Kajaria Ceramics stock: Investors should wait for a better entry point

Volume growth, lower costs and stable pricing are the positives

The stock of Kajaria Ceramics is up 26 per cent over the past month on expectations of better-than-expected earnings growth —  led by volume recovery, steady prices, and falling costs. Brokerages had cut their revenue and earnings estimates after the June quarter results, which saw volumes and revenue fall over 60 per cent. 

Analysts at ICICI Securities believe sales have recovered up to 90 per cent in July and August from the year-ago period. They believe growth momentum in the tiles sector may continue in the near term with metros and tier-1 cities set to further open up after the September quarter and this shall reflect in Kajaria Ceramic’s volumes.  

Stability of prices is another factor which should benefit the company. With Morbi-based players witnessing a demand recovery on the back of higher exports, pricing pressures are expected to ease in the domestic market. B&K Securities believes that a gradual recovery in demand from the domestic market, as well as robust growth in export orders, will likely ease out the competitive intensity in the market, which will augur well for branded players, such as Kajaria Ceramics. 

The falling cost amid improving volumes are also expected to aid the operating profit margin. The reduction in gas prices by the Gujarat government has made the current prices 15 per cent cheaper than those prevailing in May 2020. If the same is retained by the company (the company’s joint ventures in Morbi, Gujarat) and cost-cutting initiatives sustain, it can lead to a higher margin. In addition to the lower power cost on account of the falling gas price, lower staff and other expenses are expected to bring down the overall cost. ICICI Securities expects the margin to improve from 13.8 per cent in FY21 to 16.5 per cent in FY22. 

The Street also draws comfort from the steady cash flows and strong balance sheet of the company. Amit Agarwal of Nirmal Bang Research expects operating cash flows to increase from Rs 200 crore in FY21 to Rs 470 crore in FY23. This is to be driven by earnings growth and improvement in working capital. Given the sharp price run-up and valuation at 31x its FY22 earnings, investors will have to wait for a better entry point to get into the stock.