Emkay Global Financial Services is bullish on Kajaria Ceramics and has recommended buy rating on the stock with a target of Rs 610 in its July 9, 2014 research report.
>> We believe that Kajaria's compounding growth story to continue as company shares its plan for 18-20 percent pa growth in next two years on back of industry growth of 12-13 percent
>> Post weak results in Q3FY14 due to lower availability of products, Q4FY14 results were encouraging with revenue and PAT growth of 17 percent and 37 percent led by margin expansion
>> Increased cost pressure in unorganized sector due to switch to gas and softening gas cost with stable currency to lead margin expansion for the organized players
>> With improved visibility for earnings growth and balance sheet we expect valuations to remain expensive and upgrade our price target to Rs 610 based on 24xFY16 EPS and maintain BUY recommendation
"Kajaria posted revenue growth of 17 percentyoy (mainly driven by volume) to Rs 5.2bn (in-line with our estimates) in Q4FY14. Change in accounting for excise duty from current quarter and low base affect of previous year resulted in 90bps EBIDTA margin expansion to 16 percent. With reduction in interest cost, PAT increased by 37 percent to Rs 421mn (ahead of our estimates of Rs 396mn). In FY14 company posted revenue growth of 17 percent to Rs 18.8bn and EBIDTA margins of 14.9 percent with PAT growth of 19 percent. Results were affected due to strike at Morbi, Gujarat for one month, which affected production. Company is confident of achieving sales growth of 18-20 percent on back of industry growth of 12-13 percent. Strong demand from Tier2 and Tier3 cities and encouraging response from company's dealers' network, Kajaria is likely to gain market share from unorganised market and expected to post growth of 18-20 pa. With Morbi based players loosing low cost advantage due to switch from coal to gas and stabilization in gas cost (after huge volatility in gas prices in FY14), we expect organized players to gain pricing power."
"With recent rally in stock (33 percent in last one month) the current valuations of the stock has become expensive at 24x one year forward from 15x earlier. We believe that near term upside is likely to remain muted but long term growth remains intact as company shares its Rs 3.5bn capex plan to increase its capacity by 50 percent over next two years. This will help the company to meet its guidance of achieving 18-20 percent pa growth. However, we estimate FY14-16E revenue CAGR of 25 percent and PAT CAGR of 28 percent based on our assumption of organized players gaining market share from unorganized sector. We are upgrading our price target to Rs 610 based on 24xFY16 EPS of Rs 25.4. Strong balance sheet with D/E of 0.4x and RoCE of ~30 percent, we believe that valuations are likely to remain expensive. We maintain our BUY recommendation on the stock," says Emkay Global Financial Services research report.
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