Retain ‘buy’ on Kajaria Ceramics, TP lifted to Rs 620

Strong tile exports come to rescue for the unorganised players. India is capitalising on China’s loss of market share. Benefits could be limited for branded tile players given low focus in exports; a stronger Morbi could be a disadvantage.

Exports save the day for India tile industry. Despite anticipated headwinds, strong growth momentum in exports has supported the industry in challenging times. Media reports suggest a 30% y-o-y growth in exports during June-August 2020 (source:sawdust.online). We attribute this to China losing market share in the US given US-imposed anti-dumping duties (ADD) in late 2019 bringing China imports to 1% from a 30% market share, preference for a diversified supplier base post COVID-19 outbreak, benefitting India, and rebalancing of supply/demand amid COVID-19 which has created pent-up demand and supply disruptions. India exports have had a CAGR of 31% over the last five years, raising its global market share to 13% in 2019 from 3% in 2014, while China’s market share has declined to 27% from 41%.

Expect a modest 2QFY21e for Kajaria as demand recovers slowly. While revenues should be down in 2QFY21e, we expect Kajaria to return to profitability from here on and post growth in 2H. We estimate a 17% y-o-y decline in revenues given slow demand recovery and a 35% y-o-y decline in EBITDA due to the impact of operating leverage. We expect Kajaria to retain benefits of lower gas prices as product pricing remains stable. Retain ‘Buy’; lift TP to Rs 620 from Rs 450. We cut our FY21-23e EPS estimates by 3-7% as we build in slower recovery in sales. Our fair value is based on a two-stage DCF, which we discount back to arrive at our TP. The higher TP results from changes in WACC as we remove the 2% COVID-19-led additional risk premium given the recovery in markets.