Stock Review: Kajaria Ceramics

 

 

Strong Results, Current Low Valuation And Expansion Moves To Add To Its Glaze

 

TILES-maker Kajaria Ceramics has seen its share price rise by over 80% in the past one year, sharply outpacing the Sensex, which gained 16%.

   Substantially improved operations and consistent financial results over the last five quarters have helped the growth.

   For the recently completed September quarter, the company reported a smart 52% jump in net profits to 13.3 crore as it curtailed its fuel costs and reduced the interest burden. The company's net sales growth stood at 19.6%, while its volume growth increased 4.4% to 7.08 million square metres (msm) of tiles. The operating margin weakened slightly by 70 basis points to 15.7% on account of lower capacity utilisation of the ceramic floor tile unit at Sikandrabad and the need to offer more discount to dealers for pushing sales due to heavy rains and floods in the northern parts of the country in the months of July and August.

   The company witnessed a steep rise in the sale of high-end glazed vitrified tiles, which it currently imports. This resulted in a 78% jump in its cost of traded goods.

   The company cushioned the fall in its margins through 16% reduction in its fuel cost and 21% cut in other manufacturing expenditure. The supply of natural gas at its Gailpur plant in Rajasthan starting May helped it curb the fuel costs.

   Of the 6.9 msm ceramic floor tile capacity at its Sikandrabad plant in Uttar Pradesh, 4.2 msm was for dry-grinding technology, which couldn't succeed in India.

   After scaling down the production, the company finally closed the unit in July. The company is in the process of converting this capacity into a vitrified tile plant by adding some balancing equipment by February 2011.
   Except for this plant, the company has been running its other plants at nearly 90% capacity level.

   The company is also in the process of adding six msm capacity of high-end polished/glazed vitrified tiles at its Gailpur plant to be commissioned by January 2011. Once commissioned, this will replace the company's imports and help improve operating margins. The company is aiming to achieve about 950 crore of turnover in FY11 with operating margins above 16.5%.

   Considering the recent results, the company's current valuation is 12.4 times its earnings for trailing 12 months. Considering the various efforts that the company is taking to expand capacities and augment margins, the valuations appear attractive.