Near-term demand remains a concern for listed tile maker Kajaria Ceramics

The December quarter performance of the country's largest listed ceramic tile maker, Kajaria Ceramics, was subdued. Weak domestic demand in the quarter weighed on volumes, while revenues were also below par due to muted realisations. The stock has fallen 9 per cent from its highs this month, given a disappointing Q3 and near-term demand concerns for the rest of FY24.

The company's overall sales volumes at 27 million square metres were 6.4 per cent higher year-on-year, while realisations fell by 3 per cent to Rs 374 per square metre. The demand weakness is an ongoing trend, as volumes and sales for the nine months ended December at 7 per cent and 4 per cent, respectively, remain on the lower side. Volumes in Q4 are likely to mirror the year-to-date performance and thus end with growth of 6-7 per cent.

The positive for the sector and the company in the quarter was lower input costs. Falling energy costs helped the company post a 34 per cent increase in operating profit while operating profit margins expanded by 330 basis points year-on-year to 15.5 per cent. Fuel expenses as a percentage of sales were at 20.8 per cent, down 570 basis points compared to the year-ago quarter levels of 25.5 per cent. However, it is up 50 basis points on a sequential basis.

A reduction in power and fuel costs, coupled with higher volumes, is beneficial for the company. It is expected to share some of the savings with dealers through discounts and incentives to drive volumes. The company expects margins to be in the 14-16 per cent range for FY24 and 15-17 per cent for FY25.

Even as the March quarter and FY24 volumes are likely to be on the lower side, management and brokerage commentary suggest that recovery could be strong in FY25. The company expects to outperform the sector going ahead and is eyeing 500-600 basis points higher growth than the industry average. This is on the back of a shift from unorganised to organised players and an upturn in the real estate sector, which is expected to have a rub-off effect on tile demand in FY25. According to the company, other triggers are the sustenance of export growth momentum by players based in Morbi, Gujarat, lower competitive intensity in the market, the government's thrust on infrastructure, and a revival in private capital expenditure.

Analysts led by Ashish Poddar of Systematix Research believe regular capacity additions with an investment of Rs 400 crore in FY24 and Rs 250 crore annually over the next three years in all regions, expansion in dealer network (mostly in semi-urban areas), and branding efforts would support strong growth. The brokerage has not changed its estimates post-Q3 results and has maintained its hold rating with a target price of Rs 1,395.

The stock, however, remains a top pick among midcaps for Jefferies Research, which estimates 13 per cent growth in sales and 26 per cent growth in net profit over the FY23-26 period. This is expected to be driven by a revival in housing, market leadership, and optimisation of the mix with value-added sales at 60 per cent. Further, market share gains given the export thrust by Morbi players, margin focus, traction in margin-accretive bathware and vitrified tiles, and a strong balance sheet are positives supporting their buy call. It has a target price of Rs 1,630 per share.

Motilal Oswal Research expects the company's premium multiple to be maintained, given the 23 per cent earnings growth over FY23-26, strong return ratios, and a healthy balance sheet. It has reiterated a buy rating with a target price of Rs 1,600 a share based on 40 times its FY26 earnings.