Upgrade price target

March 13, 2012

Kajaria is likely to emerge as the largest domestic player Previous Reco Buy Target Price Rs 225
NA/4% 57 5,430 17,814

Reco Buy CMP Rs 156

taking over H&R Johnson by FY13. It has gained market share by 320bps to 21.7% in last two years

Despite Industry witnessing EBITDA margins contraction of

EPS change FY12E/13E (%) Target Price change (%) Nifty Sensex

300bps in FY12 due to mounting cost pressure, Kajaria maintained its margins at ~16%

Growth in domestic tiles industry to remain buoyant and we

believe that industry consolidation is likely to drive share of organised players in future

Price Performance
(%) Absolute Rel. to Nifty
Source: Bloomberg

Introduce FY14 est with EPS of Rs 18.7. Upgrade valuation

3M 53 34 6M 12M 44 31 122 126

1M 17 16

multiple to 12x (from 10x) on sustainable growth and improved return ratios. Reiterate BUY with target of Rs 225

Emerging largest domestic player, increased market share by 320bps

Kajarias thrust on growth through organic / inorganic opportunities has helped it in gaining market share over the largest domestic player H&R Johnson. Kajaria has increased its market share from 18.5% in Q1FY11 (based on aggregate sales of top-9 domestic players) to 21.7% by Q3FY12. The leader H&R Johnson has been loosing its market share due to lower growth leading to its market share declining from 27.3% to 24.4% over the same period. We believe that with current growth drivers, Kajaria is likely to emerge as the largest domestic player, taking over the leader in FY13.

Relative Price Chart

175 Rs % 130 152 102

129

74

106

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18

60 Mar-11

May-11

Jul-11

Sep-11

Nov-11

Jan-12

-10 Mar-12

Despite cost pressure, company has maintained its EBITDA margins

During FY12, industry has witnessed significant cost pressure driven by increase in gas cost, transportation cost along with currency depreciation resulting into 300bps drop in industry EBITDA margins to 10.7% by Q3FY12. However Kajaria has been able to maintain its margins at ~16% driven by its cost efficiency and strong pricing power. We see strong opportunity of margin expansion in Kajaria driven by rising pricing power of the industry.

Kajaria Ceramics (LHS)

Rel to Nifty (RHS)

Source: Bloomberg

Stock Details
Sector Bloomberg Equity Capital (Rs mn) Face Value(Rs) No of shares o/s (mn) 52 Week H/L Market Cap (Rs bn/USD mn) Daily Avg Volume (No of sh) Daily Avg Turnover (US$mn) Ceramics KJC@IN 147 2 74 157/68 11/221 187982 0.4

Domestic tile industry growth remains buoyant

Indian tiles industry continues to witness strong growth with a CAGR (FY06-10) of 12% as against global average of 6%. It still offers stupendous growth opportunities as per capita consumption in India at 0.42 remains poor vs 2.26 in China. Despite strong growth, industry is witnessing structural shift with organised players gaining share over unorganized players through acquisition route and industry consolidation is likely to drive growth in future. The recent acquisition model adopted by the companies should help players improve their return ratios and lower their investment.

Shareholding Pattern (%)

Dec-11 Sep-11 Jun-11 Promoters FII/NRI Institutions Private Corp Public
Source: Capitaline

53.5 7.8 8.6 12.1 18.0

52.0 6.1 9.6 12.7 19.6

51.3 5.5 9.2 12.8 21.2

Upgrade price target to Rs 225, reiterate BUY

On back of buoyant domestic growth in ceramic tiles industry and Kajarias leadership position we expect Kajaria to benefit from this sustainable growth and we introduce our FY14E est with EPS of Rs 18.7 in FY14E. With sustainable revenue growth at a CAGR of 22% (FY11-14E), PAT growth of 31% and RoE of 33.6% by FY13E we expect Kajarias valuation to improve in future. We upgrade our valuation multiple from 10x to 12x and increase our price target to Rs 225 based on FY14E and reiterate BUY. Financial Snapshot Rs Mn
EBITDA (Core) 1,475 1,946 2,432 2,798 (%) 15.5 15.3 15.8 16.1 APAT 607 811 1,095 1,373 EPS (Rs) 8.2 11.0 14.9 18.7 EPS % chg 69.2 33.6 35.1 25.3 RoE (%) 29.5 32.1 33.6 32.3 P/E 18.9 14.2 10.5 8.4 EV/ EBITDA 9.6 7.5 5.7 4.6 P/BV 5.2 4.1 3.1 2.4

