Analyst Corner: Kajaria – Return ratios under pressure; Ebidta margin down

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Published: February 26, 2020 1:45:23 AM

The management plans to adopt an asset-light business model — outsourcing production rather than setting up own facilities.

kajaria, kajaria stocksDespite revenue growth of 9.1% to Rs 2,960 crore, Ebitda fell 1.5% to Rs 450 crore.

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).

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