Kajaria Ceramics' Q4FY19 results (Outperformer) - Improving micro, improving macro!

Q4FY19 results highlights

• Tiles: Volume grew 11.2% yoy to ~22.5 mn sq. m. (IDFCe: +11.7%). KJC continues to gain market-share from unorganized players as the latter continue to remain under severe stress. Blended realisation, however, fell ~3.3% yoy/~3.8% qoq, mainly due to mix issues (higher outsourcing). Tiles revenue grew ~7.5% yoy to ~Rs7.6bn (5% miss).
• Sanitaryware/Others: Sanitaryware grew ~10.6% yoy to ~Rs528m (10% miss) on high base. Plywood revenue in Q4 stood at ~Rs73m (nil yoy).
• Cons. revenue grew ~8.7% yoy to ~Rs8.2bn (4% miss). However, gross margins fell ~470 bps yoy to 56.5% (IDFCe: 61.0%) due to product mix skewing towards lower value products. Also, outsourced revenue grew ~33.5% yoy, compared to in-house revenue (incl. JV) which grew just ~3.1% yoy, thus contributing to pressure on gross margins.
• EBITDA margins fell only 90 bps yoy to 15.1% (IDFCe: 15.9%) due to steep fall in fuel costs (-240 bps yoy), while other expenses fell ~150 bps yoy. Cons. EBITDA grew ~2.4% yoy to ~Rs1.2bn (9% miss). Higher other income (27% yoy; 63% beat), and lower finance cost (30.3% yoy fall; 7% lower than est) meant that APAT grew faster than EBITDA, growing ~4.4% yoy to ~Rs689m (5% miss).
• Balance Sheet: Net cash position as of Q4 stood at ~Rs1.3bn (vs ~Rs630m as of Q3) due to stringent control of its working capital cycle. For FY19, KJC’s NWC fell by 2 days to 54 days.

Key positives: Strong volume growth / Lower fuel costs.

Key negatives: Weakness in gross margins.

Impact on financials: Largely unchanged.

Valuation & view   

Market developments like the NGT order banning coal gasifiers (thus forcing the unorganized industry to come under tax surveillance due to gas procurement), and the improving implementation of the eWay bill is helping level the field for organized players. Given that the unorganized industry in Morbi was already facing financial pressure due to high WC stress and weak market environment, the disappearance of tax arbitrage would mean that branded players like KJC would be in a strong position to capture market-share. KJC’s volume growth performance in H2FY19 is testimony to this, in our opinion, and the situation should continue to improve in the quarters ahead. Softening gas prices too would be an added plus. In addition, for KJC, reducing losses on the JV side and expected break-even in Sanitaryware business should support 23.8% EPS CAGR for KJC over FY19-21E. Maintain OP with a TP of Rs669, valuing the company at 30x FY21E EPS.