Rohan Gupta rohan.gupta@emkayglobal.com +91 22 6612 1248 Balwindar Singh balwindar.singh@emkayglobal.com +91 22 6612 1272

YE-Mar

Net Sales

FY11 FY12E FY13E FY14E

9,523 12,714 15,437 17,401

Emkay Global Financial Services Ltd

Company Update

Kajaria Ceramics

Kajaria Ceramics

Company Update

Sustained thrust on capacity expansion

Enhancement of capacity through a mix of acquisitions, brownfield expansion has helped Kajaria to boost growth Kajaria has been aggressively focusing on boosting its capacity through organic and inorganic route. It has increased capacity from 21mn sqm in FY09 to 36mn sqm by FY13E though debottlenecking, brownfield expansion and acquisitions.
Capacity additions

38.0 34.0 30.0 26.0 22.0 18.0 14.0 10.0

mn sqm

6.6 6.0 2.4 21.0 FY10Debottlenecking FY13EAcquisition FY11Brownfield FY13E FY09 36.0

Source: Company, Emkay Research

Kajaria to emerge as the largest domestic player, taking over H&R Johnson
Kajarias focus on topline growth has reduced the gap between market share of the largest domestic player H&R Johnson and Kajaria from 8.8% to 2.7% only and we expect Kajaria is likely to lead by FY13 Thrust on growth through organic / inorganic opportunities has helped Kajaria in continuously gaining market share over the largest domestic player H&R Johnson. Kajaria has increased its market share from 18.5% in Q1FY11 (based on aggregate sales of top-9 domestic players) to 21.7% by Q3FY12. The leader H&R Johnson has been loosing its market share due to lower growth which has led to its market share slipping from 27.3% to 24.4% over the same period. We believe that with current growth drivers, Kajaria is on the verge of becoming the largest domestic player, taking over the leader in next 2-3 quarters.
Kajaria Vs H&R Johnson Market share

31.0% 29.0% 27.0% 25.0% 23.0% 21.0% 19.0% 17.0% 15.0% Q1 FY11

Market share gap was 8.8%

Gap has reduced to 2.7%

Q2 FY11

Q3 FY11 Kajaria

Q4 FY11 H&R Johnson

Q1 FY12

Q2 FY12

Q3 FY12

Source: Capitaline, Emkay Research

Kajaria Ceramics continues to outperform its peers

Kajarias accelerated topline growth has helped it to outperform its peers by a wide margin Strong demand coupled with favorable shift towards value-added products has helped the industry to grow both their topline as well as improve their margins with the share of high end vitrified tiles increasing. Although most of the ceramic players continue to post strong growth, Kajaria Ceramics has consistently outperformed its other regional peers in the last 2 years. Over the last 7 quarters, Kajaria has posted 20%+ growth rates on a consistent basis, with growth accelerating to 40% in the last 5 quarters (with the exception of Q4 FY11). In 9mFY12, the company posted 40%+ topline growth while other leading players were able to clock average topline growth of 25% only.

Emkay Research

13 March 2012

Kajaria Ceramics Topline growth for top players (%YoY)

55% 40% 25% 10% -5% -20% Kajaria Ceramics Somany Ceramics Asian Granito Q1 FY11 Q2 FY11 Q3 FY11 Q4 FY11 Q1 FY12

Company Update

Q2 FY12

Q3 FY12

Euro Ceramics

Source: Capitaline, Emkay Research Leading player H&R Johnson historical numbers are not available

Increasing share of vitrified tiles limits downside risk to margins

Increasing share of value added products which carry higher margins have helped Kajaria to limit downside risks to margins. Rising share of value-added products (vitrified tiles) in total sales have helped to limit downside risks to margins arising from rapid increase in costs. While manufactured vitrified tiles contribution to sales volumes increased from 12% in FY11 to 28% in 9mFY12, share of vitrified tiles in total revenues jumped to 36% in 9mFY12 compared to 16% in FY11. We would like to highlight that vitrified tiles carry higher EBITDA margins of 16-17% compared to 14-15% for ceramics. Hence, improving product profile towards value-added products has helped Kajaria to limit its downside risk to margins.
Volumes & Revenues Mix Manufacturing volumes: Ceramics as a % of total manufactured Vitrified as a % of total manufactured Total Manufactured Volumes Trading volumes Total Sales Volumes 88% 12% 68% 32% 100% 72% 28% 70% 30% 100% FY 10-11 9mFY12

