Analyst Meet Update

May 24, 2011

Kajaria Ceramics Ltd.

Priyanka K. Jadhav Research Analyst Mobile: +91 77383 93374 Tel: +91 22 66188833 priyanka.jadhav@indianivesh.in

Kajaria ceramics conducted an analyst meet on 23rd May, 2011 to discuss the companys future plans and growth prospects.

Key takeaways from the analyst meet:

Industry
Globally, the total production for tiles stands at 8515 million square meter (msm) (CY 2009). China ranks first with the production of 3600 msm tiles. Whereas total production from India during this period was 490 msm, accounting for 6% of the total world production. The total world consumption of tiles is 8460 msm; Indias consumption is 494 msm (6% of the total world consumption). Indias consumption growth is the 29% over the previous year, second only to Egypt. As of march 2010, the Indian tiles industry is 494 msm. National players have a market share of 50%; remaining 50% of the industry is represented by other regional players mainly present in the state of Gujarat. Except for CY09, the industry has been growing at a CAGR of 15-16% per annum in last 5-6 years. Excluding Asias production, the industry has shown a negative growth of 8% in CY09.
Indian tile industry production (CY09) Ceramic Glazed Tiles Vitrified Tiles - polished Vitrified Tiles - glazed Vitrified Tiles TOTAL Million square metre (msm) 334 160 145 15 494 Rs Bn 64 56 47 9 120

Source: Company Presentation, IndiaNivesh Research

Kajaria ceramics Ltd.

Largest manufacturing capacity: Kajaria Ceramics is the largest manufacturer of ceramic and vitrified tiles in India, with a total production capacity of 30.6 msm, distributed across three plants - Sikandrabad in Uttar Pradesh, Gailpur in Rajasthan and Morbi in Gujarat.
Plant Sikandrabad (UP) Gailpur (Rajasthan) Morbi (Gujarat)* Ceramic Tiles 3.20 14.10 2.30 19.60 MSM(Million Square Metre) Vitrified Tiles Total 5.00 8.20 6.00 20.10 0.00 2.30 11.00 30.60

* Kajaria acquired 51% stake in Morbi Ceramic private Limited. Source: Company Presentation, IndiaNivesh Research

Kajaria imports glazed vitrified tiles from Europe and China and has put up own manufacturing in Gailpur in March 2011 (3 MSM p.a). It imports polished vitrified tiles from China and has put up a manufacturing facility in Sikandrabad (UP) in February 2010 and also in Gailpur in March 2011 to cater to high end segment (total aggregate capacity 8 MSM p.a). It manufactures high end ceramic glazed tiles and has taken over controlling stake in Soriso Ceramic (total aggregate capacity 19.60 MSM P.A) Strong distribution network: the company has a strong dealer distribution network of 700 dealers, apart from their network of sub-dealers. Retail initiative: the company also operates a retail chain of showrooms selling high end imported tiles and sanitary ware from Spain and China. Currently, it has 12 showrooms (8 own + 4 franchises) and 12 warehouses. Foray into high-end sanitary ware business: Leveraging its brand value and strong distribution network, Kajaria ceramics has recently forayed into the high-end sanitary ware business in collaboration with Vitra, an Eczacibasi group company (Turkey), thereby positioning itself as a complete bathroom solution provider.

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601 & 602, Sukh Sagar, N. S. Patkar Marg, Girgaum Chowpatty, Mumbai 400 007. Tel: (022) 66188800

Analyst Meet Update (contd...)

Foray into wooden flooring space: Kajaria has entered the wooden flooring space as a trading initiative in November 2010. The wooden flooring products are sold through the existing distribution dealer network. Improving ROCE due to higher asset turn ratio: Historically, the Indian tile companies have a low asset turnover ratio as the cost of machinery was very high. However, with the foray of Chinese companies into machine manufacturing, the prices of Italian machines have also come down. Also, with the companys focus towards selling and marketing of higher end products has improved the realizations. The ROCE for FY11 has improved to 24.94% from 18.94% in FY10.
ROCE (%)
30 25 20 15 10 5 0 FY07 FY08 FY09 FY10 FY11
Source: Company Annual Report, IndiaNivesh Research

