Kajaria Ceramics' Q1FY19 results (Outperformer) - Higher fuel prices hurt; not out of the woods…

Q1FY19 results highlights

• Tiles sales volume grew by 8.8% yoy, to 17.9MSM (IDFCe: 17.0MSM) on a relatively soft base (+3.8% in Q1FY18). Blended tile realization declined 6.2% yoy due to GVT price correction over last 2 quarters; however, on a sequential basis realisation appears to have bottomed out. Sanitaryware/Faucet revenue grew by strong 68.7% yoy.
• Cons. rev. grew by 4.6% yoy to Rs6.6bn (in-line). Growth was led by in-house mfg alone (+14.2% yoy) while JV/outsourced revenue fell 12.8%/15.0% respectively. JV revenue has been declining for the past eight quarters now!
• Higher in-house manufacturing led to gross margins improving by 70 bps yoy to 65.4%. Gross profit grew 5.8% yoy to ~Rs4.3bn. However, cons. EBITDA fell 7.2% yoy to Rs968m (8% miss) due to higher fuel expenses (+330 bps yoy to 23.4% as % of rev.). EBITDA margin declined by 190bps yoy to 14.7% (IDFCe: 16%), lowest since Q2FY14.
• Cons. PAT at Rs456mn was down 10.6% yoy (16% miss). PAT decline was cushioned slightly by lower interest expense (-46.5% yoy). KJC’s debt level has reduced to ~Rs1.3bn in June (vs Rs 1.7bn in Mar 2018).
• KJC has taken board approval to dispose off its 51% stake in Soriso Ceramic Pvt. Ltd. for ~Rs110m. Soriso sold ceramic tiles (5% of KJC’s total capacity; 3% of FY18 cons. revenue).

Key positives: Realisations flat qoq (declines appear arrested).

Key negatives: High fuel costs.

Impact on financials: Cut 19E/20E EPS by 20%/19% respectively.

Valuation & view   

While we remain constructive on the prospects of organized tiles players in the long run, we believe that near-term uncertainties like (1) sluggish real estate demand, (2) rock-bottom prices (with little scope for hikes), (3) slow implementation of the eWay Bill, and (4) the sharp hike in fuel prices, would provide plenty of speed bumps in the near-term. We have cut our FY19E vol. estimate to 10.3% (vs 14.5% earlier) and trimmed down our margin estimates to 15.8%/16.6% for FY19E/20E respectively (vs 17.5%/18.5% earlier). Our earnings cuts stand at 20.2%/18.7% respectively for FY19E/20E. Given the clouded near-term outlook, we cut our target multiple to 27.5x (vs 30x earlier). Our revised target price stands at Rs489. Maintain OP as Kajaria will be the biggest beneficiary of uptick in demand, whenever it happens sustainably. A sharp fall in gas prices would be a key upside risk to our estimates.