Event update: Kajaria Ceramics (Outperformer) - Biggest beneficiary of industry formalization drive…

We met the management of Kajaria Ceramics (KJC) at their annual analyst meet. Following are the key takeaways:

• Tiles volume growth guidance at 15%+: Mr. Kajaria is ‘confident’ of 15%+ volume growth in Tiles despite flat industry growth estimated in FY20E. Growth will be driven by strong momentum for branded players in Tier II & III towns (esp. post-GST), significant addition of exclusive showrooms (to be ramped up to 400 from existing 240, over the next two years) and Morbi units being under stress post the NGT order to ban coal gasifiers (almost 250 units remain shut, as of now, out of 450 which used coal gasifiers). Volume market-share currently stands at 10% and could reach 14% over the next 4 years. We are building in ~14% volume growth in FY20E.
• Pricing expected to be stable with positive bias: Morbi has increased prices of ceramic tiles by 4-8% and KJC has followed suit by increasing the same by 4-6%. There are chances of some price hikes coming in PVT as well; however, in GVT, KJC is at a significant premium to the market and will not be undertaking any price hikes. At an overall level pricing is expected to be stable to improving from the base of FY19. We are building in 1.4% pricing improvement in FY20E.
• Margin trajectory positive: Management refrained from giving any margin guidance; however, does not expect any negative or positive impact from gas prices in FY20E. However, A&P spends would be almost flat in FY20E (at Rs1.05bn vs Rs1bn in FY19) and this coupled with 15% volume growth should lead to efficiencies at the margin front. We expect margin to improve by 110bp to 16.3% in FY20E.
• JV losses to come down: Losses stood at Rs310m in FY18 which were brought down to Rs30m in FY19 (includes ~Rs60m Plywood loss) and in FY20E, JVs are expected to contribute Rs100-120m to profitability.

Outlook & Valuation

We came out fairly positive from KJC’s annual analyst meet as the management sounded much more confident about achieving its guidance versus the previous three years. We strongly believe that the NGT order to ban coal gasifiers will accelerate the formalization of the Indian Tile industry and KJC, given its scale & competence, will be the biggest beneficiary of the same. Additionally, over the medium-term, the industry could attain some pricing power as pricing aggression from unorganised players subsides (given their unfair cost advantage is lost) and this could be a multiple re-rating event for Kajaria. We maintain our estimates (~24% EPS CAGR over FY19-21E) and OP rating.