Kajaria Ceramics Ltdhas announced that WestBridge Crossover Fund will increase its stake in the company from 7.8% to 14.6%. Kajaria will also look to increase its FII holding limit to 40%.
Kajaria will receive Rs 150 crore — leading to around 8% equity dilution — which will primarily be used for funding capex in FY14-15.
The company is planning to incur capex of around R450 crore in the next 2-3 years, and is currently in the process of firming up a detailed capex plan. This could include a green-field capacity expansion project. We have currently built in capex assumptions of R120 crore for FY14E and R140 crore for FY15E.
We are yet to incorporate the dilution impact in our financial estimates, pending further clarity from the company. We expect the tile industry to grow 13-14% per annum for the next three years, driven by greater market penetration, increasing urbanisation, growing demand for houses and rising awareness of hygiene issues. Kajaria is an established brand in the Indian tile sector, with a wide network. We expect the company to report 26% EPS CAGR over FY13-18E.
We have ‘buy’ rating with a price target of R325. This is based on 15x FY15E PE and EPS of R21.59. We believe Kajaria will report weak Q2FY14 results due to margin pressure as a result of high gas prices and rupee fall. We would likely view any weakness in Kajaria’s share price due to weak Q2 results as a good buying opportunity given the attractive valuation.