Kajaria Ceramics rating – Hold: Performance in second quarter was strong

Kajaria strongly outperformed our as well as consensus forecasts for Q2FY22 driven by solid volume growth (25% y-o-y) with Ebitda margin at 18.5%. Despite rising input cost, Kajaria has been able to pass it on, delivering 30% y-o-y PAT growth. Furthermore, management maintained strong growth outlook for H2FY22 in spite of continued uptick in input cost. We anticipate solid demand recovery and favourable industry scenario to help organised players such as Kajaria. All in all, we are raising FY22/23/24e PAT by 14%/17%/18% and also raise the target to 40x (from 35x) in line with its historical peak. This along with a rollover to Q4FY23 yields a revised TP of Rs 1,340 (Rs 1,030 earlier); reiterate ‘Hold’.

Strong recovery in volumes- Kajaria posted strong volume growth of 25% y-o-y. This coupled with input cost (gas price) pass-through lifted revenues by 38% y-o-y to Rs 9.7 bn, beating our and consensus estimates. The company has taken several price hikes over the last 3–4 months, of 4–5% in tiles (to pass on rising gas cost and packing materials), 8–10% in sanitaryware and 20–25% in faucetware (due to a jump in brass prices). Though input prices continue to rally, management is confident of passing it on to protect margins. In light of continued solid demand from tier2/3 and small cities, the company held on to its 20% growth outlook while maintaining margins at 18–19%.

Pro-growth outlook —Given favourable industry scenario, Kajaria is entering into elevated growth trajectory of 23% CAGR over FY19–23e versus 7% over FY15–19. Given robust near-term growth outlook and strong H1FY22 results, we are raising FY22/23/24e EPS by 14%/17%/ 18% However, given limited upside potential, we retain ‘Hold’.