Low value and high growth
Moneylife Digital Team
Kajaria Ceramics manufactures ceramic wall & floor tiles and glazed & polished vitrified tiles. The company also markets international tile brands, bath-ware and wooden flooring solutions. Promoted by Ashok Kajaria in technical collaboration with Todagres, SA (Spain), it started manufacturing at Sikandrabad (Uttar Pradesh) in 1988. The company’s production capacity has grown 30-fold from 1msm (million square metres) in 1988 to 30.60msm in 2011 with manufacturing also done at Gailpur (Rajasthan) and Morbi (Gujarat). Its competitors include Cera Sanitaryware, Hitkari China, Regency Ceramics and Somany Ceramics. Of these, Cera and Somany are both excellent companies but Kajaria is a better bet than both of them. It has recorded a faster revenue growth and seems to be more proactive in introducing new products.
Apart from organic growth, Kajaria acquired a 51% stake in Gujarat-based Soriso Ceramic in an all-cash deal for Rs5.62 crore in February 2011. The acquisition will help the company increase its capacity further to cater to the southern and western parts of the country to save on transportation charges.
In March 2011, Kajaria completed the expansion of its 6msm (annual capacity) plant at Gailpur with an investment of Rs129.90 crore. The plant manufactures high-end polished/glazed vitrified tiles. In the month, the company also converted its 2.60msm ceramic tile unit into a vitrified tile manufacturing facility at Sikandrabad with an investment of Rs20.30 crore. The full impact of enhanced production from both these plants is expected in FY11-12. Kajaria has also signed a long-term agreement with GAIL (India) for the supply of gas to its Gailpur unit, replacing high-cost propane.
For the financial year ended 31 March 2011, Kajaria recorded a standalone net profit of Rs60.66 crore against Rs35.85 crore in FY09-10. In the same period, the company’s standalone net revenues rose to Rs952.35 crore from Rs735.53 crore. Sales volumes increased to 29.71msm in FY10-11 from 25.28msm in FY09-10. 
In FY10-11, the company’s standalone earnings per share (EPS) increased to Rs8.24 from Rs4.87 in FY09-10. For FY10-11, operating profit (earnings before interest, taxes, depreciation and amortisation) stood at Rs148.54 crore compared to Rs115.67 crore, on account of higher revenue. Kajaria recommended a dividend of 100% (Rs2 per equity share of Rs2 each) for FY10-11. The capital employed in the business increased marginally to Rs502.24 crore in FY10-11 from Rs452.17 crore in FY09-10, despite investment in 6msm brownfield capacity expansion, conversion of part of the ceramic tile capacity into a vitrified facility and acquisition of controlling stake in Soriso Ceramics. The average return on capital employed jumped to 24.94% from 18.94% in FY09-10, while average return on net worth jumped to 29.45% from 20.40% in FY09-10.
Kajaria’s quarterly performance has been robust as well. Standalone net profit for the quarter ended 31 March 2011 leapt to Rs18.43 crore from Rs12.77 crore in the corresponding period last year, backed by a sharp rise in net revenues to Rs281.32 crore from Rs214.46 crore.
Over the past five quarters, Kajaria has reported an average growth in revenues and operating profit of 27% and 24%, respectively. Its average operating margin is 15% and return on net worth is 27%. For the kind of growth that Kajaria is recording, its valuation is very attractive. Its market-cap to revenues is just 0.59, its market-cap to operating profit is just 3.90 times. Consider buying the stock at the current market price.