Kajaria Ceramics Q2 FY26: Margin Revival Drives 53% Profit Surge Despite Muted Revenue Growth

Following the results announcement, the stock traded at ₹1,248.50 on 16 October 2025, reflecting a 1.19% gain from the previous close. The company's ability to deliver strong bottom-line growth whilst maintaining near-flat topline performance has raised investor confidence, though the stock remains 12.20% below its 52-week high of ₹1,422.00.

The quarter's performance marks a significant inflection point for Kajaria Ceramics, which had struggled with margin pressures through much of FY25. The company's ability to expand operating margins by 453 basis points year-on-year whilst maintaining revenue stability demonstrates effective cost management and operational efficiency improvements. The sequential improvement of 20.58% in net profit quarter-on-quarter further underscores the momentum building in the business.

Financial Performance: Margin Revival Steals the Show

Kajaria Ceramics delivered a standout performance on the profitability front in Q2 FY26, with operating profit (PBDIT excluding other income) jumping to ₹213.45 crores from ₹158.90 crores in the year-ago quarter, representing a robust 34.32% year-on-year growth. This margin expansion occurred despite net sales growing a modest 0.57% to ₹1,186.01 crores from ₹1,179.27 crores in Q2 FY25.

The operating margin expansion to 18.00% in Q2 FY26 represents the highest quarterly margin achieved in the past three years, surpassing even the strong 15.60% recorded in Q2 FY24. On a sequential basis, margins improved by 105 basis points from 16.95% in Q1 FY26, indicating sustained operational momentum. The PAT margin similarly expanded to 11.30% from 7.50% a year ago, reflecting improved profitability at every level of the income statement.

Employee costs showed disciplined management, declining to ₹130.52 crores in Q2 FY26 from ₹144.34 crores in Q2 FY25, contributing to the margin expansion. Interest costs remained elevated at ₹5.78 crores compared to ₹4.73 crores year-ago, though the company maintains a comfortable interest coverage ratio of 32.00x on average. Depreciation charges increased marginally to ₹41.89 crores from ₹40.58 crores, reflecting ongoing capital investments.

The quality of earnings improved substantially, with profit before tax reaching ₹181.74 crores, up 50.75% year-on-year. The tax rate for the quarter stood at 25.97%, marginally lower than the 29.04% recorded in Q2 FY25, providing a modest tailwind to net profit growth. Other income contributed ₹15.47 crores, up from ₹9.87 crores in the year-ago quarter, reflecting better treasury management.

Operational Excellence: Cost Management Drives Margin Expansion

The standout feature of Q2 FY26 results was Kajaria's ability to expand margins significantly whilst maintaining revenue stability, demonstrating operational leverage and effective cost control. The company's gross margin expanded to 18.81% from 13.91% year-ago, indicating improved pricing power and favourable input cost dynamics in the ceramics industry.

Return on equity for the latest quarter stood at 11.79%, though below the company's five-year average of 15.46%, reflecting the impact of accumulated retained earnings expanding the equity base. The company's return on capital employed (ROCE) of 18.72% remains healthy, though it has moderated from the five-year average of 23.39%, suggesting room for improvement in capital efficiency as new capacities stabilise.

The company's working capital management showed mixed trends, with current assets of ₹1,818.56 crores against current liabilities of ₹707.69 crores as of March 2025, providing a comfortable current ratio. Trade payables increased to ₹338.08 crores from ₹293.29 crores in the previous year, indicating improved negotiating leverage with suppliers. The company generated strong operating cash flows of ₹500 crores in FY25, demonstrating robust cash conversion despite capital expenditure of ₹371 crores during the year.

Industry Context: Navigating Subdued Demand in Building Materials

The ceramics and tiles industry has faced headwinds over the past year, with subdued real estate activity and cautious consumer spending impacting volume growth across the sector. Kajaria's modest revenue growth of 0.57% year-on-year reflects these challenging demand conditions, though the company has managed to maintain market share through its extensive distribution network and brand strength.

