Research Report
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[NOT COPIED FROM ANYWHERE.
INFORMATION GAHTERED AND COMPILED FROM VARIOUS BUSINESS RELATED MAGAZINES &
PUBLICATIONS, WEBSITES, NEWSPAPERS, REPORT FROM BROKERAGE HOUSES]
Kajaria Ceramics Limited
Indian Tile Industry
The total Indian tile industry size
is around Rs. 19,500
crores, but as compared to China and Brazil India’s Share is just 1/6th
and 1/7th respectively, which clearly shows huge growth potential
lies ahead for this industry to grow. Ceramic tiles are integral to home
improvement. They are primarily hygiene products, evident from their varied use
in bathrooms and kitchen to most households to medical centres, labs, shopping
malls and other centres.
This is a very competitive space to
operate with so many unorganized players manufacturing at low cost, low quality
and pretty much fragmented. Most of the tile production in India happens at
Morbi Gujrat which is a hub for unorganized tile companies.
Top 5
Leading Manufacturing Nations [MSM=Miles
Square Metre]
Regions Year
2012(MSM) % of
World’s Production
China 5200 47
Brazil
866 8
India
691 6
Iran
500 5
Itly
376 3
[Source : Ceramic World Review]
[Latest figures could not be made
available due to lack of information source]
Top 5
Leading Consuming Nations in 2012
Regions %
of World’s Production
China
39
Brazil 7
India 6
Iran 3
Vietnam
2
Opportunity
in INDIA
Indian economy to grow at faster rate
than other developing countries. Recent GDP growth of 7.5% is quite
satisfactory and now policies of Government will place the Indian economy in
the new growth track. The whole sentiment of the FIIs, FPIs and HNIs have become positive after the
formation of new Government and policy announcement and more importantly
endeavour towards the implementation of those policies.
Further new government’s push for
housing for everyone, recent budget announcement for making sanitary toilets in
India will give fuel to the engine of the tile industry. Now, also imports from
china are declining as domestic players have developed the capability to
manufacture quality and cost efficient products. Chinese manufacturing cost
have increased and Indian currency has weakened.
Further huge urbanization happening
in India and it will continue to happen. The spread of roads, telephones and
electricity is helping urban centres extend, creating new population clusters,
resulting in emergence of significant housing demand from non-metro locations.
There are few tailwinds for organized
tile industry in India in near future:
(i)
Per
Capita consumption of tile in India is 6 times less than China and 7 times less
than Brazil which shows huge potential for growth.
(ii)
As
per last census 2011, numbers of cities have grown 3 times in 10years which
show rapid urbanization happening in India.
(iii)
People
migrating from rural to urban will cross 40% to 33%; young generation’s
spending on brands and affordability. Tiles expenses as a % of housing cost is
less than 10%.
About
KAJARIA
Kajaria, having its registered office
at Sikandrabad, Uttar Pradesh, is promoted by Mr. Ashok Kajaria. Mr. Kajaria
has over 30 years of rich experience in the tile industry, global marketing and
business related to construction industry. The company enjoys a broad presence
across ceramic tiles, polished vitrified tiles and glazed vitrified tiles.
Pan-India
Reach
Kajaria possesses one of the largest
sectoral deladrship networks comprising more than 10,000 sales points across
India.
Multichannel
Distribution Netowrk
(a) Kajaria Galaxy – 25 Nos. – 4,000 sq
ft each for all tile verticals.
(b) Kajaria Prima – 95Nos. – A dealer
store for display of Ceramic wall and floor tiles without keeping any other
tile brands.
(c) Kajaria World – 19 Nos. – A
Standalone store that provides dedicated space to high end tiles.
(d) Kajaria Studio – 222 Nos – For
Polished Vitrified and/or glazed vitrified tile verticals.
(e) Kajaria – 550 Nos. – For Multibrand
delaers.
Clients of Kajaria
There is a huge client-base of
Kajaria. In order to keep the report brief I am mentioning 3 to 7 names from
each sector in this vertical.
(a) Corporate: Bosch, HUL, Ambuja Cement, L&T,
Microsoft, Vodafone retail stores, Tata Steel.
