Kajaria Ceramics’ Q3FY26 performance reflected a market grappling with weak construction demand, inventory de-stocking, and muted tile volumes, yet profitability resilience stood out. While consolidated revenues grew a modest 1.1% year-on-year to Rs11.6 billion, EBITDA surged over 31%, driven by operating leverage, cost discipline, and a richer product mix. Exceptional losses weighed on reported profitability, but management commentary points to visible green shoots from January onward. With margins stabilizing in the 17–18% band and a strategic shift toward value-added products under “Kajaria 2.0,” IDBI Capital upgrades the stock to BUY with a revised FY28-based valuation.

Muted demand keeps revenue growth under pressure

Kajaria Ceramics entered Q3FY26 against a challenging industry backdrop, marked by subdued housing demand and cautious dealer sentiment. Net sales rose just 1.1% YoY to Rs11.68 billion, primarily due to flat tile volumes as the company deliberately reduced inventory at the dealer level.

Blended realizations declined 1.3% YoY to Rs355 per square meter, reflecting pricing pressure across both own-manufactured and outsourced segments. Despite stable dispatch levels, demand softness prevented any meaningful volume-led recovery during the quarter.

Operating leverage drives sharp margin expansion

While top-line growth remained constrained, Kajaria delivered a standout performance on the operating front. EBITDA jumped 31.2% YoY to Rs2.01 billion, with margins expanding sharply by 395 basis points to 17.2%.

This improvement was driven by:

Improved cost control and lower input volatility

A calibrated shift toward premium and value-added tiles

Rationalization of SKUs to enhance plant efficiency

Management reaffirmed its medium-term EBITDA margin guidance of 17–18%, noting that any upside beyond this band would be reinvested into brand building and advertising.

Exceptional loss dents reported profitability

Despite strong operating metrics, bottom-line growth remained modest due to a one-off exceptional loss of Rs396 million. Reported net profit stood at Rs864 million, up just 1.8% YoY.

On an adjusted basis, profitability tracked closer to operational performance, but the exceptional item masked the underlying earnings momentum for the quarter. IDBI Capital views this as non-structural and does not factor it into long-term valuation assumptions.

Product mix evolution under Kajaria 2.0 strategy

Kajaria’s strategic transformation under the “Kajaria 2.0” initiative continues to gain traction. A key highlight during the quarter was the conversion of one unit at the Gailpur plant from ceramic floor tiles to BS-55 tiles, aimed at addressing premium demand pockets.

The company is also pruning low-velocity SKUs, which management believes will improve throughput, reduce working capital intensity, and enhance margin stability over the next few quarters.

Early signs of demand recovery emerge

Management commentary during the earnings call struck a cautiously optimistic tone. January trends have turned positive, with early indications of recovery in both tiles and bathware segments.

Additional demand tailwinds include:

Industry-wide price hikes in faucets (8–12% effective January 19, 2026)

Planned sanitaryware price increases from March 1, 2026

Stable gas prices with only marginal increases expected in Q4

Retail-to-project mix remained balanced at 70:30, providing earnings stability amid sector volatility.

Quarterly performance snapshot

Strong balance sheet supports long-term growth

Kajaria continues to operate with a healthy balance sheet. Net debt remains negligible, while cash and bank balances are projected to rise steadily through FY28E.

Return metrics are expected to strengthen alongside earnings recovery:

RoE projected at 18.7% in FY28E

RoCE expected to exceed 20% by FY28E

The company’s disciplined capital expenditure and steady dividend payouts reinforce its positioning as a financially robust building materials major.

Valuation reset and investment view

IDBI Capital has rolled forward its valuation framework to FY28E, assigning a 30x price-to-earnings multiple, reflecting Kajaria’s leadership position, brand strength, and improving earnings visibility.

Target Price: Rs1,158
Implied Upside: ~31%

Among organized tile manufacturers, Kajaria remains IDBI Capital’s preferred pick, supported by:

Pan-India distribution scale

Strong brand recall

Diversified product portfolio

Margin resilience despite demand cyclicality

Conclusion: Positioned for cyclical upturn

While Q3FY26 underscored the persistence of near-term demand challenges, Kajaria Ceramics demonstrated its ability to defend margins and protect profitability. With demand indicators improving, price hikes taking effect, and strategic initiatives gaining momentum, the company appears well-positioned to benefit from a cyclical recovery in FY27–FY28. IDBI Capital’s BUY call reflects confidence in Kajaria’s execution strength and long-term value creation potential.