Kajaria Ceramics: Ground Expansion

According to reports, Kajaria Ceramics, the largest producer of ceramic tiles in India will in all probability expand its Kaikalur near Vijayawada in Andhra Pradesh. This facility comes under a joint venture with Vennar Ceramics (subsidiary of Anjani Portland Cement). The current capacity of this plant is 6500 Square meters per day (2.3 million square meter (MSM) per year) and this can go up to 10000 square meters (about 3.6 MSM) a year after the planned expansion. This however has been denied by the management. Sanjeev Agarwal, VP - Finance refused to comment on this, citing the silent period requirements. But he denied these reports and hence there is much to be known before one could act on the basis of this expected development.

This JV in question was formed in FY12 after Anjani Portland Cement decided to set up a ceramic wall tiles project in Andhra Pradesh. It was commissioned by June 2012. The project has a captive gas-based power plant of 2.7 MW.

The management may have denied these reports for now, but we believe, this capacity expansion is in line with the company's growth strategy as well as the current trend in the industry. Over the last two years, all major players in the Sanitaryware sector have expanded their capacities. Kajaria Ceramics has also looked at inorganic growth by acquiring some brownfield capacities. In October recently it acquired a 51% stake in Gujarat-based Cosa Ceramics. With a total of four acquisitions in the last one year it’s capacity has gone up to 41 MSM.

The expansion of the Vijaywada plant would see Kajaria's total capacity go up to 42.6 MSM. The JV has already seen its entry in the South Indian market where realty is gathering pace. In the first half of the year this facility operated at 83% utilization and the company is expecting a 100% utilization of this plant in the second half of the year. This indicates the company’s recognition of the high potential that Ceramic wall tiles hold in the South Indian market. This also implies that there is every probability of the company going in for the capacity expansion which could probably be announced during the quarterly results. Though the 1.6 MSM capacity is not too big for the company, the underlying assumption is that the product demand is rising which may require the company to put up another capacity in the South.

We remain bullish on the counter due to its high growth over the last five years. The stock has been recommended by us earlier too and has provided decent returns as well. We believe that the current level is also good to enter. We advice those who have already bought into the counter to hold on for further gains and those wishing to get in can do so with a 20% return in mind over the next one year.