Revenues: Ceramics as a % of total manufactured Vitrified as a % of total manufactured Total Manufacturing Revs Trading revs Total revenues
Source: Company, Emkay Research

84% 16% 52% 48% 100%

64% 36% 61% 39% 100%

Average realizations improve due to shift in product mix

Driven by improvement in product mix (increasing share of vitrified tiles), average manufactured realizations improved to Rs 290/sqm in 9mFY12 compared to Rs 244/sqm in FY11. While domestic ceramic tiles witnessed increase of 8% in realizations during this period, average realizations of vitrified tiles increased by 18% yoy. Launch of new high-end products in both ceramics (wall tiles) & vitrified tiles also contributed to improvement in realizations.

Emkay Research

13 March 2012

Kajaria Ceramics

Company Update

Trading continues to unleash strong growth opportunity for the industry..

Growing consumers preference for branded products have unleashed healthy trading opportunities for companies with strong distribution network. In order to leverage their strong distribution network leading players have been strengthening trading opportunities. Companies have been sourcing products domestically as well as imports. With unorganized players inability to compete with the larger organised players and growing customer preference for branded products, trading opportunities have increased rapidly. As a result contribution from trading increased from approximately 30% to 40% in previous 6-8 quarters.

And Kajaria has been maintaining its revenue contribution from trading
Despite sharp increase in own manufacturing capacities (increased by 70% over last three years), Kajaria has been constantly maintaining revenues from trading which contributes 35-40% to its revenues. However Kajarias share in total trading opportunity has declined to 24% by Q3FY12 from 35% in FY10 which we understand is mainly due to sharp increase in own manufactured products and replacing some of the traded products through own manufacturing. Trading revenues % of sales
47% 42% 37% 32% 27% 22% Q1 FY11 Q2 FY11 Q3 FY11 Q4 FY11 Q1 FY12 Industry Q2 FY12 Q3 FY12

Kajaria Ceramics
Source: Capitaline, Emkay Research

Industry consolidation Next phase of growth for organised players

Though unorganized players have enhanced their capacities to meet rising demand, however rising cost pressures & their inability to push sales have left them struggling. Organized players have entered into joint ventures with these players & benefited from low investment & assured availability of products We believe that industry consolidation will drive next phase of growth in the industry. Unorganised players have started facing tough competition from the organised players due to rising customer preference for branded products. Industry has witnessed significant capacity addition in unorganized segment mainly in Morbi, Gujarat. However driven by rising cost pressure and their inability to push the sales, these players have started entering into joint ventures or became acquisition targets of leading regional players. These arrangements help unorganized players in running there plant at optimal level while organized players on back of their strong distribution network and brand benefit from low investment and assured availability of quality products. Leading players like Kajaria, HR Johnson, Somany and Orient has recently started entering into such joint ventures and we expect such consolidation in the industry to gather pace in near term. Industry in consolidation mode
Acquirer Co Kajaria Ceramics Kajaria Ceramics H & R Johnson Somany Ceramics Orient Ceramics #
Source: Industry, Emkay Research # Orient ceramic acquisition of Bell also had significant debt on Bells balance sheet

Target Co Soriso Ceramics Jaxx Vitrified Small Tiles Pvt Ltd Vintage Tiles Bell Ceramics

