Markets
Kajaria Ceramics had a bumper start to the year. Now it needs demand to catch up.
Summary
- Kajaria Ceramics shares have underperformed compared to the Nifty 500 in 2024 due to subdued demand for tiles. Despite that, the company expects improved growth in 2024-25, aided by its branding and distribution efforts.
Shares of Kajaria Ceramics Ltd have lagged the Nifty 500 index so far in 2024. While the Kajaria stock has gained about 16%, the index has risen by 25%. Kajaria’s stock market underperformance can be attributed largely to weak demand in the tiles sector. Still, Kajaria’s returns are not insignificant. A saving grace is that the company began 2024-25 clocking an 8% year-on-year growth in sales of tiles by volume in the June quarter (the first quarter of FY25), far ahead of the industry’s 3-4% growth.
Kajaria is looking at a low double-digit growth in volumes in FY25 aided by extensive branding and distribution efforts. In the second quarter, however, the monsoons are likely to spoil the party as it is a seasonally weak period when construction activities typically slow down. Thus, momentum is likely to gather pace only in the second half of FY25.
In general, the company foresees the tiles industry to fare much better in FY25 than it did in FY24, with exports momentum likely to sustain and a rub-off of strong real estate demand likely leading to better tiles off-take.
After posting about 4% year-on-year consolidated revenue growth in FY24 to ₹4,578 crore, Kajaria’s management expects a three-year compound annual growth rate of 12% over FY24-FY27. Nonetheless, the management said during the company’s first-quarter earnings call that revenue growth in FY25 would be slightly lower than volume growth and that prices had more or less stabilized.
“The company expects to spend aggressively on advertisements in FY25, which is likely to provide further brand pull," said analysts from Nuvama Research. Kajaria’s advertising, publicity and sales promotion expenses increased 21% year-on-year in FY24 to ₹131 crore.
That said, the commissioning of Kajaria’s Nepal facility should aid earnings growth. On the margin front, lower cost biofuel is expected to offer support. In the first quarter, Kajaria’s Ebitda margin had contracted year-on-year by 90 basis points to 15%, but it remains in the range of 15-17% that the company has guided for FY25.
To be sure, the stock’s valuations are not enticing enough even as some reckon the company’s leadership position deserves higher valuations. Kajaria’s shares trade at 38 times FY26 estimated earnings, Bloomberg data showed.
“Beyond the near-term demand hiccups, medium-term prospects are expected to remain intact," Jefferies India said in a report dated 20 September. The brokerage forecasts Kajaria’s FY24-27 sales and profit-after-tax Cagr at 14% and 23%, respectively, driven by volumes (11-12% Cagr), optimizing mix (higher mix of vitrified tiles), better margins in bathware, and deeper distribution into tier 2/3/4 cities. Better-than-expected growth can act as a trigger for further expansion in valuation.
