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Kajaria Ceramics' Q4FY18 results (Outperformer) - Below expectations; Hoping for a better FY19E!

Q4FY18 results highlights

• Tiles sales volume grew by 4.8% yoy, to 20.2MSM (IDFCe: +6.6% yoy) on a relatively high base (+10.8% in Q4FY17). Blended tile realization declined 1.8% yoy (IDFCe: +0.7%) largely due to weak GVT realizations. Sanitaryware/Faucet revenue grew 23.8% yoy.
• Cons. rev. grew by 4.1% yoy to Rs7.5bn (4% miss). Growth was led by outsourced revenue (+19.6% yoy) and in-house manufacturing (+10.1% yoy) even as JV revenue declined by 17.1% yoy. JV revenue has been declining for the past seven quarters now!
• Higher contribution of outsourced products (14.7% of net revenue in Q4 vs 12.7% yoy) led to gross margin declining 50 bps to 61.2%. Gross profit grew 3.2% yoy to ~Rs4.6bn.
• Cons. EBITDA fell 8.2% yoy to Rs1.2bn (12.1% miss) due to higher fuel expenses (+230 bps yoy) and lower gross margin. EBITDA margin declined by 210bp yoy to 16.0% (IDFCe: 17.5%).
• Cons. PAT at Rs660mn was down 6.7% yoy (9% miss). PAT decline was cushioned to some extent by lower interest expense (-40% yoy).

Key positives: Lower interest expense.

Key negatives: Decline in JV rev. continues; realization fall.

Impact on financials: Cut 19E/20E EPS by 10% each.

Valuation & view   

Although the longer run outlook for organized players remains strong, given the market-share gains expected over unorganized industry, the sluggish demand on the domestic real estate front, excess capacity on the GVT side (leading to pricing pressure), slow implementation of the eWay bill, and the recent surge in fuel prices would mean that the translation to growth would be more gradual in nature. However, our interaction with large Morbi based players indicates that demand is picking up and pricing has bottomed out. This along with implementation of eWay bill bodes well for the organised industry and KJC should be a big beneficiary. Management commentary of turning around JVs in FY19E is an added positive for KJC. We have toned down our FY19E vol. estimate to 14.5% (vs 16% earlier) and margin estimates to 17.5%/18.5% for FY19E/20E (vs 18.2%/19.3% earlier). Our numbers build in a 14.8%/21.6% revenue/PAT CAGR over FY18-20E. In light of the slower than expected recovery, we cut our target multiple to 30x (vs 32x earlier) and cut our target price to Rs656 (30x FY20E EPS). Maintain Outperformer.