Analyst Corner: ‘Reduce’ on Kajaria Ceramics, revise target price Rs 487

In an environment where ceramic tile industry is down due to slack in the real estate sector, deferment of renovation demand and liquidity constraints, Kajaria Ceramics (KJC) — as opposed to striving for aggressive market share gains (as guided earlier) — now seems content playing a waiting game by just keeping its basics right.

The basics are maintaining tight control on working capital; focusing on retail by expanding distribution & sustaining aggressive branding measures, and improving FCF aided by muted capex. KJC is thus likely to report muted volume growth and margins in FY20 amid realisation pressures and operating deleverage. Maintain ‘reduce’.
While our estimates already factor-in muted growth for the current fiscal; we now tweak our revenue/earnings estimates lower for FY21E by 3.5%/2.6% considering the likelihood of muted demand over the next 2-3 quarters.

We maintain ‘reduce’ on the stock with a revised target price of Rs 487 (Rs 500 earlier) valuing it at 25x FY21 earnings. The ceramic tile industry continues to decline amid testing times. Industry volumes continue to be in declining mode (low-single digits) due to muted growth in the real estate sector, deferment of renovation demand, and liquidity constraints.

South India (excl. Tamil Nadu) appears to be the most impacted as compared to other zones. While realisations in ceramic wall and PVT categories are close to bottoming out, the existing glut in GVT is likely to impact overall realisations in the near term.