Capacity- mn sqm 2.3 3.1 2.3 2.55 14.6

Stake % 51% 51% 50% 26% 63%

Rs mn 60 63 NA 50 158

Emkay Research

13 March 2012

Kajaria Ceramics Newsflow- Consolidation in industry

Company Update

H & R Johnson acquired 50% stake in Small Tiles Pvt. Ltd. in Nov-11- H & R Johnson (India), a division of Prism Cement Ltd. acquired 50% stake in Small Tiles Pvt. Ltd. in Nov-11. Small Tiles has an installed capacity of 2.3mn sqm and it would manufacture and supply glazed floor tiles to H & R Johnson (India). These tiles would primarily cater to Northern, Central, Eastern regions of India and the overseas market. This acquisition marks H & R Johnsons 5th tiles joint venture and would enable the company to keep pace with the growing demand for tiles. Somany Ceramics acquired 26% stake in Vintage Tiles for Rs 50mn- Somany Ceramics acquired 26% stake in Vintage Tiles Private Limited (VTPL) for Rs 50mn in Oct-11. VTPL is at an advanced stage of setting up a new plant to manufacture about 7500 square meters of polished vitrified tiles per day at Morbi (Gujarat). This strategic stake will allow Somany Ceramics to market / sell the entire quantity of polished vitrified tiles to be manufactured by VTPL. Orient Ceramics acquires 63% stake in Bell Ceramics for Rs 158mn- Orient Ceramics acquired 63% stake in Bell Ceramics for Rs 158mn in Sep-2010. Bell Ceramics has two manufacturing plants located at Vadodara & Bangalore and manufactures ceramic glazed tiles. Bell Ceramics has an installed capacity of 14.6mn sqm

Kajaria may eye for acquisition opportunity in south / east markets

In order to strengthen its national presence, Kajaria might scout for acquisition opportunities in southern / eastern region. To strengthen its national presence, Kajaria has acquired capacity in Western region through acquisition of Soriso and Jaxx. 22% of its capacity is now in western region while balance is in northern and central region. Kajaria s manufacturing facilities

Opportunities lie in Eastern & Southern markets to establish production facilities

Source: Company, Emkay Research

Emkay Research

13 March 2012

Kajaria Ceramics

Company Update

Though Kajaria already has presence in southern market but the product requirement is met from production in north plant or sourcing from western regions resulting into higher transportation cost and working capital requirement. We believe that Kajaria may acquire some plant in southern region to benefit from reduction in transportation cost and lower working capital. Company may also have plans to establish / acquire production facilities in Eastern markets also. However we understand due to large opportunities in southern region company is likely to focus on southern market initially.

Gas prices on rise also driven by currency depreciation

Natural gas prices have increased significantly by 20-25% since Apr11. Further adversely affected by currency depreciation since gas costs are Import Parity Price (IPP) linked, depreciation of rupee against dollar in the last few months has led to increase in gas costs for the industry.

However Kajarias partial long term arrangement helps protect margins

Kajarias partial long term arrangement to source gas has helped it to protect margins Though higher fuel cost has been experienced by all the industry players and has resulted in price increase for the end consumer, Kajaria has partially benefited from its long term arrangement on ~60% of its total gas requirement of 2lac scmd. Kajarias long term gas arrangement has resulted into increase in gas costs mainly due to currency depreciation. Gas cost- Rs/scm
29.0 27.0 25.0 23.0 21.0 19.0 17.0 15.0 July'11 Oct'11 June'11 May'11 Nov'11 April'11 Aug'11 Dec'11 Sep'11 Feb'12 Q3 FY12 Jan'12

Long term arrangement

Source: Company, Emkay Research

Blended

Despite avid cost pressure, Kajaria has maintained its margins

Though industry has reported decline in EBITDA margins, however Kajaria has been able to sustain margins. Companys strong brand equity, product innovation & ability to pass on higher cost has helped it Driven by strong brand equity, product innovation and companys ability to pass on the higher input cost, Kajaria has been able to maintain its EBITDA margins despite industry witnessing margin pressure. Industry has reported drop in EBITDA margins (aggregate of 8 leading players) by 290bps to 10.7% by Q3FY12 from 13.6% in Q1FY11. However Kajaria has been able to maintain its EBITDA margins at 16%. We expect Kajaria to witness EBITDA margins expansion by 50bps to 16.1% by FY14 (15.6% in 9MFY12) driven by strong pricing power enjoyed by the company. Kajaria Vs Industry EBITDA margins
17% 16% 15% 14% 13% 12% 11% 10% 9% Q1 FY11 Q2 FY11 Q3 FY11 Q4 FY11 Q1 FY12 Q2 FY12 Industry

