Stock Pick from Furniture, Furnishing & Paints

CHOICE SCRIP

Here Is Why:

• KCL has managed to expand its margins due to operational efficiency and lower interest cost.

• The stock is available at a cheaper valuation compared to its peer companies.

• It is the only Indian company to receive ‘Asia’s Most Promising Brand’ award.

Kajaria Ceramics: ‘SWACHH’ INVESTMENT

The new Narendra Modi-led government is emphasizing more on ‘Swachha Bharat Abhiyan’ which has made many construction material manufacturers buzzing. However, out of the number of many such companies, we found a good financially strong company with a well-established market in India. Kajaria Ceramics (KCL) is one of the largest ceramic floor and wall tile manufacturers in India. The company has an in-house state-of-the-art research and development facility for developing new designs and creating cost-effective products. The company has received various certifications such as ISO 9001 for quality management, ISO 14001 for environment management, OHSAS 18001 for safety and health management and SA–8000 for commitment to society.

KCL has its office network spread across more than 23 cities in the country with its headquarters situated in New Delhi. The company is operating its domestic business through a network of 900 pan-India dealers. With the new government’s initiatives to push infrastructure and better sanitation systems in rural areas, KCL’s products have come into demand. As evidence suggests, the company has expanded their production capacities to meet the requirements of its ever increasing roster of clients. The realty boom in the country has also helped it to expand its client base across vitrified tiles and designer tiles’ markets.

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Interestingly, KCL is not completely dependent upon the domestic business. It is the largest exporter of ceramic tiles in India. Furthermore, the company has an exclusive office and showroom in UAE. KCL exports its products across 20 odd countries. Its products have good quality and are recognised across many markets outside India. The company is the only Indian company to receive ‘Asia’s Most Promising Brand’ award in the premium tiles category. It also received the President’s Award for achieving the highest exports in the industry.

On the financial front, KCL has posted a stellar performance during the December 2014 quarter. The revenue during Q3 FY15 showed a growth of 26 per cent and stood at Rs 556 crore in Q3 FY15 against Rs 440 crore in Q3 FY14. The company posted EBITDA growth of 31.50 per cent to Rs 88 crore in Q3 FY15 compared to Rs 67 crore in Q3 FY14. Despite 90 per cent increase in other expenses to Rs 89 crore, the EBITDA margin expanded by 62 basis points to 15.72 per cent in the December 2014 quarter. Further, the company managed to cut down its interest cost by almost 50 per cent in Q3 FY15. This has clearly translated into 55 per cent growth in its net profit which stood at Rs 46 crore in Q3 FY15. The increase in operational efficiency and decrease in interest cost has helped KCL to expand its profit margin by 165 basis points to 8.46 per cent in December 2014.

On the valuation front, KCL’s stock is trading at a PE multiple of 34x times its trailing earnings per share EPS of Rs 20.89 per share. The stock is available quite cheaper than its peer companies such as Cera Sanitaryware and HSIL. Further, more than 28 per cent institutional holdings in the company give us strong conviction about its fundamentals and hence we recommend buying this stock.