(b) Entertainment: Inox – Jaipur,
Cinemax, Zee Tv Studio – Noida.
(c)
Auto: M&M, Maruti Suzuki, Honda
Scooters, Tata Motors.
(d) Banks : SBI,
RBI, BOB, HDFC, Axis, Yes Bank, Indusind Bank
(e) Builders and Developers: Shova Developers, Mihindra lifestyly,
Omaxe group, HDIL Ajmera Group.
(f)
College
and Schools: DPS,
Don Bosco, Sarala Devi Birla, Amity University.
(g) Govt: Airport Authority of India,
BHEL, BPCL, BSNL, LIC, Forest Dept, NTPC, ONGC.
(h) Hotels: ITC Grand, Pink Pearl,
Haldirams’, City Palace – Udaipur.
(i)
IT:
IBM, TCS, Infosys, Wipro, Techmahindra, HCL Tech.
(j)
Retail
Sector: Big Bazar, City Centre, Shoppers Stop, Reliance Mart.
(k) Sprots: DY Patil Stadium Jawaharlal
Nehru Stadium, Wankhade Stadium.
Products of Kajaria
Kajaria
produces and sells three types of tiles. The details are following:
(a)
Ceramic
Tiles
Most
commonly used tiles in households for flooring and wall. Lot of low cost
manufactures are present in this space. So, competition is steep in this
segment as this is the low end in the value chain. Kajaria gets 44% revenue from this segment.
(b)
Polished
Vitrified Tiles
There is a structural shift towards
vitrified tiles due to its high-quality, less porosity, less water consumption,
high durability and its strength. It is expensive than ceramic tiles.
Kajaria is the largest producer of vitrified tiles. The company gets 38% Share from this segment. Also
operating margin (16% - 17%) is greater as compared to ceramic tiles (14% -
15%). The company is aiming for higher growth in this space. The company has
commissioned two plants recently for capacity addition. Consumers also
preferring this tile due to the reasons mentioned above. Kajaria Used to import
before; but it has consciously invested in adding PVT capacity due to its high
margin and strong growth.
(c)
Glazed
Vitrified Tiles
This segment contributes 18% of the total revenue of the company. This
product was introduced in 2007-08 in India for the first time in an organised
manner by way of import. It is alternative to the expensive Italian marbles.
Kajaria, today possesses the largest product basket in terms of designs and
sizes. The company offers the largest number of wood and stone finish tiles in
the large format.
This tile represents the premium
segment in the tile value chain, marked by quality, durability and flexibility
to impart unique designs and textures. The use of digital printing technology
on vitrified tiles has widened design and texture options. This is more
expensive than PVT and it is gaining acceptance for the consumer on the upper
end.
Recently the company has introduced the eternity HD wood range in two sizes,
initiated export to the US for the first time and increased the domestic retail
presence.
Financials
Kajaria registered healthy growth
despite the numerous challanges faced by the domestic tile manufactures amid of
volatile economic situations. The company has shown strong financial muscle and
sustained profitable business growth over the last 4 – 5 years.
Net Sales (Rs in millions)
2010-11 2011-12 2012-13 2013-14 2014-15
9523
13,115 15,822 18,387 21,869
Net sales grew by 18.94% over 2013-14 whereas industry growth rate is 14% - 15%.
Most importantly the working capital
cycle is reduced drastically from 80days in 2009-10 to 25 days in 2013-14
[2014-15 figures could not be made available due to lack of information source].
This was largely due to a faster product offtake and faster payments by
dealers. Shorter Working Capital cycle increased net cash flow from operations.
Debt Equity Ratio (times)
2009-10 2010-11 2011-12 2012-13 2013-14
1.39 1.28 0.96 0.82 0.41
Net Profit (Rs in millions)
2010-11 2011-12 2012-13 2013-14 2014-15
606
809
1045
1242
1756
Net profit grew by 41.38% over 2013-14.
