs. Led by
recent price hikes and stabilization in exchange rate, energy cost as a percentage of
sales declined by 67bps during the quarter. The management expects energy costs
to remain at current levels going forward. Contribution from trading revenues
declined to 19.2% against 25.4% in Q3FY13.
Earnings estimates revised downwards on lower sales volume: We have revised
sales volume estimates downwards by 5.9%/4.4% for FY14E/FY15E considering
lower sales volume in the quarter. Factoring in lower sales volume, revenue
estimates have been revised downwards by 5.9%/4.4% for FY14E/FY15E. We have
also revised energy cost estimates downwards considering moderation in energy
costs during the quarter which leads to higher OPM of 30bps/10bps for
FY14E/FY15E. Profit estimates are being revised downwards by 2.6%/3.4% for
FY14E/FY15E.
Valuation and key risks: The stock is trading at 19.6x FY14E EPS and 16x FY15E
adjusted EPS of Rs14.4 and Rs18.6 respectively. We value the company at 14.3x Dec-
15E EPS and arrive at a price target of Rs330, an upside of 11% from CMP. Key risks
to our thesis are: a) lower than expected sales volume due to weak construction
scenario, b) higher energy costs and c) threat from Chinese imports.
��
We maintain Hold rating on Kajaria Ceramics as we believe that valuations look
expensive after sharp run up in the stock post Q2 results. We believe further rerating of the stock will be restricted (it is trading near to mean+sd1) as we expect
RoE to decline to 24.1% in FY15E against 32.5% in FY13. However, we continue to
like the company due to a) its leadership position and strong brand equity b)
consistent better-than-industry growth rate, which is expected to continue over
the next few years on the back of aggressive capex plans and c) declining leverage
(0.3x in FY16E vs. 0.9x in FY13). In the quarter, Revenue was below our estimates,
however, positive surprise in the operating margin led to in-line profits.
Revenue impacted by strikes, expect recovery from Q4FY14E: Led by a mere
1.9% YoY volume growth due to strikes at Morbi, Gujarat for 24days, the company
reported Revenue of Rs4,400mn (vs. estimated Rs4,974mn, up 5.4% YoY). Blended
realization increased 3.5% YoY during the quarter. The management indicated that
sales volume growth will be maintained from Q4FY14E and believes volume growth
will be in the range of 14-15%.
OPM improves led by lower trading revenues and energy costs: EBITDA margin
improved 58bps YoY (and 134bps QoQ) led by higher realization (up 3.5% YoY),
lower contribution from trading revenues and moderation in energy costs. Led by
recent price hikes and stabilization in exchange rate, energy cost as a percentage of
sales declined by 67bps during the quarter. The management expects energy costs
to remain at current levels going forward. Contribution from trading revenues
declined to 19.2% against 25.4% in Q3FY13.
Earnings estimates revised downwards on lower sales volume: We have revised
sales volume estimates downwards by 5.9%/4.4% for FY14E/FY15E considering
lower sales volume in the quarter. Factoring in lower sales volume, revenue
estimates have been revised downwards by 5.9%/4.4% for FY14E/FY15E. We have
also revised energy cost estimates downwards considering moderation in energy
costs during the quarter which leads to higher OPM of 30bps/10bps for
FY14E/FY15E. Profit estimates are being revised downwards by 2.6%/3.4% for
FY14E/FY15E.
Valuation and key risks: The stock is trading at 19.6x FY14E EPS and 16x FY15E
adjusted EPS of Rs14.4 and Rs18.6 respectively. We value the company at 14.3x Dec-
15E EPS and arrive at a price target of Rs330, an upside of 11% from CMP. Key risks
to our thesis are: a) lower than expected sales volume due to weak construction
scenario, b) higher energy costs and c) threat from Chinese imports.
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