Kajaria Ceramics
Source: Capitaline, Emkay Research

Emkay Research

13 March 2012

Kajaria Ceramics

Company Update

Kajarias margins highest among the leading players

While Somany & Asian Granito witnessed margin contraction in excess of 100bps, Kajaria managed to report flat margins during the same period. Though NITCO witnessed margin expansion of 290bps in 9m FY12, however NITCOs margins even at this level are lower than Kajaria. In our opinion, increasing share of value added products coupled with efficient costs management at Kajaria has been the primary reason for Kajaria being able to sustain margins. EBITDA margins
18% 16% 14% 12% 10% 8% 6% 4% Q1 FY11 Q2 FY11 Q3 FY11 Q4 FY11 Q1 FY12 NITCO Tiles Q2 FY12 Q3 FY12

Kajaria Ceramics
Source: Capitaline, Emkay Research

Somany Ceramics

Asian Granito

Low gearing and efficient working capital helps Kajaria to keep interest outgo below industry average
Low gearing coupled with higher margins for Kajaria has enabled the company to limit its interest outgo & report higher bottomline Industry has also witnessed rising interest outgo due to sharp jump in interest rates (increased by 13 times in last 24 months). Though on aggregate basis interest outgo as % of sales remained stable at ~5.5%, however in Q3FY12 industry spend on Interest as % of EBITDA has gone up to 50% by Q3FY12 from 42% in Q1FY11. While for Kajaria, interest as % of sales at 4.5% is almost 100bps lower than the industry on back of low gearing and efficient working capital management. Higher EBITDA margins of Kajaria also ensure lower outgo on interest as % of EBITDA at ~25% as against 50% for the industry average. This results into higher net profit margins for the company. Interest costs as a % of sales (industry and Kajaria)
7% 6% 5% 4% 3% 2%
Q1 FY11 Q2 FY11 Q3 FY11 Q4 FY11 Q1 FY12 Q2 FY12 Q3 FY12

Interest costs as a % of EBITDA (Industry and Kajaria)

55% 45% 35% 25% 15% 5%
Q1 FY11 Q2 FY11 Q3 FY11 Q4 FY11 Q1 FY12 Q2 FY12 Q3 FY12

Kajaria Ceramics
Source: Capitaline, Emkay Research

Industry average

Kajaria Ceramics

Industry average

Emkay Research

13 March 2012

Kajaria Ceramics

Company Update

Tiles Industry Demand-Supply

Domestic growth remains intact - India ranks 3 in ceramic tiles while China continues to dominate the market
India has consistently ranked 3 amongst the top 5 producers as well as consumers of ceramic tiles globally. While India produced 550 mn sqm of tiles in 2010 (increased by 12%), its consumption during the same period stood at 557mn sqm with increase of 13% yoy. Further, Indias share of world production has been consistently rising over the years increasing to 5.8% in 2010 as compared to 4.4% in 2006. Correspondingly, the countrys consumption as a % of world consumption increased to 6.0% in 2010 compared to 4.7% in 2006. Top 5 producers- % of global production
50% 40% 30% 20% 10% 0% 2006 China 2007 Brazil 2008 India 2009 Iran 2010 Italy
rd

rd

Top 5 consumers- % of global consumption

40% 35% 30% 25% 20% 15% 10% 5% 0% 2006 China 2007 Brazil 2008 India 2009 Iran 2010 Vietnam

Source: Ceramic World Review, Emkay Research

Volume growth in India remains at 12% against global average of 6%

Rising population, rising disposable incomes & strong replacement market growth has helped volumes in India to grow at a CAGR of 12% against global average of 6% Indian ceramic tile industry has grown at a CAGR of 12% from 2006-10 compared to 6% growth witnessed globally. The strong growth witnessed in India over the last 4-5 years has resulted from a combination of factors including- 1) Increasing population & middle class count, (2) Rising disposable incomes and (3) Replacement market growth in rural and semiurban markets. Consequently, demand for consumer related goods has witnessed strong growth over the years due to increase in spending power. Top 5 consumers- consumption growth
50% 40% 30% 20% 10% 0% 2007 China Brazil 2008 India Iran 2009 Vietnam 2010 Global

Source: Ceramic World Review, Emkay Research

Favorable demand supply scenario bodes well for the future

India remains one of the fastest growing markets worldwide due to its improving demographics & strong economic growth. Demand has consistently grown over the years reaching 557mn sqm while production stood at 550mn sqm in 2010. We believe demand would continue to be strong as rising disposable incomes increase the affordability quotient of Indian consumers.

