Kajaria ceramics: A long term multibagger

June 13, 2017 2 Ankit Shrivastav

Introduction:

With rapid urbanization and growing demand for housing in tier 2 and tier 3 cities, demand for home decor products has been rising. Govt’s push to affordable housing, will fuel the demand further. One of the key beneficiaries of such demand is Kajaria ceramics.

 Business and history:

Kajaria ceramics is the largest tiles manufacturer in the country. It was established in the year 1985. It’s a midcap company with market cap of 10,500 crores. Market share of the company is 10% in unorganized tiles segment and 20% in organized tiles segment. Company is engaged in the manufacturing and trading of ceramics, polished and glazed vitrified tiles.

Company has widespread network of display centers and distribution channel to market and sell its products through Kajaria World, Kajaria Galaxy, Kajaria Studio and other multi-brand dealers. It is engaged in sanitary ware and faucets verticals through its subsidiary, Kajaria Bathware Pvt Ltd.

Company has an annual aggregate capacity of over 68.6 million square meters, distributed across over nine plants in Uttar Pradesh and Rajasthan; approximately five plants in Gujarat, and over one plant at Vijayawada in Andhra Pradesh.

Kajaria Ceramics is the largest brand in the Indian tiles market, and is trying to improve visibility with deeper penetration to tier 2 and tier 3 cities, by expanding its dealer network.

Below is the chart representing various tiles manufacturing companies in India and their market share in the segment.

As it is clearly visible, Kajaria Ceramics is the market leader in the tiles segment with more that 24% market share, which means Kajaria Ceramics serves almost one fourth of the total ceramic tiles segment in India.

Revenue Segments:

Company’s core business is manufacturing and selling variety of decorative tiles, almost 99% of its revenues are generated from sale of tiles. Since its revenue is concentrated in a single segment, company is now diversifying in other segments. Company wants to emerge as a complete bathroom solutions provider, a segment related to company’s current business, which will help in cross selling their products and services to their customers.

So what makes Kajaria Ceramics a potential multibagger? Here is my analysis.

Basic EPS:

Company’s EPS has seen a tremendous growth in the past decade from Rs. 1.04 per share in 2007 to Rs. 29.52 per share in 2016, a growth of 39.74% CAGR per year. In the past 5 years company’s EPS has seen a CAGR of 21.89% per year.

Cash EPS:

Kajaria Ceramics Cash EPS has seen a growth of 24.43% CAGR in the past decade, from Rs. 3.99 per share in 2007 to Rs. 35.51 per share in 2016. In the past 5 years, company has posted healthy cash EPS growth of 17.27% CAGR per year.

Here is the chart comparing Basic EPS and Cash EPS

Revenue from operations/Share:

Company’s revenue from operations per share has increased from Rs. 55.88 per share in 2007 to Rs. 308.12 per share in 2016, CAGR of 18.62% per year, while in last 5 years growth has been 11.55% CAGR per year.

Net profit margins:

Kajaria’s net profit margins have improved significantly in the past decade. From 2.6% in 2007, company’s net profit margin has improved from 2.6% to 9.59% in 2016, a CAGR of 13.94% per year. In the past 5 years, company’s net profit margin has seen a growth of 9.33% CAGR per year.

ROCE:

Company’s ROCE has seen a good growth in the past 10 years from 1.83% in 2007 to 23.36% in 2016, a growth of 29% CAGR per year. However in the past 5 years, ROCE growth has slowed down to 4.12% because company is diversifying its business in other related segments such as bath fittings.

Debt/Equity:

Company has significantly reduced its debt in the past decade, from debt to equity ratio of 2.35 in 2007, company has reduced to 0.05 in 2016. If we look at five year debt to equity ratio, company has reduced its debt significantly. While in 2012, 60% of total company’s funds were financed by debt and rest 40% by equity. By the year 2016, out of the total funds of the company, only 5% is financed by debt and rest 95% is financed by equity. Kajaria Ceramics is moving toward becoming a zero debt company in the future which means company will be able to retain all its profits, which will not only improve profitability but will also provide better dividend per share in the future.

Dividend payout ratio % of Net Profit:

Kajaria ceramics has been consistent dividend paying company in the past ten years. Kajaria has consistently paid almost 15% to 20% of its net profit as dividends to its shareholders. In the past 5 years, Kajaria Ceramics’s dividend payout ratio has reduced from 22.79% in 2012 to 16.91% in 2016. It is a conscious decision by the company to plough back the funds which will be used in expanding the business in the future. However, if we look at the dividend per share data, company’s dividend per share has doubled in last 5 years.

Dividend per share:

Company‚Äôs dividend on per share basis has improved in the past ten years. In 2007, company paid Rs. 0.2 per share as dividend while in 2016; dividend per share went up to Rs. 5 per share, a clear indicator of company‚Äôs improving profitability and investor friendliness. Even if we look at past 5 year data, Company’s dividend per share has doubled from Rs 2.5 per share in 2012 to Rs. 5 per share in 2016.

The fact that company is giving a smaller portion of its net profit as dividend yet its dividend per share is increasing every year is a proof that company is not only able to generate better profits every year, but is retaining a bigger portion of profits. These retained earnings will be used in future expansion of the business, giving Kajaria’s investors a good capital appreciation in the long term.

Future Expansion plans:

Kajaria Ceramics is trying to capture a larger part of the unorganized tiles market, nearly half the domestic industry. Under-penetration of tiles, especially in rural areas, along with increasing trend of nuclear families, will be key demand drivers for the sector.

Company diversified into sanitary ware and faucet manufacturing under brand name kerovit. Commissioned a plant in morbi capacity of 7 lac units per annum, and 1 million faucet making facility in galipur rajasthan. With this diversification, Kajaria Ceramics is planning to become a complete bathroom solutions company.

What makes Kajaria Ceramics a great investment?

  • India‚Äôs biggest brand in tiles industry.
  • 20% market share in organized tiles segment and 10% in unorganized tiles segment.
  • Improving profitability and reducing debt.
  • Rising demand for affordable housing will boost company‚Äôs sales and distribution network
  • Strong distribution network penetration in tier 2 and tier 3 cities.
  • Diversification in related business categories, such as faucet manufacturing and other bathroom fittings.
  • Big funds like Franklin Templeton investment funds has recently bought 22 lakh shares in Kajaria Ceramics news link given below:

    Franklin Templeton Buys 22 lakh Shares of Kajaria Ceramics 

Total Comments ( 2 )

  1. Akash says:

    Thanks for the detailed analysis Ankit. I a newbie in this field and your articles are really helping people like me to understand the basics

    I have noticed in your analysis, you have not included or considered the financial numbers/ratios for 2017 which are not good compared to the previous years. Is there any specific reason?

    • Ankit Shrivastav says:

      Thanks for the comment Akash, There is no specific reason, by the time I finished writing this post, results were not updated. As far as poor results are concerned, the results are not poor, On October 6th 2016,
      Kajaria Ceramic stocks split the face value from Rs. 2 per share to Re 1 per share. Because of this split, EPS of Kajaria shows 16.96 for 2017. If we adjust EPS of 2017 to pre split levels, it will be almost Rs. 34 per share which is higher than previous year’s EPS of Rs.29.56 per share.

      Hope my answer was helpful.