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Demand environment remains healthy

We re-iterate our BUY rating on Cera Sanitaryware (CRS) led by continued healthy demand environment aided by pick-up in the residential housing market and also from home improvement market. Our interaction with dealers and management indicates continued demand tailwind even in Q1 in the core segments of sanitaryware and faucetware. Margins should also remain firm going ahead as the company has taken price increase of ~3% in sanitaryware and ~5% in faucetware during mid-May, 2022 which should negate raw material price pressures. Management has guided to double the revenue over the next ~3.5 years with margin improvement of at least 50bps-75bps YoY in FY23. We expect CRS to witness revenue/PAT CAGR of 17%/27%, respectively, over FY22-24 led by faucetware and sanitaryware segments with continuous high return ratios. Maintain BUY with an unchanged Mar’23 target price of Rs5,592 set at 32x PER FY24E (in-line with 1-yr forward five-year average PER).

* Revenue CAGR of 17% during FY22-24E: CRS is expected to witness revenue CAGR of 17% during FY22-24E aided by growth in sanitaryware and faucetware segments. Both these segments are witnessing strong demand due to pick-up in the residential housing market and increased demand from home improvement market. CRS derives ~55% of revenue from tier-3 and below markets, which continue to witness healthy demand. The sanitaryware segment is expected to witness revenue CAGR of 15% over FY22-24E with incremental volumes being catered to from outsourcing until the new owned-manufacturing facility commences production. The greenfield sanitaryware facility is expected to commission production in 24-30 months at a capex of Rs1.28bn. In faucetware segment, revenue CAGR of 22% during FY22-24E is expected, aided by commencement of enhanced capacity of 1.2mn pcs (current capacity of 3mn pcs) in Q1FY24. Total capex planned for brownfield expansion of faucetware facility is Rs690mn. Both these capex will be funded from internal accruals.

* Margins to remain stable at ~15-16%: CRS has taken price increase of 3% in sanitaryware segment and 5% in faucetware segment in mid-May,2022. This price increase, coupled with earlier price increases in FY22 will enable the company to maintain margins at ~15.5% going ahead (average margin over FY12-FY22 had been ~15%). We have modelled EBIDTA/PAT CAGR of 17%/27% during FY22-24E. The management has guided for margin improvement of at least 50bps-75bps in FY23.

* Valuations: CRS has a strong net-cash balance sheet with healthy growth prospects led by uptick in housing market and increased demand from home improvement market. We continue to like the company for its comprehensive product portfolio, wide distribution reach and strong brand presence. Maintain BUY with an unchanged Mar’23 target price of Rs5,592. Key risks to our call: 1) Slowdown in demand from housing, 2) continued higher input prices, which may dent demand / profitability.

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