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Company Background

Cera Sanitaryware Ltd. (Cera), promoted by Mr. Vikram Somany, is amongst India’s largest producer of sanitaryware and faucetware. It also has a presence in tiles and has JV with Morbi based tile manufacturer Milo Tile LLP.

Investment Rationale

Robust topline growth with rise in volumes due to positive consumer sentiments

* During Q3FY22, consolidated net sales grew significantly by 28.1% y-o-y at Rs 4,044.6 mn due to positive consumer sentiments, resulting in high demand, inspite of third wave of COVID-19. Cera has continued to witness a strong demand due to home upgradation and improvement undertaken by consumers. The Company is focused on monetising the demand by maximum production of technologically advanced SKUs in-house, broad based product portfolio & vendor network and using pricing power of the brand to proactively lead the sanitaryware and faucetware markets. Robust demand trend is expected to remain intact going forward.

* Cera is also benefiting from the absence of Chinese sanitaryware products from the market. Also, it relies on its owned manufacturing capabilities rather than opting for imports. A significant rise in freight cost during the quarter made imports from China unviable. Thus, sanitaryware players who are dependent on Chinese imports, have not been able to book orders before 2022 in the expectation of softening freight rates. This vacuum has opened huge opportunities for Cera which has helped it to acquire new customers and gain market share.

* During the quarter, Cera has managed to operate owned sanitaryware and faucetware plants at a fairly high capacity utilisation of ~103% and 99% respectively. During Q3FY22, sanitaryware, faucetware, tiles and wellness segments contributed 53%, 35%, 10% and 2% respectively. Robust y-o-y growth of ~47% and ~52% witnessed in sanitaryware and faucetware segments whereas tiles and wellness segments saw de-growth of ~46% and ~4% respectively.

* The Company is making continuous efforts to de-bottleneck and automate the plant process which can enhance production / quality of products and will result in a reduction of production cost. Thus, focusing on optimum production as well as product availability may lead to high inventory (both, raw material and finished stock), going forward. As a result, capital employed in inventory may rise in next few quarters.

* Cera is well positioned for growth in coming years. We have built in a revenue growth of ~26% in FY22E and ~15% each in FY23E and FY24E respectively keeping in view Cera’s robust track record and rise in demand pickup post ease of lockdown restrictions.

EBIDTA margins expected to stabilize in the vicinity of 16%

* EBITDA margins improved significantly by 280 bps y-o-y and 120 bps q-o-q at 16.5% attributable to higher contribution from high margin sanitaryware and faucetware businesses.

* Management said that cost of key raw materials for sanitaryware such as china clay, feldspar, plaster of paris etc. which contributes ~95% to the cost of production, remained stable. However, cost of glazing recipe, moved up by ~5% during the quarter, which constitutes less than 1.5% of sanitaryware raw material mix. Packaging cost has also gone up by 3% adding to the cost of production. However, cost of Brass, a key RM for manufacturing faucetware has remained stable during the quarter.

* Gas prices have continued to rise during the quarter. However, due to availability of gas from the isolated wells near Cera’s plant, pricing of gas from GAIL continues to remain below market price and is expected to remain so in the future. Gas prices from GAIL has inched up from Rs 9.5/SCM in September to Rs 13.3/SCM in October whereas gas prices from Sabarmati Gas have gone up from Rs 45/SCM in September to RS 70/SCM in November. To address the continuous rising cost, Cera has taken the price hikes of 5-7%, 4% and 10% in sanitaryware in February, August and November 2021 whereas it has taken price hikes of 8-10%,10% and 5.5% in Faucetware in February, August and December 2021 respectively. The cumulative impact of above price hikes is expected to be seen in Q4FY22E and FY23E.

* Going forward, we expect EBITDA margin to stabilize at ~16% by FY24E, on the back of a rise in contribution from high margin value added products, better cost control and structural shift towards organised players, which is further expected to generate traction in the industry.

VALUATION

* Positive consumer sentiments and focus of Morbi players towards export market, augurs well for organised players like Cera in gaining market share, which is sustainable going forward. Further, green shoots of revival visible in residential real estate sector, bodes well for organised players. We expect Cera to emerge as a strong player with asset light model in place, strong brand recall and deleverage balance sheet.

* Going forward, we have valued the stock on the basis of P/E - method of relative valuation - of 30x of FY24E earnings of Rs 176.6 per share and recommend to accumulate the stock with a target price of Rs 5,299 per share (upside of ~14%).

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