Emkay Research

13 March 2012

Kajaria Ceramics India's demand-supply mn sqm

600 550 500 450 400 350 300 2006 2007 Production
Source: Ceramic World Review, Emkay Research

Company Update

2008 Consumption

2009

2010

India still remains a small market compared to China

Despite strong growth witnessed in Indian ceramic tile industry, India still remains a miniscule market compared to China. Further, Indias per capita consumption of tiles is significantly lower than other countries Despite the Indian ceramic tile industry growing at a CAGR of 12% from 2006-10 compared to 6% CAGR witnessed during the same period in China, India still remains a nascent market. While Chinas demand stood at 3500mn sqm in 2010 (accounting for 37% of the global demand), Indias demand stood at 557mn sqm and accounted for a mere 6% of the global demand. We believe with rising disposable incomes & burgeoning middle class, there is no reason why India would not witness a strong consumption growth in the coming years. This is further supported by the fact that the per capita consumption in India is still very low at 0.42 compared to 2.26 in China, 3.24 in Brazil & ~1.7-1.8 in Turkey, Egypt.

Emkay Research

13 March 2012

Kajaria Ceramics

Company Update

Financials and valuations

Kajaria has been continuously surprising us on the positive side
Kajaria has been posting results ahead of our est mainly on account of higher topline growth. Reported earnings have been ahead of Emkay est
3.5 3.0 2.5 2.0 1.5 1.0 Q1 FY11 Q2 FY11 Q3 FY11 Q4 FY11 Q1 FY12 Q2 FY12 Q3 FY12 Expected EPS
Source: Emkay Research

Actual EPS

Acquisition new growth driver for Kajaria is favorable for investors

Acquisitions of Soriso and Jaxx in Gujarat, more to come in future
Kajaria has recently acquired 51% stake in Jaxx with investment of Rs 65.6mn paid in cash. Jaxx Vitrified Private Limited, Morbi, Gujarat based player has a capacity to produce polished vitrified tiles of 3.1 mn sqm per annum. Jaxx has brand new plant which is scheduled to commence its operation soon and has necessary fuel arrangements. This plant will manufacture polished vitrified tiles (PVT) and cater to western and southern markets. Earlier this year company has acquired 51% stake in Soriso Ceramic Pvt. Ltd. with investment of Rs 56 mn in Feb'11. Soriso is based in Morbi, Gujarat, with installed capacity of 2.3 mn sqm of ceramic floor tiles.

Under the arrangement company enjoys higher PAT margins of ~8% vs existing 6.5% and higher RoE of ~70% vs current RoE of 32%
Kajarias acquisition of stake in Soriso & Jaxx is highly RoE accretive and is likely to lead to improvement in return & profitability Jaxx has a capacity to produce polished vitrified tiles of 3.1 mn sqm per annum and the plant is likely to commence operations soon. We estimate revenue potential from this plant at Rs 0.9-1bn (~7% of Kajaria's FY13 est revenues). We estimate PAT margins in this subsidiary at 8% as against current PAT margins of 6.5% in Kajaria. With higher PAT margins the payback period for this venture is likely to be less than one year and this will be RoE accretive for the company. Consolidated RoE can go up to 70% as against Kajarias current RoE of ~32%.

Emkay Research

13 March 2012

10

Kajaria Ceramics
in Rs mn Revenue EBITDA EBITDA % Interest Depreciation PBT PAT Minority Int PAT after Minority PAT margin % Jaxx 1000 100 10% 27.6 15 57.4 40.2 40.2 4.0% Kajaria 1100 110 10% 9.6 0.0 100.4 70.3 70.3 6.4%

Company Update
Consol 1100 210 19% 37.2 15 157.8 110.5 20.1 90.4 8.2%

Total Capital employed Equity Debt Working Capital - Debt Gross Block RoCE RoE
Source: Company, Emkay Research

