Kajaria’s Prospects Justify Valuation

Co aims to maintain growth momentum in H2 too

In spite of turbulent market conditions, Kajaria Ceramics achieved a rare distinction of hitting an alltime-high on October 13, when it announced its September ’11 quarter results. Braving the strong cost pressures that lowered its margins, the company posted a strong 42% net profit growth.  

The company achieved a 42.7% jump in net sales to . 316.4 crore supported by 37% growth in volumes to 9.6 million square meters (msm). Its operating profit margin for the quarter slipped 90 basis points to 14.8% due to higher raw material costs, increased gas prices and a depreciating rupee. With its expanded and new capacities, the company is replacing its earlier imported products with indigenously manufactured ones while outsourcing the low-value products — a strategy which is supporting its margins. 

This is reflected in its trading activity. Revenues from trading, which stood at 45% in FY11, dropped to 40% in Q2. This was achieved in spite of a 50% jump in traded volumes to 3.05 msm, indicating a nearly 12.9% fall in realisation per unit of traded product. In the manufactured segment, revenues grew at 51.8% to . 189.4 crore even as the volumes grew 31% to 6.59 msm indicating an 8.9% improvement in realisations. Over the past six months, the company’s debt remained unchanged at . 285 crore. Its debt-to-equity ratio at end of September ’11 was 1.1 against 1.3 at end of March ’11. Its working capital cycle has improved substantially to 38 days in the September quarter from 100 days a year ago.
The company plans to maintain its revenue growth momentum in the second half of FY12 as well with increasingly more revenues coming from manufactured products.
Its Gujarat-based subsidiary Soriso Ceramic is doubling its 2.3 msm capacity of ceramic floor tiles by February 2012. The company has also forayed in high-end sanitary ware and wooden flooring and is aiming to become a complete solution provider.
The company’s growth momentum and promising prospects have helped it command a premium valuation over its peers. The scrip is trading at a P/E multiple of 12 times compared to a P/E between 5 and 7 for its peers such as Somany Ceramics, Nitco Tiles and Asian Granito.