24.94

18.94 14.5 12.38 8.78

Growth in real estate sector to trigger demand: Across 2010-15, Indias real estate sector is expected to grow at a CAGR of 15-16%, driven by 18-19% growth in residential real estate, 55-60% growth in retail markets and 20-22% growth in the commercial real estate segment. Demand for tiles is also expected to rise in tandem. 70% of the tiles distributed by Kajaria cater to the retail segment (against industry average of 50%), thus providing better returns. The retail demand for tiles is likely to grow because of the following triggers: Increasing middle-class & rising population: Indias middle-class is expected to account for 85% of urban households. Indias urban population is expected to increase by 100 million over 10 years or 10 million annually, creating a huge annual demand for houses and flooring solutions. India is projected to stay the youngest with its working-age population estimated to grow to 70% of its total population by 2030 the largest such quantum in the world. Improved disposable incomes: with the improvement in disposable incomes, discretionary spending in lifestyle and premium products is expected to increase to around 70% of annual household expenses by 2025. Growth of replacement market in rural and semi-urban markets

The growth from institutional and projects segment is expected to come from urbanization leading to increase in commercial space. Demand for commercial space is expected to come from sectors such as organized retail, hospitality sector, healthcare care and other infrastructure development activities like airport development. Increasing cost of Chinese ceramic tiles and levy of anti-dumping duty: Increased labour cost in china, hardening of the Chinese currency and increase in sea-borne freight cost has made imports from china cost-ineffective. The Indian government has imposed anti-dumping duty on Chinese ceramic tiles imports. Therefore the Chinese imports have minimized, benefitting Indian tile manufacturers.

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Kajaria Ceramics Ltd| Analyst Meet Update

May 24, 2011 | 2

Analyst Meet Update (contd...) Valuation

Kajaria ceramics Ltd is placed well to leverage its pan-India distribution network and strong brand recognition for entering new product lines of high end sanitary ware and wooden flooring. We expect the revenues of Kajaria to trigger on account of better realizations as it focuses on high-end products and product categories. Also, having the largest manufacturing capacity places it well to exploit the growing demand from the real estate sector and also the demand created because of minimized Chinese imports. At the CMP of Rs.87, the stock is trading at 8.6x PER FY12E Bloomberg earnings estimates. We had recommended a BUY on the stock with a price target of Rs.90 which was achieved some time back. We reiterate BUY with a target of Rs.105.

Consolidated Financials
Rs (Mn) Net Sales EBDITA EBDITA Margin% Less: Interest Less: Depreciation PBT PBT% Tax Provision PAT PAT Margin % EPS (Rs)
Source: Company Filings, IndiaNivesh Research

Q4FY11 2813 426 15% 66 71 288 10% 104 184 7% 2.51

Q4FY10 2145 308 14% 48 73 186 9% 59 128 6% 1.74

QoQ growth (%) 31% 38% 38% -3% 55% 76% 44%

Mar 11 9524 1485 16% 299 295 891 9% 285 607 6% 8.24

Mar 10 7355 1157 16% 375 267 514 7% 156 358 5% 4.87

YoY growth (%) 29% 28% -20% 10% 73% 83% 70%

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Analyst Meet Update (contd...)

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601 & 602, Sukh Sagar, N. S. Patkar Marg, Girgaum Chowpatty, Mumbai 400 007. Tel: (022) 66188800 / Fax: (022) 66188899 e-mail: research@indianivesh.in | Website: www.indianivesh.in Disclaimer: This document has been prepared by IndiaNivesh Securities Private Limited (IndiaNivesh), for use by the recipient as information only and is not for circulation or public distribution. This document is not to be reproduced, copied, redistributed or published or made available to others, in whole or in part without prior permission from us. This document is not to be construed as an offer to sell or the solicitation of an offer to buy any security. Recipients of this document should be aware that past performance is not necessarily a guide for future performance and price and value of investments can go up or down. The suitability or otherwise of any investments will depend upon the recipients particular circumstances. The information contained in this document has been obtained from sources that are considered as reliable though its accuracy or completeness has not been verified by IndiaNivesh independently and cannot be guaranteed. Neither IndiaNivesh nor any of its affiliates, its directors or its employees accepts any responsibility or whatever nature for the information, statements and opinion given, made available or expressed herein or for any omission or for any liability arising from the use of this document. Opinions expressed are our current opinions as of the date appearing on this material only. IndiaNivesh directors and its clients may have holdings in the stocks mentioned in the report. To unsubscribe please send a mail to mail@indianivesh.in
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