Rising gas prices can hurt margins, but analysts remain bullish on Kajaria Ceramics

Price of natural gas, a major cost component for tile manufacturing companies, is soaring and this is a key overhang for Kajaria Ceramics. The company’s share traded flat intra-day on September 29, while it declined 2.5 percent on September 28, closing Rs 28 lower at Rs 1,232, on the National Stock Exchange.

Peers Somany Ceramics, Exxaro Tiles and Orient Bell ended the day in the red, 1-2 percent lower. So far, in 2022, Kajaria Ceramics has declined almost 9 percent.

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“According to our estimates, gas cost could be around 60 percent of the total cost of production (it used to be around 35-40 percent earlier). Gas cost was 40 percent of the tile realisation for Kajaria Ceramics in Q1FY23,” Achal Lohade, Consumer Discretionary Research Analyst, JM Financial, said.

Surge in gas prices

India imports close to 55 percent of its natural gas requirements. With Russia escalating tensions and allegedly sabotaging the Nord Stream pipeline, natural gas prices have been soaring as Europe stares at an energy crisis.

In the last two months, Singapore spot gas prices rose 69 percent. Gujarat Gas prices have also surged from Rs 34.2/scm (standard cubic meter) in June 2021 to Rs 64/scm in September 2022.

“Gas prices have increased over the past 18 months, given the rise in crude oil price and rupee depreciation. Within this, Ras Gas price are linked with the three-month average of Brent crude price. Hence, it will see an increase of 9 percent QoQ,” said Lohade.

According to JM Financial’s estimates, gas cost for Kajaria was Rs 59.3/scm in Q1FY23. For Q2, it will be Rs 68.5/scm, and, for Q3, it will be Rs 67.3/scm.

Propane or no propane

Several players in Gujarat’s Morbi region, popularly known as the ceramic city, have been switching to propane as an alternative to natural gas. But that’s not an option for Kajaria Ceramics.

In the Q1FY23 earnings concall, Chairman and Managing Director Ashok Kajaria explained: “We have no reason to go to propane because what you are seeing today in terms of gas prices is not something which will be there for all times to come. With the kind of volumes we are dealing with, we cannot use propane or LPG. We have to run on line gas.”

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Currently, the company has an annual capacity of 82.8 million square metre (MSM). It has announced a new capacity of 6 lakh pieces per annum at an existing plant in Gailpur, which will increase the capacity to 16 lakh pieces per annum.

A new sanitary ware manufacturing facility in Gujarat, with a capacity of 8 lakh pieces/annum, is expected to be completed by December 2023.

Price hikes

So, rising input costs will definitely impact the company’s margins in the near term, but there’s good news for investors. The company can offset input cost inflation by price hikes.

Kajaria Ceramics hiked tile prices by 2.5 percent on May 1 and September 1. “Cumulative price hikes in FY22 stood at 10 percent in tiles and 15 percent in sanitary ware and 12-13 percent in bath ware. Such healthy price hikes across segments indicate the company’s strong brand franchise,” according to global research firm Jefferies.

Meanwhile, the company continues to maintain its guidance of 15-20 percent volume growth in FY23 and 15 percent growth in FY24 on the back of market share gains and distribution expansion into tier 2 and 3 cities. Revenue growth guidance stands at 20-25 percent, with 15 percent margins in FY23E.

Capitalising on exports

If things are bad in India due to rising gas prices, matters are even worse overseas. Globally, the cost of manufacturing is much higher, given the high energy prices and this opens the doors for Indian exports.

Meanwhile, tile exports from China to the US has fallen significantly due to the trade war between the two superpowers. India has managed to capitalise on this and is now among the top five countries from where the US imports most tiles by volume and value.

According to JM Financial, “Tile exports, which fell from the peak of a monthly export value of Rs 1,240 crore in October 2020 to Rs 860 crore in November 2021, rebounded to the monthly average of Rs 1,250 crore, during March-June 2022. This was on the back of higher electricity and gas costs in other exporting countries, like Italy, Spain and China.”

What are brokerages recommending?

JM Financial has a Buy rating on Kajaria Ceramics, with a September 2023 target price of Rs 1,310. “In terms of volume outlook, we are positive, given the tailwinds from the real-estate sector and also robust export momentum,” said Lohade.

ICICI Direct also has Buy call with a target price of Rs 1,355. “With a net cash balance sheet and superior brand, it is a quasi-play on the improved scenario of real estate,” it said.

Meanwhile, global research firm Jefferies has a base target of Rs 1,400 and a bullish target of Rs 2,000 on the scrip, as it remains bullish on a potential housing revival in India.

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