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Kajaria Ceramics share value

7/22/2014

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Kajaria Ceramics is the largest manufacturer of ceramic/vitrified tiles in India. It has an annual aggregate capacity of 46.60 mn. sq. meters, distributed across seven plants-Sikandrabad in Uttar Pradesh, Gailpur in Rajasthan, four plants in Morbi in Gujarat and one at Vijayawada in Andhra Pradesh.

Let's take a look at financials:
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Kajaria financials and margins
Using a three stage DCF model, I arrived at the following value with these assumptions:
- profit growth of 20% for the next 5 years, 15% for years 5-10 and 4% thereafter
- discount rates of 11%, 13%, 15% using the Capital asset pricing model (CAPM)
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Kajaria Ceramics share value
Even after assuming a very optmistic growth of 20% and 15%, Kajaria Ceramics is not worth more than 4000 Rs.Cr. according to my DCF valuation. That implies a downside of at least 10% for the stock. The company is executing and growing well, but at these levels, the margin of safety is nonexistent and buying this stock would present an unfavorable risk/reward ratio. That doesn't mean it can't go a bit higher though. DCF valuation is only a rough metric and Mr. Market can carry stocks far beyond their reasonable values.
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Kajaria competition
Looking at some of it's competitors (indirect or direct), Kajaria Ceramics is valued around the average, with slightly higher profit,sales growth and ROE.

It is a good business with a leading position in India, however I'm not a buyer at these levels. I will rather sit and wait till a more favorable opportunity appears.
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