Stock Review: Kajaria Ceramics

 

The spectacular earnings growth seen in the past couple of years is set to sustain for India's leading ceramic tile manufacturer Kajaria Ceramics in FY12 as well. The company has aggressively added capacities and taken steps to improve margins that will maintain its growth momentum.

After recording three years of stagnating profits between FY07 and FY09, the company moved on to a strong growth path in FY10 with a four-fold profit jump over FY09. The growth momentum has continued in FY11, with the company posting a 83% profit growth in the first nine months to . 42.2 crore. The company now appears set to cross . 1,000 crore of turnover and . 60 crore of net profit in FY11.

Due to rising demand and capacity constraints, the company currently depends significantly on trading, which constitutes 45% of total revenues. The manufacturing business typically earns higher operating profit margins around 20% while the trading business has 8-10% margins. The company's combined operating profit margin stood at 15.8% in the first nine months of FY11.

The company recently completed expansion at its Rajasthan facility to add 6-million square meters (MSM) of vitrified tiles at a cost of . 130 crore. At the same time, it also completed conversion of 2.6 MSM ceramic tiles capacity to vitrified. Earlier in February 2011, it had acquired a 51% stake in Soriso Ceramics with around 2 MSM capacity of ceramic tiles.

All these steps are expected to add another 300 crore to total revenues in FY12 while improving margins as the share of manufactured products in its overall sales goes up.

Expansions were mainly funded from the company's internal accruals, which means its debtto-equity ratio has, in fact, improved, of late. From 1.67 at the end of FY10, the debt-to-equity ratio improved to 1.3 by end-September 2010 and is expected at 1.2 for end-FY11.

In January, the company also tied up with a Turkish manufacturer of 'VitrA' brand of sanitaryware and bathroom fittings. Kajaria will be its exclusive importer and sole distributor for India. Trading in these value added products will also help the company improve its operating margins.

Kajaria's scrip has widely outperformed broader markets consistently over the past one year. The scrip gained 34% in past one year against around 8% gain in the BSE Sensex. Its current market price, which is just 10% below its 52-week high, is around 10 times its earnings for trailing twelve months.