Kajaria Ceramics’ recent disclosure of fraud is a sentiment dampener as it raises corporate governance issues. During the rollout of a new vendor onboarding system, Kajaria found an embezzlement of around ₹20 crore.
The fraud, spanning the past two years, involved an advance payment made as capital expenditure for a new plant at Kerovit Global Pvt Ltd — a wholly owned subsidiary of Kajaria Bathware Pvt Ltd. A senior employee created a fake vendor and siphoned off funds.
In an analyst call on 22 December, the management said the financial impact of ₹20 crore will be recognized as an exceptional item in FY26. Also, the accused chief finance officer (CFO) has been terminated.
The financial impact appears manageable given Kajaria’s scale of operations. Even so, the incident highlights weaknesses in process controls, given that the capex was fully incurred, the plant was operational, yet CFO was able to siphon off funds, said HDFC Securities.
This comes when Kajaria’s muted revenue growth has been a pain point marred by external and internal factors. Lately, the Indian tile industry has been in a phase of weak demand, marked by intense competition and pricing pressure, particularly from Morbi-based manufacturers.
This has hampered volume and realisation growth. To boost profitability, the company is going through a transformation program Kajaria 2.0. It has already achieved ₹150 crore of annualised cost savings, most of which are recurring.
Post restructuring, which is expected to be over by the end of FY26, growth would improve, driven by industry recovery, dealer productivity, better cross-selling, and higher utilisation of existing capacities.
Importantly, this growth is expected without large new capex, which should improve return on equity and return on capital employed. Remember, in FY25, Kajaria exited two non-core and low-quality businesses—the loss-making plywood division and the UK operations under Kajaria International DMCC which suffered from structurally high costs and weak profitability.
But so far in this calendar year, the stock has declined 14% and a repeat of any such events in future could lead to de-rating. According to Nuvama Research, the fraud does raise questions about checks and balances in place and Kajaria should initiate steps to have a robust internal control system.
“We retain earnings estimates, but we are cutting target valuation to 28x (from 33x), which is 20% below the ten-year average forward price-to-earnings,” said Nuvama Research report dated 23 December.
