Kajaria Ceramics' Q1FY20 results (Outperformer) - Realisation surprises negatively

Q1FY20 results highlights

• Tiles: Volume up 9.6% yoy to ~19.6 mn sq. m. (IDFCe: +7%). Growth continues to come through market-share gains from unorganized players (overall industry growth muted at 0-2%). Blended realisation fell 3.8% yoy/1.2% qoq mainly on account of mix issues (higher ceramic/PVT). Tiles revenue grew ~5.4% yoy to ~Rs6.5bn (in-line).
• Sanitaryware/Plywood: Sanitaryware grew 3.8% yoy to ~Rs412m (10% miss). Plywood revenue in Q1 stood at ~Rs81m (vs ~Rs73m qoq).
• Cons. revenue grew ~6.5% yoy to ~Rs7bn (in-line). However, gross margins fell ~550 bps yoy to 59.9% (IDFCe: 58.5%) due to product mix skewed towards Ceramic/PVT and outsourced. Outsourced revenue grew ~67.9% yoy, vs in-house revenue (incl. JV) which fell ~3.3% yoy.
• Cons. EBITDA grew 9.5% yoy to ~Rs1.1bn (in-line) while margins came in at 15.1% (IDFCe: 15.2%). Ind-AS 116 impact on EBITDA stood at ~Rs40m. Adjusted EBITDA would be ~Rs1bn (+5.3% yoy; 5% miss). Adjusted EBITDA margin stood at 14.6%.
• PBT stood at ~Rs809m (+11.8% yoy; 4% miss) while PBT margins improved ~60 bps yoy to 11.6%. APAT grew 11.9% yoy to ~Rs510m (Ind-AS 116 impact at the PAT level was negative ~Rs5m).
• Balance Sheet: Net cash position as of Q1 stood at ~Rs1.7bn (vs ~Rs1.3bn as of Q4). NWC has increased to 62 days vs 58 as of Q4 end.

Key positives: Healthy volume growth.

Key negatives: Weak product mix led realisation impact.

Impact on financials: 13%/14% cut in FY20E/21E EPS.

Valuation & view   

Although Q1 performance was overall in line, the quality was weak as fall in realisation due to mix issues (lower GVT sales vs ceramic/PVT, higher outsourcing) came as a negative surprise. Management highlighted that while higher outsourcing is negative from an EBITDA margin perspective, it is accretive at the PBT and RoCE level; however, as of now it does not seem to be the case. As KJC’s South GVT plant comes on stream from Sep’19, we should see realisations improve sequentially as mix improves in favour of self-produced premium products. We continue to believe that KJC is a desirable option to play the long-term story of branded tiles penetration as it continues to outperform the industry in terms of volume growth, but the sustained weakness in the overall tiles industry (due to weak real estate) remains a concern. Thus, we cut our target multiple to 28x (vs 30x earlier). The recent price correction has, however, brought down valuations to ~24x FY21E EPS, thus improving the risk-reward profile for investors. Maintain Outperformer with a revised TP of Rs538.