The management plans to adopt an asset-light business model — outsourcing production rather than setting up own facilities.
Kajaria’s FY19 annual report analysis highlights the impact of macroeconomic weakness leading to continued pressure on its return ratios (RoE down 310 bps to 15.5%/post-tax RoCE down 160 bps to 14.4%). This was led by Ebitda margin declining (tiles business) to 15% (v/s 17% in FY18) on rising fuel costs and decreasing unit realisation, and rising capital intensity to finance capex for tiles, bathware and plywood.
The management plans to adopt an asset-light business model — outsourcing production rather than setting up own facilities. Despite revenue growth of 9.1% to Rs 2,960 crore, Ebitda fell 1.5% to Rs 450 crore. While Ebit margins of the tiles segment fell 80 bps to 13.2%, it was still superior to its peers. But performance of bathware (Kerovit) was sub-par with Ebitda margins at 4.3%, despite being up 260 bps y-o-y (v/s 14.3% of CERA) due to lower scale of operations. Earnings to cash flow conversion improved to 100% (v/s 80% in FY18) due to a fall in the cash conversion cycle to 90 days. This was led by a rise in trade payables to 98 days.
In FY19, the company forayed into the plywood business via its subsidiary Kajaria Plywood. However, losses of `6.05 crore turned Kajaria Plywood’s net worth negative (-`2.35 crore) in its very first year of operation. Rising fuel costs and lower realisations hurt profitability. Despite revenue growth, Ebitda fell to `450 crore (v/s `460 crore in FY18), primarily led by an 18% surge in fuel costs to `620 crore on rising gas prices, and decline in unit realisations, leading to 9.1% revenue growth to `2,960 crore; volume growth was 12% to 80 msm. ‘Kerovit’ delivered robust growth, but margins weak: In FY19, Kerovit reported 30% revenue growth to `180 crore. Gross margin at 54% was similar to its peer (55% for CERA). However, higher employee cost at 21% (v/s 12% for CERA) due to lower scale of operations kept Ebitda margins low at 4.3% (v/s 14.7% for CERA).
Standalone trade payables stood at 62 days (v/s 51 days in FY18). Weak operational performance hurts subsidiaries’ returns. Despite improvement, subsidiaries’ margins at 8% (v/s 5% in FY18) remained lower than the standalone at 15%. Over FY15-19, aggregate RoCE of subsidiaries stood halved at 5.8% (v/s 13.6% in FY15).