Sharekhan Suggests Buying This Stock For 27% Upside: Consolidated Revenue Up Sharply At Rs. 1102 Crore

Reputed brokerage firm Sharekhan has suggested buying the stocks of Kajaria Ceramics Ltd. to investors. According to the firm's report, its consolidated revenues stood at Rs. 1102 crore, which was up 15.7% y-o-y, in Q4FY22, while blended tile realizations were up 13.1% y-o-y. This quarter, the company is seeing strong domestic demands.

Target Price, CMP, and company performance

The Current Market Price (CMP) of Kajaria Ceramics Ltd. is Rs. 943. Sharekhan has estimated a Target Price for the stock at Rs. 1,200. The stock is anticipated to offer a 27.25% upside, in 1 year.

Stock Outlook
Current Market Price (CMP)	Rs. 943
Target Price	Rs. 1,200
1 year return	27.25%

For Kajaria Ceramics Ltd. (Kajaria), revenues from the bathware and plywood segments have increased by 15.9% y-o-y and 25.4% y-o-y. The management additionally expects a 15-20% rise in tile volumes (aided by completion of three expansion plans) and 20-25% tile revenue growth for FY2023 although reframed from giving guidance on OPM due to high gas prices, increased raw material costs, and freight costs.

However, the company's volumes (up 2.3% y-o-y) were affected by lockdowns in several states during January-February. Its consolidated OPM at 15.1% (down 498bps y-o-y) was affected by higher gas prices, a reduction in gas supply, and a sharp rise in other raw materials. Consolidated operating profit/net profit were marginally down 13%/25% y-o-y.

Advantages and risks mentioned by Sharekhan

Stating the advantages, Sharekhan mentioned, "Blended tile realizations were up 13% y-o-y. Revenues from Sanitary ware and plywood were up 16% y-o-y and 25% y-o-y respectively. Working capital days were reduced to 52 days from 58 days in Q3FY2022. Net cash surplus strong at Rs. 373 crores. Kajaria is expected to be a beneficiary of the strong domestic demand from the housing sector and market share gains from unorganized players. The management has guided for 15-20% y-o-y volume growth for FY2023 although reframed from guiding on OPM due to current volatility in gas prices. The company would be investing close to Rs. 300 crore per annum capital expenditure over the next 3 years in augmenting its capacities."

On the other hand, commenting on the key risks, the firm said, "Muted tile volume growth of 2% y-o-y for Q4FY2022. OPM were severely hit by a rise in gas prices and an increase in other raw materials. Higher than expected interest expense, depreciation, and effective tax rate for Q4FY2022."

"The stock has corrected over 25% during trailing 3 months and is currently trading at a P/E of 26x its FY2024E earnings, which we believe fair prices in volatility in gas prices," Sharekhan said retaining the buy rating with a downwardly revised estimate.

About the company: Kajaria Ceramics Ltd.

Kajaria Ceramics is India's largest manufacturer of ceramic/vitrified tiles and the world's 9th largest tile manufacturer. The company has an annual capacity of 70.4 mn. sq. meters presently, distributed across 8 plants - 1 in Sikandrabad in Uttar Pradesh, one in Gailpur, 1 in Malootana in Rajasthan, three in Morbi in Gujarat, one in Vijaywada, and one in SriKalahasti in Andhra Pradesh. Cumulative price hikes taken by the company during FY2022 were 10% in tiles, 15% in Sanitaryware, and 12-13% in bath fittings. It has undertaken a 2% price hike in tile from May 1, 2022, although costs have gone up by 3-3.5% as compared to Q4FY2022. Industry tile exports to remain strong in FY2023 at Rs. 17000 crore to Rs. 18,000 crore compared to an estimated Rs. 12,700 crore in FY2022.

Sectoral Outlook: Building Materials

Additionally, about the building material sector in India, where Kajaria Ceramics Ltd. is a leading player, Sharekhan said, "From June, the sector has been one of the fastest in recovery with an easing of lockdowns domestically. The sector has witnessed a resumption of dealer and distribution networks and a sharp improvement in capacity utilization. Most players have begun to see demand and revenue run-rate reaching 80-90% as compared to pre-Covid levels. Scaling up of revenue is also expected to lead to better absorption of fixed costs going ahead, aiding a recovery in net earnings. The industry is expected to rebound with strong growth in FY2022."

Disclaimer

The above stock was picked from the brokerage report of Sharekhan. Investing in equities poses a risk of financial losses. Investors must therefore exercise due caution. Greynium Information Technologies, the author, and the brokerage house are not liable for any losses caused as a result of decisions based on the article.

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