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    Hold Kajaria Ceramics, target price Rs 389: Emkay Global

    Synopsis

    Though the near-term outlook remains challenging, the brokerage says it will continue to command premium multiples due to its leadership position and balance sheet strength.

    Buy-sale15
    Emkay Global has given a hold rating to Kajaria Ceramics with a 12-month target price of Rs 389, The share price moved up by 0.82 per cent from its previous close of Rs 391.40. The stock’s last traded price is Rs 394.60.


    Kajaria Ceramics’ Q4 performance was hit by lockdowns and the firm reported a 19 per cent year on year volume fall. In FY20, volume declined 2.8 per cent year on year. Realization fell 1.1 per cent year on year /0.8 per cent quarter on quarter. Prices of GVT and PVT tiles were under pressure as Morbi-based players tried to push volumes into markets to meet their liquidity requirements. Revenue from Sanitary ware/Bath fittings fell 22.1 per cent year on year. Realization from own manufactured products fell 4.5 per cent year on year, but that of JV products rose 5.2 per cent year on year.

    Investment Rationale

    Tiles demand was hit by lockdowns and recovery is expected only in the second half of FY21, says the brokerage. The company management said that sales volumes in May/Jun‘20 were at 35 per cent/50-60 per cent of last year’s volumes. The brokerage has cut volume estimates by 26.3 per cent/18.7 per cent for FY21/22E. The management indicated cost reduction measures across verticals and expected cost savings of Rs 800 million in FY21. The brokerage cut EBITDA by 40.3 per cent/25 per cent for FY21/22E.

    Gas prices have fallen by Rs3-4/scm (average price Rs31/scm in Q4); however, the benefits would mostly be reflected in Q2FY21 as the firm had inventory at FY20-end. Management does not expect much pressure on Tiles prices due to liquidity issues faced by Morbi players. Capex in FY21E is likely to be limited at Rs300-400mn vs. Rs1.2bn in FY20. Receivable days improved to 50 vs. 61 in FY19, but inventory days rose by 13 to 65 in FY20. ROE is likely to be at 13.3 per cent/14.2 per cent in FY22/23E vs. 15.5 per cent in FY20, says the brokerage.

    Though the near-term outlook remains challenging, the brokerage says it will continue to command premium multiples due to its leadership position and balance sheet strength (net cash should improve to Rs 3.8 billion/ Rs 6.1 billion/ Rs 8.3 billion in FY21/22/23E against Rs 1.1 billion in FY20). Emkay Global has introduced FY23 estimates and maintains hold rating, with a revised target price of Rs 389 (22 times mid-FY23E EPS).


    Key risks to the call include a steep recovery in tiles demand/prices.

    Kajaria Ceramics-EMkayGlobalJune302020
    Source: Emkay Global

    Financials


    For the quarter ended March 31, 2020, the company reported consolidated sales of Rs 652.04 crore, down -12.04 per cent from last quarter sales of Rs 741.30 crore and down -20.03 per cent from last year's same quarter sales of Rs 815.31 crore. The company reported net profit after tax of Rs 48.82 crore in the latest quarter.

    Promoter/FII Holdings
    Promoters held 47.58 per cent stake in the company as of March 31, 2020, while FIIs held 23.14 per cent, DIIs 15.18 per cent and public and other 13.97 per cent.



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    (What's moving Sensex and Nifty Track latest market news, stock tips and expert advice, on ETMarkets. Also, ETMarkets.com is now on Telegram. For fastest news alerts on financial markets, investment strategies and stocks alerts, subscribe to our Telegram feeds .)

    Download The Economic Times News App to get Daily Market Updates & Live Business News.

    Subscribe to The Economic Times Prime and read the Economic Times ePaper Online.and Sensex Today.

    Top Trending Stocks: SBI Share Price, Axis Bank Share Price, HDFC Bank Share Price, Infosys Share Price, Wipro Share Price, NTPC Share Price

    ...more
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