The company's five-year sales CAGR of 14.33% demonstrates its long-term growth trajectory, though recent quarters have seen moderation in line with broader construction sector trends. The industry is witnessing consolidation, with organised players like Kajaria gaining share from unorganised manufacturers due to quality concerns and GST compliance requirements. The government's continued focus on infrastructure development and affordable housing provides a structural tailwind, though the timing of demand recovery remains uncertain.

Input cost pressures, particularly from natural gas and electricity, have moderated in recent quarters, providing relief to margins. The company's ability to pass on cost increases through selective price adjustments has improved, reflecting its market leadership position. However, intense competition in the mid-market segment continues to constrain pricing power, requiring Kajaria to maintain focus on operational efficiency and product innovation.

Industry Leadership: How Kajaria Compares to Peers

As India's largest ceramics and tiles manufacturer, Kajaria Ceramics commands a premium valuation relative to most peers, justified by its market leadership, superior distribution reach, and brand equity. The company's scale advantages enable better raw material procurement and operational efficiencies compared to smaller competitors.

Kajaria's P/E ratio of 58.05x trades at a premium to most peers except Safari Industries, reflecting market expectations of sustained margin improvement and eventual volume recovery. The company's P/BV ratio of 7.20x sits in the mid-range of peers, with Cera Sanitaryware trading cheaper at 5.80x despite superior ROE of 18.30%. Kajaria's ROE of 11.79%, whilst healthy, lags behind Cera's performance, suggesting scope for further profitability improvement.

The company's dividend yield of 0.73% exceeds most peers except Cera Sanitaryware, with a consistent dividend payout ratio of 48.71% over the past five years demonstrating commitment to shareholder returns. Kajaria's net cash position provides a significant competitive advantage over leveraged peers, offering flexibility for growth investments and cushion during industry downturns.

Valuation Analysis: Premium Justified by Quality but Limited Upside

Trading at ₹1,248.50 with a market capitalisation of ₹19,858 crores, Kajaria Ceramics commands premium valuations across multiple metrics. The P/E ratio of 58.05x represents a substantial premium to the broader market and most industry peers, reflecting the company's market leadership and quality credentials. However, this valuation leaves limited room for multiple expansion, placing the onus on earnings growth to drive returns.

The company's price-to-book ratio of 7.20x exceeds its historical average, indicating that current valuations price in expectations of sustained margin improvement and return profile enhancement. With a book value per share of ₹172.27, the stock trades at over 7 times book value, which appears stretched given the current ROE of 11.79%. For the valuation to be justified, the company needs to demonstrate sustained improvement in return ratios towards its historical average of 15.46%.

The EV/EBITDA multiple of 30.53x appears expensive relative to historical norms and peer averages, suggesting limited margin of safety at current levels. The stock's 52-week range of ₹745.00 to ₹1,422.00 indicates significant volatility, with the current price sitting 12.20% below the high and 67.58% above the low. The valuation grade has been classified as "Expensive" since May 2025, when the stock crossed ₹946.75.

Shareholding Pattern: Institutional Rebalancing Underway

The shareholding pattern reveals interesting dynamics, with promoters maintaining a stable 47.48% stake over the past year, demonstrating continued confidence in the business. The absence of any promoter pledging further reinforces the financial strength and governance quality of the company.

Foreign institutional investors have reduced their stake significantly, declining from 16.04% in December 2024 to 12.55% in June 2025, representing a reduction of 3.24 percentage points in the most recent quarter. This selling by FIIs coincides with the stock's correction from its 52-week high, suggesting profit-booking at elevated valuations. The number of FII holders decreased from 147 to 142, indicating broad-based reduction in foreign interest.

Mutual fund holdings have also declined marginally from 24.44% to 23.74% quarter-on-quarter, though the reduction has been modest compared to FII selling. The number of mutual fund schemes holding the stock increased from 25 to 26, suggesting some funds are initiating positions even as others reduce exposure. Domestic institutional investors (insurance and other DIIs) have increased their stakes modestly, with insurance holdings rising to 1.45% from 1.20%.