360 130 150 80 250 19% 31%

145 65 0 80 0 49% 108%

440 130 150 160 250 33% 70%

Kajaria Ceramics- accelerated topline growth & margin sustainance reinforces our belief
Kajarias enhanced focus on driving growth through JVs/acquisitions has helped the company to accelerate its topline growth. Indian tile producers have been able to successfully cash in on the India consumption story and have witnessed strong growth rates over the last few years. Although most of the ceramic players continue to post strong growth, Kajaria Ceramics has consistently outperformed its other regional peers. In 9m FY12, the company posted 40% topline growth while its peers were able to clock topline growth of 25% only. Despite ardent cost pressures, Kajaria has also been able to sustain margins. While other ceramic players have witnessed margin contraction in excess of 100bps, Kajaria witnessed flat margins during the same period. Increasing share of value added products have helped to limit downside risk to margins for the company as share of vitrified tiles in total revenues jumped to 38% in 9mFY12 compared to 16% in 9mFY11.

Introduce FY14 earnings; raise FY13 est by 4%

On back of buoyant domestic growth in ceramic tiles industry and Kajarias leadership position we expect Kajaria to benefit from this sustainable growth. 12.7% growth in revenue in FY14 is mainly driven by higher utilization of recently acquired capacities in Gujarat and improved trading revenues. We believe that Kajaria will continue to boost its capacity through further acquisitions in near future. We also expect 30bps increase in EBITDA margins to 16.1% driven by higher pricing power. We expect APAT (after minority interest) to increase by 25.3% yoy to Rs 1.37bn and company to report an EPS of Rs 18.7 in FY14. We have also revised FY13 est by 4% to reflect Jaxx acquisition.
FY13E Old Est. Net sales EBITDA EBITDA % PAT EPS 14223 2,226 15.7% 1049 14.3 New Est. 15,437 2,432 15.8% 1095 14.9 % Change 8.5% 9.3% 10 4.4% 4.1% FY14E Introducing Est. 17401 2,798 16.1% 1373 18.7 % yoy 12.7% 15.1% 33 25.3% 25.3%

Rs mn

Emkay Research

13 March 2012

11

Kajaria Ceramics

Company Update

Sustainable growth and RoE expansion to trigger re-rating of the stock, upgrade price target to Rs 225, Reiterate BUY
Kajarias sustainable revenue growth coupled with improvement in profitability & return ratios is likely to improve its valuation profile. We have increased our target multiple to 12x & rolled it over to FY14 est. Revised target stands at Rs 225 (previous Rs 143) With Kajaria gaining market share over the leader and likely to emerge as the largest domestic player in ceramic tiles industry, sustainable revenue growth at 22% (FY11-14E) and PAT growth of 31% and RoE expansion from 32% in FY12 to 33.6% by FY13E we expect Kajarias valuation to improve in future. We believe that the new growth model adopted by the company of acquiring small players will strengthen its regional presence and will help it to reduce on logistics cost. We have increased our target valuation multiple to 12X (earlier 10x) and rolled it over to FY14 estimated EPS of Rs 18.7. We upgrade our price target to Rs 225 from previous Rs 143 and reiterate our BUY recommendation on the stock.

Emkay Research

13 March 2012

12

Kajaria Ceramics

Company Update

Key Financials
Income Statement
Y/E, Mar (Rs. mn) Net Sales Growth (%) Expenditure Materials Consumed Employee Cost Other Exp EBITDA Growth (%) EBITDA margin (%) Depreciation EBIT EBIT margin (%) Other Income Interest expenses PBT Tax Effective tax rate (%) Adjusted PAT Growth (%) Net Margin (%) (Profit)/loss from JVs/Ass/MI Adjusted PAT After JVs/Ass/MI E/O items Reported PAT PAT after MI Growth (%) FY11 9,523 29.5 8,049 5,399 758 1,892 1,475 28.4 15.5 295 1,180 12.4 11 299 892 285 32.0 607 69.2 6.4 607 607 607 69.2 FY12E 12,714 33.5 10,768 6,805 954 3,010 1,946 31.9 15.3 371 1,575 12.4 10 427 1,158 347 30.0 811 33.6 6.4 811 811 811 33.6 FY13E 15,437 21.4 13,005 8,131 1,127 3,747 2,432 25.0 15.8 429 2,003 13.0 10 409 1,604 481 30.0 1,123 38.5 7.3 27.7 1,095 1,095 1,095 35.1 FY14E 17,401 12.7 14,602 9,018 1,270 4,314 2,798 15.1 16.1 451 2,347 13.5 10 357 2,000 600 30.0 1,400 24.7 8.0 27.7 1,373 1,373 1,373 25.3 Gross Block Less: Depreciation Net block Capital work in progress Investment Current Assets Inventories Sundry debtors Cash & bank balance Loans & advances Other current assets Current lia & Prov Current liabilities Provisions Net current assets Total Assets 7,000 2,209 4,790 1 90 3,263 1,515 909 30 808 2,519 2,130 389 743 5,624 7,001 2,581 4,420 800 90 4,077 2,016 1,119 133 808 2,577 2,154 424 1,500 6,810 7,801 3,010 4,791 400 90 5,157 2,538 1,353 458 808 2,995 2,538 458 2,162 7,443 8,201 3,461 4,740 300 90 6,343 2,860 1,526 1,148 808 3,335 2,860 475 3,008 8,137