Return on Capital Employed ( % )
2009-10 2010-11 2011-12 2012-13 2013-14
16.98 22.09 27.96 28.89 29.06
Growth of Share Price
In April 2013 the high and low price
of Kajaria was Rs209.25
and Rs177.25
respectively in National Stock Excchange (NSE). Now the price of the company
quoting Rs 750 plus i.e. price is increased more than 4 times during past two years. So, we
can say that it has delivered more than 400% return in last two years whereas
Sensex Return is less than 30% in last two years. So, it outperformed Sensex
and Nifity and it will continue to do so.
Comparison with Peers
Top 3
players accounts for half of organized sales of `10,000 crores.
Kajaria:
2,000 Crores.
H&R Johnson:
1,900 Crores.
Somany:
1,400 Crores.
Operating Margin (%)
2014
2013 2012 2011
Kajaria 12.41
13.95 15.27 15.58
Somany 6.49 8.12 8.40 9.46
Orient 8.0 10.0 9.10 8.84
Net Margin (%)
2014
2013 2012
Kajaria 6.2 6.3 6.2
Somany 2.22 3.0 2.83
Orient 0.35 1.71 2.46
Other Competitor Nitco Tile is making
losses for last 3 years.
Look at the difference between
Kajaria and its listed competitors in terms of margins. They are not even close
to its OPM an NP. What is more important is Kajaria is less leveraged than its
peers.
Price Realisation per sqm (` )
2009-10 2010-11 2011-12 2012-13 2013-14
292 321 330 348 354
It took five
years to increase prices by 20%, so the future growth should come from volume
only not value. It cannot raise prices vis-a-vis inflation.
Region wise Revenue Split
Today it has strong presence in north which contributes 42% of revenue; the south contributes 29% and balance come from West and East Zones. Currently Tire II
and III cities contribute 25% to 30% to the company’s topline.
Chartered Accountant
Company’s
auditor is O.P. Bagla & Company. The firm has 40 years of rich experience
and expertise.
SWOT ANALYSIS
STRENGTHS
Kajaria has strong presence in North
mainly due to its plants are located in Galipur(Rajasthan) , Sikandrabad(UP).
It did not have strong presence in south before. Now, in order to get access to
the southern markets, it made a joint venture by acquiring 51% stake in local
tile companies; one in Vennar, Andhra Pradesh and 3 others in Gujarat. Instead
of setting up capacities from scratch, Kajaria went through this asset-light
Joint venture route to reduce the time to start production.
What is asset light model?
Asset light model is a business model where business
now instead of purchasing the land enters into a contract with the land owner,
where they share a certain percentage of profit arising out of the business
done arising out of the business done on the land. This helps in savings a huge
cost of land to the business.
WEAKNESS
Just like cement industry, tile
industry suffer from logistics cost if the manufacturing plants are not located
close to the customers selling point, margins will take a hit owing to the huge
logistics cost involved in transportation across India.
OPPORTUNITY
Still more than 60% of the houses in
India have been constructed with flooring materials like mud, sand, cement,
mosaic which provides an idea of how much more this industry has to grow to
reach its saturation.
Young generations have fantasy about
brands. ‘Kajaria’ is a well-established brand and it has gained its brand
acceptance through its quality, customer satisfaction and tactful marketing. It
has gained competitive advantage through wide distribution network, joint
venture, wide product range. Kajaria is a pure play tile company. Now it
expects to transform into India’s first holistic bathroom solution provider. In
this space there are few players like CERA. But there is a lot of scope for
growth. New multi storied, bungalows are built up and peoples’ fascination
regarding bathroom solution will lead to growth in this space.
THREAT
Growth comes at capacity additions
only and not through price realizations because tile industry does not have
pricing power owing to its excessive competition.
Another Risk is entry of foreign
companies (Italy, Spain) in the Vitrified tile segment. Right now imports from
other countries are facing margin pressures due to rupee depreciation. So, not
sure how long the foreign companies sustain their presence with low margin business.
Chinese import risk: Govt of India
has imposed anti-dumping duty on Chinese imported tiles. Also, cost of
manufacturing has increased in China which has naturally reduced the Chinese
imports.
CONCLUSION
Go for
Kajaria at every correction in stock price. Whenever market provides
opportunity, pick Kajaria on SIP basis. It has a tremendous growth potential to
go long way.
DISCLAIMER
I personally
hold Kajaria in my portfolio so I have interest in it.
