Kajaria Ceramics' Q3FY20 results (Neutral) - Near-term outlook remains weak...

Q3FY20 results highlights

• Tiles: Volume stood at ~20.4m, registering a growth of just 0.5% yoy (IDFCe: +5.2%), while blended realisation fell 3.3% yoy (down 0.7% qoq). Market weakness, and mix issues (higher outsourcing) led to overall tiles revenue decline of 2.8% yoy to ~Rs6.8bn (5% miss).
• Sanitaryware / Plywood: Sanitaryware revenue grew 1.4% yoy to ~Rs495m (4% miss), a reflection of real estate weakness. Plywood revenue in Q2 stood at ~Rs81m (+29.2% yoy; 5% miss).
• Cons. revenue fell ~2.3% yoy to ~Rs7.4bn (5% miss). Gross margins were flattish at ~61.0% (IDFCe: 59.6%), a healthy performance given realization weakness – Outsourced revenue up 4.8% yoy; In-house (incl. JV) revenue down 4.3% yoy.
• EBITDA margins fell ~90 bps yoy to 15.0% (IDFCe: 15.0%) – lower other costs were negated by higher employee expenses, power & fuel was flat yoy as a % of rev. Consequently, EBITDA fell 7.9% yoy to ~Rs1.1bn (5% miss). PAT came in at ~Rs615m (-5.0% yoy; 8% miss).
• Balance Sheet: Net cash position has improved to ~Rs1.9bn as of Q3 end (vs ~Rs1.4bn as of Q2; ~Rs1.3bn as of March 2019). NWC has risen marginally to 65 days (vs 64 days as of Q2 end; 58 as of March 2019).

Key positives: Gross margins flattish yoy.

Key negatives: 1% volume growth.

Financials Impact: 5%/7% cut in FY20E/21E EBITDA. Introduce FY22E.

Valuation & view   

Volume growth remains uninspiring (~4% in 9MFY20) despite subdued expectations (vs management guidance earlier). Although affordable housing/commercial continue to support growth, the overall weakness in the economy, and its tempering effect on retail discretionary spends, has clouded KJC’s near-term future growth outlook. Competitive intensity has not entirely abated despite the NGT clampdown and increased on-the-ground tax surveillance, and although a possible near-term positive, the potential disruption in China due to the Coronavirus helping Indian exporters, may not last long, thus keeping domestic realizations under check. Our estimates are revised lower to reflect the realities of the near-term. Maintain our Neutral rating on the stock, given weak near-term fundamentals and full valuations. TP Rs531 (28x FY21E EPS – we will roll-forward once visibility on FY21E/22E improves from current levels).