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Event update: Kajaria Ceramics (Outperformer) - FY19E to be a year of inflection!

We attended the annual analyst meet of Kajaria Ceramics Ltd. (KJC) for a discussion on the year gone by and the future outlook for FY19E. Following are the key takeaways of our interaction:

FY19E to be better vis-à-vis FY18: KJC expects tiles volume growth of 12-15% in FY19E, aided by improving demand at the retail level and withdrawal of the unorganized industry. Brand spends (~3.5% of revenue), rising fuel prices (est. 120-150 bps margin hit), JV profits of ~Rs200m+ (vs ~Rs330m loss yoy) and stable realizations would keep EBITDA margin in the range of 16-18%. Sanitaryware business is expected to grow 40% yoy in FY19E.

GST+eWay Bill to boost organized industry prospects: KJC believes that the strict implementation of the GST and eWay Bill would be very positive for organized players in general. The company is seeing strict on-the-ground implementation of these reforms and the impact is visible on the unorganized industry in Morbi. Over the next 3-4 years, KJC expects the organized share of tiles industry to rise from 50% to 60%.

~Rs1.5bn FY19E capex; ~100 MSM FY21E vol. target intact: ~Rs1.5bn capex estimated for FY19E (including ~Rs200mn maintenance capex). The company will take a decision to go through the own-manufacturing route or JV route depending on which markets it intends to tap into. By FY21E, KJC is targeting to take its sales volume to ~100 MSM (~71.6 MSM in FY18) through a mix of in-house/JV and outsourced sales.

Baby-steps into the fragmented Plywood market: Sensing opportunity of capturing a foothold in the large and fragmented plywood market (~Rs180bn size; 75% unorganized) post GST/eWay Bill, KJC is entering the Plywood space. It will explore the market through the trading model (like it did for sanitaryware, faucets) for the next 2 years before committing more resources for this business.

Outlook

Near-term issues apart (GST/eWay Bill implementation, sluggish market, rising fuel prices), the longer run outlook for organized tiles players remains bright. With prices bottoming out and market showing signs of improvement, the implementation of eWay Bill bodes well for organized industry (including KJC). JV turnaround in FY19E is an additional positive for KJC. Our numbers build in a 14.8%/21.6% revenue/PAT CAGR over FY18-20E. Maintain Outperformer with TP of Rs656 (30x FY20E EPS).