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Core segment underperformance likely to continue
After rapid revenue growth at 30% CAGR over FY05-FY15, Cera Sanitaryware (CRS) has seen a sharp decline in its growth curve in the subsequent four years (FY15-FY19) to 13% CAGR. The growth however is likely to slip in negative terrain in FY20 – for the first in two decades. This would be largely due to severe demand woes in the company’s core sanitaryware segment. With no signs of demand recovery in Q4FY20-TD (which is usually the peak demand quarter) and the unlikelihood of trend reversal in the near term, we lower our growth expectations for FY21E. Overall EBIDTA margin too is likely to remain under pressure due to operating deleverage in the sanitaryware segment and inferior product mix. Maintain HOLD.
* Cut earnings estimates for FY21E and introduce FY22E numbers. With muted demand continuing in the core sanitaryware segment even in the current peak demand quarter, we lower our FY21E growth assumptions. We cut our revenue / earnings estimates for CRS by 4.7% / 10% for FY21E. Rolling forward our numbers and valuation to FY22E, we retain HOLD on the stock with a revised target price of Rs2,446 (vs Rs2,662 earlier) valuing it at 22x FY22E earnings.
* Core segment likely to witness continued underperformance amid muted demand and stiff competition. Sanitaryware category derives significantly high percentage of its growth from expansion in the new construction / real estate sector. With growth in this sector likely to remain sluggish over the medium term, prospects for the sanitaryware segment are limited to market share gains with limited scope for growth from replacement demand and shift from unorganised to organised brands. We have thus trimmed our growth estimates for CRS in the core segment to 1.9% vs 5% earlier for FY21E.
* Allied products likely to gain traction. We expect the revenue size of allied products (tiles and faucets) division to reach Rs6.2bn by FY20E, which would then constitute 47% of the company’s overall revenues. With CRS consistently expanding its product range and increasing its distribution network for allied products, we expect the segmental share to further increase. We estimate allied products revenues to grow at a double-digit CAGR over FY20-FY22E.
* Inferior product mix and operating deleverage in core segment to drive muted EBIDTA margins. Expected operating deleverage and high competitive intensity in the sanitaryware segment is likely to put pressure on CRS’s core margins. Also, higher growth expectation in the allied products segment would be margin-dilutive due to inferior product mix. We have modelled consolidated EBIDTA margins of 13.9%/14%/14.9% for FY20/FY21/FY22, respectively.
* RoCEs to remain in 18-20% range – at decade-low levels. CRS posted impressive RoCEs in the 26-32% range over FY10-FY17, which declined to 23.3%/23.7%% in FY18/FY19 respectively. However, sub-optimal utilisation across product categories and likely margin pressures are expected to push RoCEs lower to the 18-20% range over next two years.
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