Kajaria Ceramics takes the export route to beat economy slowdown
Nandita Datta and Aabhas Pandya
The rupee depreciation will help Kajaria Ceramics improve its export margins in fiscal 1997-98. This will help the company reap a bonanza, which is planning to focus on exports as its thrust area. At present, 20 per cent of the total turnover comes from exports (in quantitative terms) and company officials says this can go up to as high as 30-35 per cent.Says R K Budhiraja, VP Finance and company secretary,``Given the chance, we can export up to 100 per cent.'' Considering the sluggish demand in the domestic market and the slowdown in the construction industry, the strategy augurs well for Kajaria Ceramics. Says an upbeat Budhiraja, ``Our focus on value-added products has given us the opportunity to tap both the domestic and foreign markets -- something which our competitors have been unable to do.'' In fact, this is what has given Kajaria Ceramics the leverage to expand its capacities in times of recession. Notes Budhiraja, ``We have always expanded our capacities when the going was tough for the
domestic industry -- in 1992 (from 10,000 to 60,000 tpa; in 1995 (from 60,000 to 80,000 tpa) and in 1997 (from 80,000 to 1.5 lakh tpa).'' According to company officials, the first priority now is to popularise the `Kajaria' brand abroad and for this, the company is improving its marketing facilities. ``We want to drive home the point that our brand compares favourably with those from Italy and Spain. To reduce delivery time, we are setting up officies and warehouses all over Europe,'' says Budhiraja. According to him, the per unit production cost in India is comparable to the west despite high power tariffs because of the inherent advantages of cheap labour and raw material cost. Kajaria, which manufactured only floor tiles till 1991, now expects the wall tiles segment to contribute substantially to the turnover. Thus, after expansion, Kajaria aims at manufacturing 90,000 tonnes of wall tiles of a total capacity of 1.5 lakh tonnes. Apart from the export thrust, Kajaria Ceremics has also restructured
its finances to bring down the interest burden. ``Our interest outgo for 1996-97 was higher than the previous fiscal mainly on account of the Rs 115 crore expansion programme which has been funded primarly through debt. However this fiscal, the burden will be less as we have restructured our working capital by taking recourse to cheap FCNR deposits. Plus, our exports give us a natural hedge against currency fluctuations.'' To that extent, Budhiraja expects a higher net profit for fiscal 1997-98. Although he declined to give a figure, he hinted that it would be higher than last year's. Analysts expect Kajaria Ceremics to earn a net profit of around Rs 25 crore on a turnover of Rs 140-145 crore in the full year working. The recent 7 per cent hike in the prices of ceramic tiles by Kajaria is expected to bring in higher sales realisation in the second half. On an equity base of Rs 14.17 crore, this gives an earning per share of Rs 20.41 compared with the current earning per share (EPS) of Rs 10. On an
equity base of Rs 14.17 crore, this gives an earning per share of Rs 20.41 compared with the current earning per share (EPS) of Rs 10. Thanks to the expansion project, Kajaria's debt-equity ratio, which has bloated to 1.3, is expected to come down to 0.87. The ratio before expansion was even lower at 0.6. What has surprised industry watchers is Kajaria's expansion drive at Bhiwadi at a time when the industry is showing no signs of a turnaround. Says Budhiraja, ``We have not been affected by the slowdown too much because we cater more to the retail segment. Over 80 per cent of ous sales comes from the retail market against the industry average of 60 per cent. As a conscious policy we have decided not to depend on buliders or housing boards/socities to sell our products. We have focused our marketing efforts at dealers, who we know will push our prodcuts and induce repeat purchase, and brand-conscious customers like corporate houses and the upcoming middle class. Even though our products are marginally
expensive than our competitors, we have been able to retain customers and build an effective customer base through constant innovation.'' This is probably one reason why Kajaria has beeen able to operate at 106 per cent capacity utilisation in a scenario of sluggish demand. The expansion at Bhiwadi, which will take Kajaria's capacity to 1.5 lakh tpa will help the company reduce operational cost thanks to the economies of scale and give it a backward area sales tax benefit. This would boost Kajaria's net profit in fiscal 1997-98. Besides, with the western region accounting for almost 40 per cent of the demand for ceramic tiles, the plant at Bhiwadi will help the company bring down its transportation costs. The new plant, expected to commence commercial production next month, will give Kajaria a head start if demand picks up next year. If it doesn't, the export market is always there. The company's turnover is expected to almost double to around Rs 250 crore in fiscal 1998-99 thanks to the new plant. But,
what can really prove to be a boon for investors is Kajaria Ceremics' steadfast stand not to dilute earnings by increasing equity. Notwithstanding Kajaria's low equity base of Rs 14.71 crore, the company rules out any equity dilution in the future. ``Unless you can service your equity base, there is no reason why you should increase your paid-up capital. And, at present, we think our equity base is what we can service effectively,'' says Budhiraja, adding that there is no question of a bonus issue despite a huge reserve of Rs 75.6 crore.``As a policy decision, we have decided not to diversify and concentrate soley on our core competence,'' he adds. A look at Kajaria Ceremics' share price on the Mumbai Stock Exchange, shows that the scrip is currently trading at its 52-week low of Rs 56. In fact, this is the lowest level the scrip has seen for the past two-and-a-half years. The scrip has been on a constant slide since August this year, when it touched Rs 135 (Rs 140 in mid-session); the scrip has been
making consistent lower tops and bottoms although for the past few days a sideways movement has been spooted. According to the charts, Rs 50 is the next support level for the scrip and, hence, it would be prudent to wait for some more time to start accumualtion.The stochastic oscillator shows that the price is lying just below the indicator and there is an indication of a buy signal emerging soon. Guarding the fort with warrants After months of dodging the press over the real reason for cancelling the warrants issued to the promoters in 1994, the truth is finally out. Kajaria Ceramics vice-president (finance) R K Budhiraja admits that the decison to allot 45 lakh warrants to the promoters had more to do with maintaining the shareholding pattern on the eve of the $ 30 million GDR issue than enhancing the equity base. ``The warrants were issued with a very specific purpose of guarding against a hostile takeover. Even at that time, we were clear that once the threat was over, the warrants would
be cancelled. We had absolutely no intention to hike our equity base once our GDR issue was shelved because of the poor market conditions,'' says Budhiraja. This explains why the company cancelled the warrants at a time when the scrip was quoting at Rs 130. The company's earlier argument of not wanting any fresh money did not sound very convincing in view of the impending expansion programme. The expansion programme was subsequently funded through a mix of debt and internal accruals.
Copyright © 1997 Indian Express Newspapers (Bombay) Ltd.
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