Kajaria Ceramics Ltd

[zygo23554]

@Yogesh_s

I don’t think you can build a sustainable competitive advantage out of tiles, ceramics and sanitary ware products. Such advantage is usually a result of R&D which I don’t think exists in this business. This is already a mature product. Maybe few years ago not many people could handle the manufacturing process but this is not rocket science so over the years there will be more competition that will bring the ROE to a more reasonable levels of 15-20% from current 30%. Entry barriers are also low.

This stock is trading at a sky high valuation. All the bullish arguments are already factored in. At current valuations, long term investors will make money only if actual performance exceeds what is already priced in. My back of the envelope reverse DCF model shows that 20% growth over the next 10 years followed by a steady growth of 8% in perpetuity is already priced in. Where is the value?

Agree on the valuation bit but not on the moat part.

This business has a tremendous moat, the very fact that the company has been winning market share and expanding product portfolio in spite of having a huge unorganized segment that can undercut prices implies that there is a moat. The moat here emerges from a combination of a well known brand that ensures channel stickiness, relative scale advantages compared to marginal players and the strength of the distribution network.

I am a distributor in my profession, each distributor tends to bring in his own ecosystem of a catchment area, strong relationships and repeat business. A distributor eventually tends to consolidate with 4-5 OEM’s since that reduces complexity and makes operations easier. As a distributor it is very easy for me to push a well known brand which comes with credibility than to push a new product where the effort involved in selling is high (even if the margins are better here). For a new entrant to enter the tiles & sanitaryware business and build the kind of distributor network that a Kajaria or Cera has created will take ages and the distributor needs to be given disproportionately large incentives to build a market in the first place.

In fact I am tending towards the view that a brand + distribution combination in a market with unorganized players is one of the strongest moats one can find. It looks very simple and innocuous on paper but it beats the hell out of most other combinations.