ICICI Direct Research, a leading brokerage firm, continued its bullish stance on Kajaria Ceramics, citing several growth factors.
The company, which is the largest manufacturer of ceramic and vitrified tiles in India, had an annual capacity of 84.5 million square metres (MSM) at FY23 end. It had a base of 1,840 dealers across India. Overall, the company is targeting adding 150 dealers every year over the next 2–3 years.
The brokerage firm's optimistic outlook stems from the healthy tiles volume growth, margin improvement driven by lower gas prices, and improvement in return ratios.
Healthy Morbi exports imply organised domestic players to benefit: The overall size of the tiles industry in FY23 stood at ₹60,000 crore, with domestic and export segments amounting to ₹42,400 crore and ₹17,500 crore, respectively. The company anticipates a domestic industry growth rate of 6–8% in FY23 and expects the overall domestic market to double in 5–6 years.
Additionally, exports are projected to grow by approximately 25% in FY24, primarily driven by players in Morbi. This, according to the brokerage, indicates continued benefits for domestic branded players.
Healthy tiles volume growth: Kajaria Ceramics has guided for 13–15% YoY volume growth in the tiles segment during FY24. This growth is anticipated to be driven by multiple factors, including increased demand from Tier II and below cities, healthy capacity utilisation, expansion of Kajaria's capacity, a strengthened distribution network, and strong brand recall, according to the brokerage.
The brokerage expects an 11% CAGR in tiles volume with tiles revenues CAGR of 13.2% over FY23-26 to ₹5,739 crore.
Margins improvement and earnings growth: The gas prices have eased significantly over the past two quarters. The company anticipates net gains of ₹130–140 crore in power and fuel costs due to lower gas prices in FY24 and thus conservatively has guided for margins in the range of 14–16% in FY24.
With the relief in gas prices, ICICI Direct predicts that the company's EBITDA margins will reach approximately 16%, 16.3%, and 17% in FY24, FY25, and FY26, respectively, compared to 13.5% in FY22. It also projects an earnings CAGR of 27% over FY23–26.
Improved return ratios: Kajaria enjoys a healthy balance sheet and is a net cash company (net cash of ₹236 crore in FY23). Furthermore, the company also intends to payout 40–50% of PAT as a dividend.
With strong earnings growth and a healthy dividend payout, Kajaria Ceramics is poised to improve its return ratios. The brokerage firm estimates that the return on capital employed (RoCE) is likely to reach 25.6% in FY26, compared to approximately 17.7% in FY23.
In light of these growth factors, the brokerage reiterated its 'buy' rating on the stock with a target price of ₹1,680 apiece. This target price signals a new record price for the stock and hints at an upside of 30% from its previous closing price of ₹1,295.
27 analysts polled by MintGenie on average have a 'strong buy' call on the stock.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of MintGenie.