The notable increase in non-institutional holdings from 9.05% to 12.57% suggests retail and high net worth investors have been accumulating shares, potentially viewing the correction as a buying opportunity. The total institutional holding of 44.04% remains healthy, providing stability to the stock, though the recent FII exodus warrants monitoring.

Stock Performance: Underperformance Despite Recent Recovery

Kajaria Ceramics has delivered mixed returns across different timeframes, with recent momentum contrasting sharply with longer-term underperformance. The stock has generated exceptional returns of 56.41% over the past six months, significantly outpacing the Sensex return of 8.34% by a substantial alpha of 48.07 percentage points. This recovery reflects the market's recognition of improving margins and operational performance.

However, the one-year return paints a concerning picture, with the stock declining 10.36% compared to the Sensex gain of 2.41%, resulting in negative alpha of 12.77 percentage points. The two-year and three-year returns show even more pronounced underperformance, with the stock generating negative 3.62% returns over two years against Sensex gains of 26.15%. This extended period of underperformance reflects the margin pressures and subdued demand conditions that plagued the ceramics sector through FY24 and early FY25.

The stock's beta of 1.35 indicates high volatility relative to the broader market, with the stock typically rising and falling by a larger proportion than market movements. This high beta characteristic, combined with volatility of 29.44% over the past year, classifies Kajaria as a "Medium Risk Low Return" stock based on recent performance, though the risk-reward profile may be improving with margin recovery.

Technical indicators present a mixed picture, with the stock currently in a "Mildly Bullish" trend since 19 September 2025. The stock trades above all key moving averages (5-day, 20-day, 50-day, 100-day, and 200-day), suggesting positive momentum. However, weekly MACD remains mildly bearish, indicating caution is warranted. The stock's position 12.20% below its 52-week high of ₹1,422.00 suggests potential upside if operational momentum sustains, though resistance at previous highs may prove challenging.

Investment Thesis: Quality Company at Premium Valuation

Kajaria Ceramics presents a nuanced investment case, combining strong fundamental quality with challenging valuation and mixed momentum indicators. The company's quality grade of "Good" reflects its market leadership, zero-debt balance sheet, and consistent operational track record. However, the financial trend remains classified as "Flat," whilst technical indicators show only "Mildly Bullish" momentum.

The company's proprietary score of 65/100 places it in "Hold" territory, upgraded from "Sell" in July 2025 following the margin recovery. Key strengths supporting the investment case include healthy long-term sales growth of 14.33% CAGR, zero debt positioning, positive quarterly results, and high institutional holdings of 39.95%. The company's five-year EBIT growth of 19.26% demonstrates its ability to generate improving profitability over longer timeframes.

However, significant concerns temper the investment thesis. The stock's bearish technical trend over longer timeframes, extended period of underperformance relative to the Sensex, and expensive valuation metrics all suggest limited upside potential at current levels. The modest revenue growth of just 0.57% year-on-year indicates persistent demand challenges that could constrain near-term performance.

Key Strengths & Risk Factors

Outlook: What to Watch

The forward outlook for Kajaria Ceramics hinges critically on two factors: sustaining the margin recovery demonstrated in Q2 FY26, and achieving meaningful acceleration in revenue growth. Whilst the company has successfully expanded profitability through cost management and operational efficiency, long-term value creation requires volume growth to return. The real estate sector's trajectory, government infrastructure spending, and consumer confidence will be key determinants of demand recovery.

Management's ability to maintain operating margins in the 17-18% range whilst gradually improving revenue growth will be crucial to justifying the current premium valuation. Any disappointment on the margin front or prolonged revenue stagnation could trigger valuation de-rating, given the stock's expensive multiples. Conversely, sustained operational improvement combined with demand recovery could drive meaningful earnings upgrades and justify current valuations.