Management Speak: Kajaria Ceramics (Outperformer) - Biggest beneficiary of industry formalization drive…

We met Mr. Sanjeev Agarwal, CFO of Kajaria Ceramics (KJC) and following are the key takeaways:

• Industry volume growth meagre, KJC gaining market-share: Overall tile industry continues to be under pressure given that real estate builders are going through their worst phase and unorganised industry has higher skew towards them. However, KJC is hopeful of delivering 12-14% volume growth in Q4FY19E and is confident of delivering at least early double digit volume growth in FY20E.
• Pricing environment stable: Overall competitive activity remains high but pricing environment is stable and there is no irrational pricing pressure on any of the segments.
• NGT order extremely positive for organized industry: KJC believes that the NGT order will lead to cost table going up for Morbi along with higher working capital investments. It will also entail near full output disclosure by the unorganized players as they will start using gas (and based on their gas consumption a certain output range can be derived). This will be very positive for organized players as there will now be a level playing field in terms of input costs and higher cost table would force Morbi to increase prices for end products.
• Focus on volume growth: If Morbi does increase prices; KJC will be in a favourable position to do so too. However, it might hold back price increases to shrink the price differential between KJC and Morbi which and could mean better consumer off-take and thus volume growth in FY20E could even be in the range of 14-15%.

Outlook & Valuation

We believe that the NGT order can pave the way for formalization of the unorganised tile space and coupled with stricter implementation of e-Way bill could mean strong volume growth for branded tile players going forward. Our sense is that KJC is extremely focused on delivering volume growth even if it entails reinvesting some of the margin gains possible in the near-term. We believe this is a prudent move as market-share gains are not always easy to come by. Currently we are building in ~13% volume CAGR over FY19-21E and there are upside risks to this depending on NGT’s order implementation. Maintain Outperformer. We are upgrading our target multiple for KJC to 30x FY21x (vs 26x earlier) given possibility of lower competitive intensity and, as a result, improved visibility for branded players.