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Kajaria Ceramics' Q3FY18 results (Outperformer) - Weak quarter; GST related market-share gains delayed…

Q3FY18 results highlights

• Tiles sales (volume) grew by a healthy 10.1% yoy, to 17.6MSM (IDFCe: 6.6% yoy) on a low base (quarter affected by demonetization as it had 0.5% yoy vol. growth). The current quarter did see a slowdown prior to the GST rate reduction in mid Nov and in that light KJC’s volume growth is commendable; Somany’s volume grew by 6% yoy.
• Blended tile realization declined by 1.3% yoy (IDFCe: +0.5% yoy) largely due to weak JV realizations (-10.3% yoy) and inferior mix; sanitaryware/faucet revenue grew by 15% yoy.
• Cons. rev. grew by 9.0% yoy to Rs6.6bn (in-line). The growth was led by ‘own manufacturing’ revenue growing by ~4.5% yoy and trading revenue growing by 39.8% yoy (trading contributed 14.4% of net rev. versus 11.2% yoy) even as JV revenue fell by ~15.9% yoy (6.2% yoy fall in JV volumes).
• Cons. EBITDA fell 2.4% yoy to Rs1.1bn (9.4% miss) due to 140bp yoy decline in gross margin (higher share of outsourcing) and higher fuel costs (+170 bps yoy). EBITDA margin declined by 200bp yoy to 16.6% (IDFCe: 18.5%). On a qoq basis other expenses increased by 69% as Q2FY18 had one-off write-back of excise duty; Q3 is the true run-rate.
• Cons. PAT at Rs543mn was down 1.4% yoy (14% miss).

Key positives: Strong tiles volume growth.

Key negatives: Higher share of trading, losses at JVs.

Impact on financials: Cut FY18E/19E/20E EPS by 11%/18%/13% each.

Valuation & view   

While we continue to expect a strong push for organised players over the medium-term led by market-share shift away from unorganised players because of GST implementation (tax compliance); in the near-term unorganised and smaller players have gained with patchy GST implementation and delay in e-way bill introduction. This coupled with sharp increase in fuel prices has made us cut our estimates sharply. We now expect 14.6% CAGR in Kajaria’s volumes over FY18-20E (depressed base) and strong earnings CAGR of 27.5% on the back of operating leverage kicking, JV issues getting sorted out and higher contribution of sanitaryware/faucet division. Given Kajaria’s industry leading market-share, margins and high return ratio profile, it deserves to trade at industry leading multiples till such time its growth does not decelerate. Maintain OP with revised PT of Rs776 (32x FY20E EPS as we roll-forward).