Nirmal Bang: Kajaria Ceramics - Initiate Coverage With ‘Accumulate’ On Attractive Valuation

Nirmal Bang Report

The steep decline in Kajaria Ceramics Ltd. stock price by 26.7% from its 52 week high primarily highlights the concerns of slowdown in earnings growth due to the Covid-19 pandemic.

The continued weakness in the stock price implies that the market is not factoring in a recovery post Covid. In our view, the negative impact is overdone.

We expect a sharp recovery towards normalcy from FY22.

The stock is currently trading at price to earnings of 26.2 times on September FY23 earning per share, which is below the five year trading range of 30-50 times one year forward earnings.

Kajaria Ceramics has a strong balance sheet with consistent decline in net debt to equity ratio despite addition of production capacity.

We expect the working capital to peak in FY21 and improve from FY22. The net debt to equity stood at (0.07)times in FY20 and is expected to decline to (0.18) times in FY22 and (0.26) times in FY23.

The cash conversion cycle (days) has increased from 25 days in FY12 to 111 days in FY20.

We expect it to peak at 145 days in FY21 given the sharp impact of Covid-19 before improving to 120 days in FY22 and 85 days in FY23.

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