Morgan Stanley Upgrades Astral & Kajaria Ceramics; Names Astral as Top Pick, Raises Kajaria Target by Over 50%

Morgan Stanley has also been optimistic about India's building products industry, upgrading both Astral Ltd. and Kajaria Ceramics Ltd., and naming Astral the one to invest in. The brokerage believes long-term growth drivers for the sector, like urbanisation, housing demand, and infrastructure development, will continue to drive progress, and Astral will outperform the others.

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The brokerage's bullish outlook drove buying interest in both stocks during Tuesday’s trading session. Astral shares rose as much as 3.5%, and Kajaria Ceramics rose about 3% in morning trade.

Astral Upgraded to 'Overweight'

Morgan Stanley upgraded Astral from 'Equal-weight' in the market to 'Overweight' and raised its target price from ₹1,378 to ₹1,660. The new target suggests a lot of upside potential from current market levels.

The brokerage says Astral is better positioned to gain structural growth opportunities because of its product portfolio, which is more diverse, having a wide range of product mix and product segment (not just traditional pipes), as it is broader than traditional pipes.

At the same time, the company has a solid presence in high-growth categories such as:

Pipes and plumbing solutions

Adhesives, construction chemicals, water management products

Morgan Stanley explained that these businesses have stronger demand drivers, relatively lower market penetration and higher potential premiumisation than traditional building materials such as ceramic tiles.

Why Morgan Stanley Prefers Astral

The brokerage predicts Astral's medium-term earnings growth will be driven by a variety of factors that are predicted as to how Astral will grow in the medium-term to accelerate Astral's earnings growth (e.g., including:

Continued market share gains

Expansion of newer business segments, backward integration in CPVC manufacturing, better operating leverage as production scales up, potential value unlocking through the proposed Chemicals demerger

Those factors could give Astral better earnings growth and better returns in the future, they believe.

Kajaria Ceramics also gets an upgrade

Morgan Stanley also improved its outlook on Kajaria Ceramics, upgrading the stock from 'Underweight' to 'Equal-weight'.

More notably, the brokerage raised Kajaria's target price from ₹912 to ₹1,410, up more than 50%.

The brokerage described Kajaria as India's best ceramic tile company, highlighting its:

Market leadership

1. Strong distribution network
2. Trusted brand value
3. Consistent execution

Morgan Stanley also noted that the tiles industry is still much more closely tied to residential housing demand than Astral's diversified portfolio.

The positive outlook for building products

Morgan Stanley thinks India’s building products industry is still one that is attractive for long-term investment.

The brokerage cited several structural growth drivers, among them:

1. Rapid urbanisation
2. Rising disposable incomes
3. A sustained housing cycle
4. Government spending on infrastructure
5. Water supply and sanitation projects
6. Affordable housing initiatives
7. More renovation activity

These factors are expected to drive demand in product categories in the next several years.

Risks to Watch

Morgan Stanley also noted potential risks as well as future growth to its growth outlook, but also mentioned optimism while maintaining that prospect.

1. The brokerage highlighted the following downside risks:
2. Weakening housing demand
3. Reduced government infrastructure spending
4. Sharp increases in raw material and commodity prices

At the same time, faster premiumisation, more real estate activity, and higher public investment could further boost earnings in the sector.

Market Reaction

Following the brokerage upgrade:

1. Astral shares rose as much as 3.49% to a record high of ₹1,377.55.
2. Kajaria Ceramics rose to 2.84% to ₹1,270 during the day.

The rally was in response to Morgan Stanley’s revised recommendations.

Outlook

Morgan Stanley’s latest report also reinforces confidence in India’s long-term building materials story. Both are still the largest in their respective sectors, but Astral’s diversified business model and exposure to faster-growing product categories are better long-term investment opportunities, they say.

Kajaria Ceramics has continued to be viewed as a good market leader, but Astral’s broader growth opportunities have made it Morgan Stanley’s top recommendation in the sector.