Kajaria Ceramics' Q2FY20 results (Downgrade to Neutral) - Fairly valued in light of worsening growth outlook

Q2FY20 results highlights

• Tiles: Volume growth of 1.1% (IDFCe: 7.5%) at ~19.8m sq.m while blended realisation fell ~3% yoy (improved 1.6% qoq). Realisation uptick qoq is encouraging but weak market conditions, compounded by flooding in Central/North/East India hurt volume performance. Tiles revenue fell ~2% yoy to ~Rs6.7bn (5% miss).
• Sanitaryware/Plywood: Sanitaryware rev. fell 2.1% yoy to ~Rs426m (11% miss), a reflection of real estate weakness. Plywood revenue in Q2 stood at ~Rs70m (vs ~Rs81m qoq; ~Rs32m yoy).
• Cons. revenue fell ~1.5% yoy to ~Rs7.1bn (6% miss). Gross margins fell ~370 bps yoy to 59.3% (IDFCe: 59.0%) due to product mix skew towards Ceramic/PVT and outsourced. Outsourced revenue grew ~39.2% yoy, vs in-house revenue (incl. JV) which fell ~8.3% yoy.
• Cons. EBITDA fell 3.4% yoy to ~Rs1.1bn (7% miss) while margins came in at 14.7% (IDFCe: 15.0%), 30 bps lower yoy. GM compression was nullified by lower fuel costs (down ~290 bps yoy; flat qoq).
• PAT came in at ~Rs932m (+73.8% yoy; 25% beat) on account of tax-write-back taken during Q2 (~Rs124m) to factor in the new tax rates.
• Balance Sheet: Net cash position as of Q2 stood at ~Rs1.4bn (vs ~Rs1.3bn as of Q4; ~Rs1.7bn as of Q1). NWC has increased to 64 days as of September vs 58 as of March 2019.

Key positives: Tax write-back, qoq realisation improvement.

Key negatives: 1% volume growth.

Impact on financials: 10% cut in FY20E/21E EBITDA.

Valuation & view   

Volume growth continues to disappoint even subdued expectations (vs management guidance). While Q2 was marred by one-off issues like flooding, we turn sceptical on the near-term recovery prospects for the tiles/sanitaryware industry given continued weakness in real estate and the overall sluggish consumer sentiment. Competitive intensity continues to remain high despite NGT clampdown on the unorganized industry. As a result, sustained demand weakness clouds KJC’s near-term growth visibility (both on volume/realisation front). We have revised our FY20E/21E volume growth estimates lower to 7%/11% (vs 13.5%/12.0% earlier) and this translates into a sharp 10% cut in EBITDA estimates but earnings are seeing an upgrade led by tax rate cuts. As the fundamentals of the business worsen in the near-term coupled with limited upside on full valuations (target multiple of 28x FY21E EPS, maintained), we downgrade the stock to a Neutral.