India Building Materials: Tile Makers Face Double Whammy

India focused Portfolio Advisory - Exp of 40+years, Das Capital Management and Advisors

Arun Thirumalai

India focused Portfolio Advisory - Exp of 40+years

Das Capital Management and Advisors

Das Capital is a research boutique with an aim to continuously map and plan the investment needs of investors focused on India. We have a six member research team with a combined experience of over 40 years as a part of our investment wing. Our team assisted in the setup of Premji Investments, which was one of India’s first family offices focused to managing Mr.Azim Premji personal wealth. We also serve as a research team to two Indian private equity energy funds “Small is Beautiful” and “KSK Emerging India Energy Fund”.

Equity Bottom-Up

Kajaria Ceramics is the largest tile manufacturer in India with a capacity of 69 mn sq m (msm) per annum. The company's brand is among the few brands in India that are synonymous with the product itself. The company has three segments under tiles namely ceramic, polished vitrified and glazed vitrified tiles. Over the past few years, the company has improved the share of the latter that is a high margin category. The company plans to increase its capacity to 100 msm by 2020 with a significant contribution from high margin products that may improve the overall profitability margins going forward.Key growth driversUnderconsumption- India, in spite of being the second largest tile consumer in the world, has a very low per capita tile consumption of 0.59 sq m per annum. With rising disposable income it is likely to reduce the gap with its peers as the global average consumption is above 3 sq m per annum.Low market share- In spite of being the largest tile manufacturer in the country, Kajaria's market share is only 8% of the overall tiles industry reflecting a significant scope for improvement.Long-term demand for housing-  Real Estate in India is expected to witness a USD 1.3 tn spend till FY24 supported by a strong government push through schemes like housing for all, smart cities and regulations like RERA etc. This may create a significant opportunity for home improvement/ building material industries including tiles.GST- The GST council has lowered the excise duty on tiles from 28% earlier to 18%, thereby reducing the price differential between an unorganized and a branded player, significantly. This may help towards a gradual shift to organized players with the rising aspiration level of the consumers.We expect the revenues to grow at a CAGR of 16% and PAT at a CAGR of 20% from FY17-20e on capacity expansion and improving profitability margin.The average capacity utilization in this period is expected to be around 96% per annum.ValuationThe company trades at a PE of 34x FY17, 32x FY18e, 25x FY19e and 19x FY20e EPS and EV/EBITDA of 19.5x FY17, 18.7x FY18e, 15x FY19e and 11.6x FY20e EBITDA which we believe is fairly valued given a strong brand name, huge demand opportunity and a high-quality management with good corporate governance standards.

Kajaria Ceramics is the largest tile manufacturer in India with a capacity of 69 mn sq m (msm) per annum. The company's brand is among the few brands in India that are synonymous with the product itself. The company has three segments under tiles namely ceramic, polished vitrified and glazed vitrified tiles. Over the past few years, the company has improved the share of the latter that is a high margin category. The company plans to increase its capacity to 100 msm by 2020 with a significant contribution from high margin products that may improve the overall profitability margins going forward.Key growth driversUnderconsumption- India, in spite of being the second largest tile consumer in the world, has a very low per capita tile consumption of 0.59 sq m per annum. With rising disposable income it is likely to reduce the gap with its peers as the global average consumption is above 3 sq m per annum.Low market share- In spite of being the largest tile manufacturer in the country, Kajaria's market share is only 8% of the overall tiles industry reflecting a significant scope for improvement.Long-term demand for housing-  Real Estate in India is expected to witness a USD 1.3 tn spend till FY24 supported by a strong government push through schemes like housing for all, smart cities and regulations like RERA etc. This may create a significant opportunity for home improvement/ building material industries including tiles.GST- The GST council has lowered the excise duty on tiles from 28% earlier to 18%, thereby reducing the price differential between an unorganized and a branded player, significantly. This may help towards a gradual shift to organized players with the rising aspiration level of the consumers.We expect the revenues to grow at a CAGR of 16% and PAT at a CAGR of 20% from FY17-20e on capacity expansion and improving profitability margin.The average capacity utilization in this period is expected to be around 96% per annum.ValuationThe company trades at a PE of 34x FY17, 32x FY18e, 25x FY19e and 19x FY20e EPS and EV/EBITDA of 19.5x FY17, 18.7x FY18e, 15x FY19e and 11.6x FY20e EBITDA which we believe is fairly valued given a strong brand name, huge demand opportunity and a high-quality management with good corporate governance standards.

Kajaria Ceramics- A Key Beneficiary of the GST Led Formalisation of the Home Improvement Sector