Kajaria Ceramics Q3FY15 Research Report By Edelweiss

Kajaria Ceramics: CMP Rs. 636, Target Price: Rs. 868, Upside: 37%

Healthy Margins; Retain Buy

Kajaria Ceramics’ (KCL) 3QFY15 revenue increased 30.5% to Rs5,562mn, in line with expectations, because of 39.1%/23.7% rise in production/sales volume, respectively, on a lower base and a 24.1% increase in capacity despite weak demand. With a better product mix and earlier price hikes, operating margin remained firm at 15.7%. Healthy operating profit growth and lower interest costs/tax rate led to a 55.2% rise in net profit to Rs456mn, 15.6%/12.7% above our/Bloomberg consensus estimates, respectively. With a fall in crude oil prices, spot prices of gas have started declining. As KCL’s power and fuel costs increased 415bps over FY12-FY14, it will benefit the most going forward from lower gas prices, which we/street haven’t factored in yet. The 55% increase in capacity, better product mix and lean working capital needs are likely to result in revenue/net profit CAGR of 20.7%/30.6%, respectively, leading to strong operating cash flow of Rs8bn and a decline in the D/E ratio from 0.4x to 0.1x, and a 385bps improvement in RoCE to 24.7% over FY14-FY17E. Based on 13.5x FY17E EV/EBITDA (from 14.5x average over FY16E-FY17E) and 24.9x P/E, we have retained Buy rating on KCL with a revised target price of Rs868 (Rs848 earlier).

Kajaria Ceramics-3QFY15 Result Update-15 January 2015