Event update: Kajaria Ceramics (Outperformer) - WestBridge infuses funds in Sanitaryware division…
Event
In a filing to the exchanges, Kajaria Ceramics Ltd. (KJC) has announced that WestBridge Crossover Fund LLC (through Aravali Investment Holdings, Mauritius) will invest ~Rs645m in Kajaria Bathware Private Ltd. (KBPL), KJC’s 100% subsidiary. The investment would be through compulsorily convertible preference shares. Post conversion, WestBridge would hold 15% stake in KBPL on a post-diluted basis. As per this deal, 100% of KBPL is being valued at Rs4.3bn or Rs27/share (5% of CMP).
Our View
KJC’s sanitaryware business is housed within KBPL (Kajaria Sanitaryware Ltd. is 82% owned by KBPL) and faucet business is part of KBPL standalone. As at Q3FY18 end, the company had annual production capacities of ~0.54m sanitaryware (Morbi, Gujarat) and ~1m faucets (Gailpur, Rajasthan) at its disposal. KBPL is expanding its sanitaryware capacity to ~0.72 mn (brownfield expansion) which should be available for utilization in FY19E.
KJC has been taking baby steps into the sanitaryware space (~52% yoy growth in FY17; ~23% yoy to ~Rs1.4bn in FY18E). We believe the funds raised would be used to further expand KJC’s sanitaryware production capacities (as a thumb rule, ~Rs800m average capex is required for a 1m pieces p.a. greenfield sanitaryware plant).
Although the company has negligible market-share in the sanitaryware space (compared to estimated market-share of industry leaders like HSIL – 16%, Parryware – 15%, and Cera – 12%), the company is determined to make a mark in the sanitaryware space through its brand ‘Kerovit’. The fresh funds would play a part in bringing KJC’s sanitaryware capacities closer to industry leaders like HSIL (~4.2m) and Cera (~3m).
Valuation
Although KJC’s stock price has seen a sharp decline in recent times given the higher competition from unorganized players, delay in eWay bill implementation and rising gas prices, we believe that KJC’s industry leading status, high margins and return ratio profile should help the company command industry leading multiples as growth returns once eWay bill issues are sorted out. We maintain our Outperformer rating on KJC with a target price of Rs776 (32x FY20E EPS).
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