Kajaria Ceramics' Q3FY19 results (Outperformer) - Performance of a leader!

Q3FY19 results highlights

• KJC’s tiles volume continued to surprise, this time growing by ~16% yoy to ~20.3 mn sq. m. (3% beat). Part of the volume growth has been fuelled through Kerala reconstruction efforts (post the floods in August) and the rest can be attributed to better brand, distribution and WC management (Morbi is struggling with WC issues). Industry volumes would have been flat yoy.
• Blended tiles realization declined 2.2% yoy (flat qoq). In-house realization fell 1% qoq, but JV/Trading realizations were up 4% qoq each. KJC had taken a price hike of ~2% in its vitrified portfolio in Oct. 
• Tiles revenue grew 13.3% yoy to ~Rs7.1bn while Sanitaryware/Faucet revenue continued its healthy up move, registering a growth of 40.6% yoy to ~Rs489m. Cons. revenue grew 14.7% yoy to ~Rs7.6bn (3% beat).
• Gross margins came off ~40 bps yoy to 60.9%, while higher fuel costs (+28% yoy; 20.4% of sales versus 18.3% yoy) led to EBITDA margins declining ~60 bps yoy to ~15.9%. However, fuel costs were lower than our estimates leading to EBITDA beat of 7% (~Rs1.2bn; 9.9% yoy).
• Cons. PAT at ~Rs648m grew 19.3% yoy (15% beat). Besides strong operating performance, higher other income (+156% yoy; 29% beat) and lower tax rate (33.8% vs est. 35%) supported PAT beat.
• KJC’s net cash positioned has improved sequentially as of Q3 (~Rs630m versus ~Rs380m qoq). NWC has fallen by 2 days to 62 days, mainly due to lower payables. Receivables remain under control.

Key positives: Strong volume growth / Lower fuel costs

Key negatives: N/A

Impact on financials: FY19E/FY20E EPS increased by 5%/6% respectively. Introduce FY21E estimates.

Valuation & view   

KJC’s performance in Q2/Q3 could be indicators that the worse is now behind for the company. With near-term macro triggers like (1) high WC stress for unorganized Morbi players, and (2) falling gas prices, we believe that KJC is on the path of industry-beating volume growth in the near-term, which would be coupled with healthy operating margin expansion as well. Sanitaryware/faucet is expected to become profitable in FY20E and would aid margins. We have increased our FY19E/20E EPS estimates by 5%/6% respectively. We currently build in ~23% EPS CAGR over FY19E-21E. We roll-forward our valuation multiple to FY21E, and increase it to 26x (vs 25x earlier). Maintain OP with a revised target price of Rs 573 (earlier Rs442).