Prabhudas Lilladher has reiterated a Buy rating for Kajaria Ceramics with a revised target price of Rs 1,224. Despite short-term challenges including subdued demand and shrinking margins, the company is expected to recover in FY26 with improved demand, operational efficiency, and capacity utilization. Kajaria aims to grow revenue at an annual compound rate of 8.5% over the next three years, driven by initiatives in dealer penetration, product diversification, and project expansion.

Performance Overview

Kajaria Ceramics reported mixed results for Q3FY25, reflecting pressure from weak demand and high operational costs.

Key Figures:

Revenue: Rs 11.6 billion, a 1% YoY increase
PAT: Rs 787 million, a 24.6% YoY decline
EBITDA: Rs 1.5 billion, a 16.8% YoY drop
EBITDA Margin: 12.8%, a contraction of 275 basis points
These figures indicate that despite marginal growth in sales, profitability was negatively impacted by lower realizations, increased overhead expenses, and losses in the bathware segment.

Segmental Performance

Tiles Segment:
The tiles division, which contributes 89% of total revenue, grew 2.7% YoY, supported by a 6.7% increase in volume.

Bathware and Other Segments:

Bathware revenue rose 2.5% YoY but suffered losses due to underperformance in the new Morbi sanitaryware unit.
Revenue from other segments fell 11.4% YoY.
The company's management expects improvements in these areas through enhanced operational efficiency and capacity optimization.

Operational Challenges

Margin Contraction:
Gross margins contracted to 58.8%, primarily due to lower average realizations and elevated employee expenses. The bathware segment, in particular, faced delays in achieving profitability, a common challenge for new production units.

Fuel Expenses:
Energy costs remained relatively stable, with fuel prices averaging Rs 37-38 per standard cubic meter (SCM) across regions.

Working Capital Management:
Kajaria reported an increase in its working capital cycle, with days outstanding rising from 58 to 59 days over the period.

Growth Drivers and Strategic Initiatives

Kajaria Ceramics is implementing several key initiatives to drive growth over the next few years:

Dealer Expansion: Enhancing dealer and showroom networks to capture greater market share.
Product Portfolio Diversification: Introducing innovative and high-value tile designs to appeal to a broader customer base.
Focus on Projects Business: Strengthening partnerships in large infrastructure and real estate projects.
Brand Building: Investing in marketing campaigns to solidify brand recognition.
Efficiency Improvements: Streamlining operations to achieve higher capacity utilization and better cost management.
Management expects these measures to result in a CAGR of 8.5% in revenue, 8.2% in EBITDA, and 9.7% in PAT between FY24 and FY27.

Technical Analysis

A technical review of Kajaria Ceramics reveals key support and resistance levels that investors should monitor:

Support and Resistance Levels:

Immediate Support: Rs 956 (52-week low)
Immediate Resistance: Rs 1,061
Key Resistance: Rs 1,224 (Target Price)
52-Week High: Rs 1,579
The stock is currently consolidating near its 52-week low and may face resistance at the Rs 1,061 level.

Candlestick Patterns:
Recent trading sessions indicate a falling trend in the short term, characterized by lower highs and lower lows. A potential reversal could occur if the stock breaks above the key resistance.

Fibonacci Retracement Levels:
Based on the stock's price range, the following retracement levels are significant:

23.6% Level: Rs 1,100
38.2% Level: Rs 1,150
50% Level: Rs 1,267
These levels provide guidance on possible entry and exit points for traders.

Future Outlook

Revival in Demand:
Management anticipates a demand rebound in FY26, driven by factors such as interest rate cuts from the Reserve Bank of India (RBI) and increased disposable income from expected tax reforms.

Expansion in Nepal Operations:
Kajaria has increased its stake in its Nepal joint venture from 50% to 51%. Capacity utilization at this facility is projected to reach 85% soon, contributing to consolidated revenue growth.

Competitive Landscape

Kajaria Ceramics operates in a highly competitive market alongside companies like:

Somany Ceramics: Known for its extensive range of ceramic and vitrified tiles.
Asian Granito: A significant player with a focus on tiles, bathware, and other building materials.
Both competitors have been expanding their market presence, putting pressure on Kajaria to maintain its leadership through innovation and capacity upgrades.

Valuation and Recommendation

Prabhudas Lilladher has revised Kajaria's target multiple from 40x to 35x FY27 EPS, resulting in a target price of Rs 1,224. This adjustment reflects the soft guidance provided by management and current demand constraints.

At the current price of Rs 960, the stock offers an upside potential of approximately 27%.

Disclaimer: Investors are advised to perform their own due diligence and consult financial experts before making investment decisions.