Balance Sheet
Y/E, Mar (Rs. mn) Equity share capital Reserves & surplus Net worth Minority Interest Secured Loans Unsecured Loans Loan Funds Net deferred tax liability Total Liabilities FY11 147 2,078 2,226 0 2,757 40 2,797 602 5,624 FY12E 147 2,684 2,831 0 3,257 40 3,297 682 6,810 FY13E 147 3,540 3,687 28 2,957 40 2,997 732 7,443 FY14E 147 4,656 4,803 55 2,457 40 2,497 782 8,137

Cash Flow
Y/E, Mar (Rs. mn) PBT (Ex-Other income) Depreciation Interest Provided Other Non-Cash items Chg in working cap Tax paid Operating Cashflow Capital expenditure Free Cash Flow Other income Investments Investing Cashflow Equity Capital Raised Loans Taken / (Repaid) Interest Paid Dividend paid (incl tax) Income from investments Others Financing Cashflow Net chg in cash Opening cash position Closing cash position FY11 881 295 288 16 698 -210 1,968 (1,629) 340 11 (56) -45 169 (288) (86) 0 -103 -309 -15 45 30 FY12E 1,148 371 427 (687) -267 991 (800) 191 10 10 500 (427) (171) 0 0 -98 103 30 133 FY13E 1,594 429 409 (372) -431 1,629 (400) 1,229 10 10 (300) (409) (205) 0 0 -914 325 133 458 FY14E 1,990 451 357 (172) -550 2,076 (300) 1,776 10 10 (500) (357) (239) 0 0 -1,097 690 458 1,148

Key Ratios
Y/E, Mar Profitability (%) EBITDA Margin Net Margin ROCE ROE RoIC Per Share Data (Rs) EPS CEPS BVPS DPS Valuations (x) PER P/CEPS P/BV EV / Sales EV / EBITDA Dividend Yield (%) Gearing Ratio (x) Net Debt/ Equity Net Debt/EBIDTA Working Cap Cycle (days) 1.2 1.8 11 1.1 1.6 28 0.7 1.0 32 0.3 0.4 32 18.9 12.7 5.2 1.5 9.6 1.3 14.2 9.7 4.1 1.1 7.5 1.5 10.5 7.5 3.1 0.9 5.7 2.1 8.4 6.3 2.4 0.7 4.6 2.2 8.2 12.3 30.2 2.0 11.0 16.1 38.5 2.4 14.9 20.7 50.1 2.8 18.7 24.8 65.3 3.0 15.5 6.4 22.3 29.5 22.5 15.3 6.4 25.5 32.1 27.9 15.8 7.1 28.3 33.6 32.7 16.1 7.9 30.4 32.3 36.1 FY11 FY12E FY13E FY14E

Emkay Research

13 March 2012

13

Kajaria Ceramics

Company Update

Recommendation History: Kajaria Ceramics KJC IN

Date 17/01/2012 13/10/2011 18/07/2011 01/06/2011 Reports Kajaria Ceramics Q3FY12 Result Update Kajaria Ceramics Q2FY12 Result Update Kajaria Ceramics Q1FY12 Result Update Kajaria Ceramics Company Update Reco Buy Buy Buy Buy CMP 109 118 103 89 Target 143 143 143 117

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13 March 2012

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