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Business News/ Markets / Stock Markets/  Motilal Oswal sees a 20% upside in Kajaria Ceramics stock; 5 key points why the brokerage is upbeat about the stock

Brokerage firm Motilal Oswal Financial Services has initiated coverage on Kajaria Ceramics with a 'buy' rating and a target price of 1,490, implying a 20 per cent upside potential in the stock. The brokerage firm is positive about the stock because of the company's growing market share, capacity expansions and improving return ratios and balance sheet.

Motilal Oswal expects Kajaria to report a nearly 11 per cent revenue CAGR over FY23-25 fueled by tiles volume CAGR of 12 per cent. Its volume reported a CAGR of 9 per cent over FY12-23. The brokerage firm expects EBITDA and profit CAGR of 25 per cent and 30 per cent, respectively, over FY23-25 fueled by volume growth and margin recovery.

"Kajaria’s profitability has got adversely impacted by Q2FY22 due to higher gas prices; however; gas prices cooled off from their peak in the second half of FY23 and we expect a gradual recovery in operating profit margin going forward (16 per cent/17 per cent in FY24E/25E versus 13.5 per cent in FY23 and 14.6 per cent in Q4FY23)," the brokerage firm said.

Kajaria has been generating free cash flow (FCF) since FY16, which, according to Motilal Oswal, is likely to continue going forward. Kajaria turned net cash in FY19 and Motilal Oswal expects it to remain net cash at 3.3b in FY25 versus 1.8b in FY23 despite higher capex ( 6.7 billion over FY24-25).

"RoCE (return on capital employed) is projected to be at 23 per cent and 26 per cent in FY24 and FY25, respectively, versus 18 per cent in FY23 (average of 20 per cent over FY18-22)," said Motilal Oswal.

The stock is up about 8 per cent for the calendar year 2023 so far against a 2 per cent gain in the benchmark Sensex.

In its Q4 and FY23 analyst meet on May 17, Ashok Kajaria, Chairman & Managing Director of the company said in spite of the difficult year, the company sold 101 million square meters of tiles in the financial year 2022-23. The company aims to double it in the next 5 to 6 years.

Here are the five key factors behind Motila's buy call for the stock:

1. Largest player in the Indian ceramics industry: Motilal Oswal pointed out that the export of tiles from India has clocked a CAGR of 23 per cent over FY18-23 with nearly 17 per cent of domestic production being exported into different countries.

Kajaria is primarily focused on domestic markets with a mere about two per cent of its total revenue being generated from outside India. The brokerage firm believes Kajaria enjoys a 6 per cent revenue share in total domestic tiles currently.

2. Superior growth profile: As per the brokerage firm, Kajaria has delivered stronger growth than its competitors and continued gaining market share in a fragmented industry.

"The company reported a 14.4 per cent revenue CAGR over FY10-22 versus 7.5 per cent for the other listed players. Kajaria’s revenue share within the organised listed players increased to 34 per cent in FY22 (36 per cent in nine months of FY23) from 10 per cent in FY20. Its sales volume clocked an 11 per cent CAGR over FY10-23, which helped to improve its industry volume share," Motilal Oswal observed.

3. Capacity expansions to augment future growth: Motilal Oswal believes Kajaria will increase capacity further to 88.5msm by FY25E.

"We have factored in a 12 per cent tiles volume CAGR over FY23-25E. The company is increasing faucet capacity by 0.6 million pieces (to 1.6 million pieces) and sanitaryware capacity by 0.6 million pieces (to 1.35 million pieces), which will augment future growth. We expect 27.5 per cent revenue CAGR in this segment over FY23-25," said Motilal Oswal.


4. Strong brand franchise; higher advertisement (AD) spends: Kajaria has cumulatively spent 2.5 per cent of its revenue ( 8.1 billion) in AD over FY11-23, which helped it create brand visibility and a higher brand recall.

"We expect AD spending to be at 2.8 per cent of revenue until FY25. Kajaria continued to strengthen its presence through (a) aggressive campaigns on social media channels (Facebook, LinkedIn, etc.), OTT platforms (Hotstar, Zee5 etc.), national sporting events (cricket matches), (b) branding in high footfall areas (more than 30 airports) and (c) ADs by Bollywood celebrities," said the brokerage firm.

5. Focus on increasing distribution network and geographical reach: As per Motilal Oswal, Kajaria has 1,840 operative dealers (net addition of 140 dealers in FY23) versus 750 dealers in FY12 (CAGR of 7.1 per cent over FY12-23), which help it generate higher volumes.

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The brokerage firm underscored that the company targets to increase the dealer count by 450 in the next three years (150 dealers every year).

"Kajaria has created 80 exclusive showrooms across the country (50 showrooms opened in one year) to improve visibility. It commands a pricing premium of 5-6 per cent over peers, which is reflected in superior margins (operating profit margin of 16.5 per cent for Kajaria, 10.9 per cent for Somany Ceramics, and 10.6 per cent for H&R Johnson in FY22)," said Motilal Oswal.

Disclaimer: The views and recommendations given in this article are those of the brokerage firm. These do not represent the views of Mint. We advise investors to check with certified experts before taking any investment decisions.

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Updated: 23 May 2023, 12:55 PM IST
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