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Why Kajaria Ceramics is a long term growth story
1 Mar 2017
Though better than expected, Kajaria Ceramics reported below average results for the third quarter of 2016-17. While its consolidated revenue grew 2% compared to the same period last year, its consolidated net profit fell 4% year on year.

This lacklustre performance was because two important demand drivers for the tiles sector-real estate sector and house renovations- faced a short-term demand disruption due to demonetisation.

Since the disruption continued in the first few weeks of the fourth quarter, its numbers are also expected to be muted.

Putting the short-term snag in performance aside, analysts are hopeful that Kajaria will get back to its past glory soon. Currently, the company is the undisputed leader on all parameters and its market share is around 10% in the overall tiles market and 20% in the organised tiles sector.

Kajaria is also gradually increasing its market share and boasts of superior growth rates- revenue has seen a 22% compound annual growth in the last five years while the industry’s growth has been 13%.

The company’s R&D facility is helping it develop new designs and reduce costs. External factors, such as the implementation of the goods and services tax, are also helping leading organised players such as Kajaria improve its market share.

The tiles and sanitary ware industry as a whole is in a major growth phase because of several government initiatives- Swachh Bharat Abhiyaan, Housing for All by 2022, Smart City Mission, etc.-which are pushing up the demand for tiles.

The government’s continuing efforts to boost the housing sector, including the recent budgetary sop for affordable housing- providing its infrastructure status-bodes well for the tiles industry.

To benefit from this increased demand, Kajaria is setting up a new polished vitrified tile plant in Andhra Pradesh. This plant, with an annual capacity of 5.7 million square metres, is expected to be operational by September 2018.

Despite this added capex, Kajaria was able to bring down its debt-equity ratio from 0.3 in 2015-16 to 0.2 now, and reduced its interest costs further.

The counter has significantly underperformed the market in the last four months-down 23% compared to a flat Sensex-due to its short-term woes.

Since the demonetization induced problems are getting over, analysts feel that this correction is excessive and investors can use the short-term woes to enter this counter.