Kajaria Ceramics Gets At Least Two Rating Upgrades After Q2 Results

At least two brokerages upgraded their investment recommendations for Kajaria Ceramics Ltd., citing India’s biggest tilemaker’s efforts to cut costs and generate healthy cash flows, and a recovery in margin in the quarter ended September.

A strong free cash flow generation on firm cash collections and muted capital expenditure in the first half of FY21 drives the company’s cash and cash equivalents higher, ICICI Direct said in a note, as it upgraded the stock to ‘buy’ from ‘hold’.

Nirmal Bang, which also upgraded the stock to ‘buy’ from ‘accumulate’, derives the optimism from Kajaria Ceramics’ ability to deliver strong growth in sales volume despite impact of Covid-19 due to improving market share; expand margin through sustained cost reduction; generate strong operational cash flows; and maintain strong balance sheet with net cash position.

Not just that, brokerages on an average also increased target price on Kajaria Ceramics by 23% after the second-quarter results.

Kajaria Ceramics, according to an exchange filing, reported a 36.5% year-on-year increase in its operating profit to Rs 144 crore in the quarter ended September. That was aided by subdued gas prices and overall cost efficiency. Its operating margin widened to 20.2% from 14.7% a year ago.

The company’s revenue, however, remained flat at Rs 712.5 crore, and net profit declined 4% to Rs 89 crore.

Analyst Ratings

Of the 31 analysts tracking the stock, 20 suggest a ‘buy’, eight has a ‘hold’ rating and the rest recommend a ‘sell’. The average of Bloomberg consensus 12-month target price, however, implies a downside of 2.8%.

The stock fell as much as 1.6% in early trade on Wednesday compared with the Nifty 50’s 0.84% gain.

Here’s what brokerages have to say…

ICICI Direct

• Hikes target price to Rs 700 from Rs 530 apiece
• Market share gains and stable pricing drive flat revenue year-on-year
• Lower overheads and stable fuel costs push Ebitda margin to four-year high
• Increases revenue and earnings estimates by 3.7%, 3.0%; and 31.7%, 13.2% for FY21 and FY22, respectively, factoring in better-than-expected volume recovery and Ebitda margin in higher teens

Nirmal Bang

• Hikes target price to Rs 664 from Rs 501 apiece
• Strong volume growth drives profits
• Values Kajaria at 30 times FY23 estimated EPS, which is at the lower end of its long-term (five-year) price-to-equity band

Jefferies

• Maintains ‘buy’, raises target price to Rs 650 from Rs 550 apiece
• Operating margin at the highest in 16 quarters
• Demand improved progressively in Q2; primarily emanating from tier 2, 3, 4 markets
• Stable pricing, market share gains in domestic tiles markets are key positives
• Expects sales, profit after tax to grow 6%, 9% CAGR over FY20-23 with more than 120 basis point margin expansion

Investec

• Maintains ‘buy’, increases target price to Rs 654 from Rs 610 apiece
• Execution on cost avenues stand out
• Management remains upbeat on margins and volume growth
• Focus on exports by Morbi-based player and cost saving theme are key positives

Emkay Global

• Maintains ‘hold’, increases target price to Rs 545 from Rs 386 apiece
• Strong Q2 performance was driven by a steep recovery in sales volume and benefits of lower costs
• Recovery in sales volume has surprised us positively; Management indicated that Q3 volumes to be similar to FY20 and more than 10% year-on-year growth in Q4
• Lower credit sales and inventory liquidation has led to Rs 130 crore reduction in working capital in the first half of FY21, which led further improvement in net cash levels
• Raises EPS estimates by 66.4%, 18.8%, 19.1% for FY21, FY22 and FY23

IDBI Capital

• Maintains ‘buy’; raises target price to Rs 670 from Rs 580 apiece
• Operations back to pre-Covid level, sales volume shows impressive recovery
• Prudent cost management led to impressive Ebitda margin improvement
• Efforts on brand building and increasing reach through display centers has been instrumental
• Increases net sales and PAT estimates by 19.9%, 2%; and 81.6%, 14.6%, respectively, over FY21 and FY22