Kajaria Ceramics Is Worth Adding To The Portfolio

Delhi-based Kajaria Ceramics is one of the largest players in the tiles segment in India. At the market cap of Rs 1,596 crore it is the biggest company in the sanitaryware/tiles segment listed on the bourses. The recent September quarter result of the company shows that it has outpaced the industry despite the slowdown in the overall real estate market. We believe that one should buy this stock since it has very good earning potential. 

Kajaria Ceramics is mainly a ceramic/vitrified tile manufacturing, marketing and selling company having a total annual capacity of 41 million square meters (MSMs). It has six plants located in different parts of the country. It is also on a capacity expansion spree with a total of four acquisitions in the last one year. After the acquisitions the company has also expanded some of these capacities at lower cost than greenfield investment requirements. 

In the last four years Kajaria’s revenues have risen at a CAGR of 27 per cent while its net profit has grown by 52 per cent. The firm has seen a boost in both EBITDA and net profit margins due to which its net profit has shown five-fold growth over the last five years. Over the last three years the company has nearly doubled its capacity by organic and inorganic means. The robust operational and financial performance has also reflected on its stock price as the stock has proved to be a multi-bagger with over 400 per cent returns in nearly three years. Even in this year the stock is up by 115 per cent over its fantastic results. We believe that the stock still has a lot of steam left in it and one should not ignore this opportunity to invest in this company. 

For the recent September quarter results the company has reported 23 per cent growth in topline to Rs 419 crore. The bottomline growth was even better at 34 per cent to Rs 26 crore. The EBITDA margins have also improved by 17 basis points to 15.4 per cent. The production and volume growth was at 18 per cent and 12 per cent respectively in the quarter. This was however at a slower pace compared to the June quarter results where production and volume growth was at 22 per cent and 20 per cent respectively. 

Currently its debt stands at Rs 273 crore which has increased by Rs 67 crore in the last six months. The debt to equity ratio however stands at a comfortable 0.8x. The interest cover ratio is also at a comfortable level of Rs 3.4x. 

The company has recently started the production of digital ceramic tiles from its Vijaywada facility from June 2012. The recent acquisition at Morbi, Gujarat of 2.6 MSM of vitrified tile facility will also prove to be very positive on the stock. Its total capacity has increased from 36 MSM to 41 MSM in just six months and hence we believe that the growth will be even better in the second half of the year. 

The stock is currently trading at a price to earnings multiple of 17x of its TTM EPS 12.78 and at 14.5x of its FY13 forward conservative EPS of Rs 15. The stock has gained 100 per cent from our recommendation in January 2012. Our advice to investors is to buy this stock with a revised conservative target of Rs 254 which will yield 17 per cent returns in the next six months.