Brokerage house Kotak Securities is bullish on Kajaria Ceramics and has recommended buy rating on the stock with a target price of Rs 860 in its research report dated March 19, 2015.
"Consumption of tiles has grown at a CAGR of 13% over last 4-5 years and has been led by increasing consumerism and urbanization. Despite slowdown being witnessed in the real estate sector, we expect the demand scenario to remain strong going forward in medium to long term coming mainly from tier 2 and tier 3 cities led by rising income levels, increasing urbanization, change in consumer preferences as well as on account of replacement demand. This is likely to benefit Kajaria Ceramics as company is ideally positioned to capture incremental demand with its strong distribution network."
"Kajaria Ceramics has expanded its capacity by 7.5 Mn sq m during H1FY15 and another 5 Mn sq m expansion at Taurus JV is likely to commission by March, 2015. Company is also on track for its brownfield expansion of 3 Mn sq m at its existing location in Rajasthan for ceramics tiles. Thus, it plans to reach a capacity of 62.1 mn sq m by end of FY15. With further greenfield expansion of 5 Mn sq m of polished vitrified tiles at a new location in Rajasthan, company is expected to increase its capacity to 67.1 mn sq m during FY16. This is likely to result in strong volume growth going forward. We thus expect volumes to grow at a CAGR of 15.6% between FY14-FY17."
"GST implementation is likely to be a game changer for the sector as it is likely to result in higher taxation for the unorganized sector. Due to excise duty avoidance and lower taxes being paid by the unorganized sector, they were able to price their products at cheaper rates as compared to the organized players. Expected implementation of GST by April, 2016 is likely to reduce the cost differential between the unorganized and organized players, thereby providing a level playing field. This is then likely to result in shift in customer's preferences towards organized sector due to lower cost differential, better quality and design. We expect Kajaria Ceramics to benefit significantly post the implementation of GST."
"Stock is currently trading at attractive valuations of 24.5x and 20.6x P/E on FY16 and FY17 estimates. We tweak our estimates and also introduce FY17 estimates. We value the company at 23.5x P/E and arrive at a revised price target of Rs 860 on FY17 estimates (Rs 712 on FY16 estimates earlier). We continue to maintain BUY recommendation on the stock. Key risk to our recommendation would come from sharp hike in gas prices or rupee depreciation or demand slowdown", says Kotak Securities' research report.
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