Key Takeaways
- Flat tile volumes masked a 9% jump in bathware and a 72% surge in adhesives revenue.
- EBITDA margin fell 78 basis points QoQ but remains 395 bp above last year’s level.
- One‑time hits of INR 396 m from new labour code provisions and a fraud settlement dented net profit.
- Stock trades around 24× FY27E and 20× FY28E P/E after a 30% price correction.
- Motilal Oswal maintains a BUY rating with a target of INR 1,057, implying a 20% discount to the 10‑year earnings multiple.
The Hook
You’re overlooking Kajaria’s hidden earnings boost— and it could reshape your portfolio.
Why Kajaria’s Margin Slide Still Matches a Sector‑Wide Upswing
At first glance, a 78‑basis‑point dip in EBITDA margin looks like a red flag. Yet the broader Indian ceramics industry is still in a recovery phase after pandemic‑induced disruptions. EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortisation) measures core operating profitability, stripping out financing and accounting nuances. Kajaria’s margin, now at 17.2%, is still comfortably above the sector average of 14.5% and a full 395 bp higher than a year ago, indicating that the company’s cost‑control mechanisms are working even as volumes wobble.
Historically, when Indian tile makers faced demand slumps, the survivors emerged with stronger balance sheets and pricing power. Compare this with Tata Steel’s steel segment, which saw similar margin compression in 2022 but rebounded as demand returned and input costs fell. Kajaria’s ability to preserve a high‑margin profile while shedding slow‑moving SKUs demonstrates a disciplined approach that could reward investors once volume recovery gains momentum.
How Bathware and Adhesives Growth Offsets Flat Tile Volumes
Flat‑tile volumes were essentially flat YoY, but Kajaria’s strategic diversification into bathware (+9% YoY) and especially adhesives (+72% YoY) is reshaping its revenue mix. Adhesives, a high‑margin ancillary product, now contributes roughly 8% of total sales versus just 2% two years ago. This shift mirrors a broader industry trend where manufacturers hedge against cyclicality in core tiles by expanding into complementary home‑improvement categories.
Competitors like Asian Paints and Asian Ceramics have also accelerated adhesive lines, but Kajaria’s brand equity in the tile space gives it a distribution advantage. The rapid adhesive growth is not a one‑off—its recent contract wins with major construction firms suggest a sustainable runway, adding a defensive layer to earnings.
Extra‑Ordinary Items: Labour Code Provision and Fraud Settlement – One‑Time Pain or Ongoing Risk?
The reported profit after tax (PAT) rose 13% YoY, yet the headline was blunted by INR 396 million of extraordinary items. Roughly half stemmed from a provision for India’s new labour code—a regulatory adjustment that will affect many manufacturers, not just Kajaria. The other half reflects a financial fraud settlement, an isolated incident that management has pledged to tighten internal controls.
From a valuation perspective, stripping out these one‑time hits yields an adjusted PAT that would have climbed closer to 20% YoY. Investors should treat these charges as non‑recurring, akin to a “special items” line in U.S. GAAP reporting, and focus on the underlying earnings trajectory.
Valuation Perspective: Is 24× FY27E P/E a Discounted Opportunity?
After a 30% correction over the past six months, Kajaria now trades near 24× FY27E and 20× FY28E earnings. The 10‑year historical average P/E for the Indian ceramics segment sits around 27×, implying that the stock is currently priced at a 20% discount to its own long‑term benchmark.
Motilal Oswal’s target price of INR 1,057 translates to a 26× FY27E EPS, still below the ten‑year mean. For context, when Tata Motors’ valuation fell 25% in early 2020 amid a sales slump, its subsequent recovery delivered a 35% upside for investors who bought at the trough. A similar risk‑reward profile exists here: the market has punished Kajaria for short‑term volume weakness, but the fundamentals—margin resilience, diversification, and a strong balance sheet—remain intact.
Investor Playbook: Bull vs. Bear Cases
Bull Case
- Volume recovery kicks in by FY24, driven by a rebound in residential construction and government housing schemes.
- Adhesives and bathware become core profit engines, raising overall margin to 19% by FY26.
- Regulatory provision fully absorbed; no further extraordinary hits.
- Stock re‑ratings to 30× FY27E P/E as sentiment improves, delivering >30% upside.
Bear Case
- Tile demand remains stagnant due to prolonged inflationary pressure on consumer spending.
- Competitors intensify price wars, eroding Kajaria’s pricing power.
- Unexpected cost escalation from raw‑material imports or further regulatory penalties.
- Stock slides below 18× FY27E P/E, forcing a reassessment of the BUY call.
For disciplined investors, the key is to monitor two leading indicators: (1) quarterly tile volume trends versus industry forecasts, and (2) the growth trajectory of adhesives revenue, which acts as a leading proxy for market share gains in the broader home‑improvement ecosystem.