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Our interaction with dealers and industry participants indicates demand trends for sanitaryware and faucetware continued to remain steady in Q2FY23 despite a strong H1CY22. The demand continues to be driven by residential housing market and home improvement market. We believe demand trends should also remain healthy going ahead as underlying drivers remain intact. In Q2 (July-Sept) there were no price hikes in sanitaryware and faucetware segments by Cera Sanitaryware (CRS) but the entire benefit of price hikes (~3% in sanitaryware and ~5% in faucetware) taken during midQ1FY23 would be seen and thus, would negate raw material price pressures and maintain margins. We expect CRS to witness revenue/PAT CAGR of 16.6%/23.9%, respectively, over FY22-25E led by faucetware and sanitaryware segments with continuous high return ratios. However, we downgrade the stock from Buy to ADD due to ~29% run-up in stock price over the past 3 months with a rolled over Sept’23 target price of Rs6,143 (earlier: Rs5,657) set at an unchanged 32x PER (in line with 1-yr forward, five-year average PER).

* Demand for faucetware and sanitaryware remained steady in Q2: As per our interaction with dealers and industry participants, demand in faucetware and sanitaryware remained steady in Q2 despite robust H1CY22 with tier-2 and below markets still remaining strong. The drivers of this demand have been the uptick in housing market and continuous demand from home improvement market. The demand trends are likely to remain healthy going ahead too as underlying drivers remain intact. CRS management has guided to double its turnover over ~3.5 years (from FY22) aided primarily by growth in sanitaryware and faucetware markets. We have modelled revenue CAGR of 16.6% over FY22-25E.

* Margins to remain stable: CRS has taken no price increase in Q2FY23 (July-Sept) but will get the benefit of the price hikes taken in mid-Q1FY23 (~3% in sanitaryware segment and ~5% in faucetware segment). This price increase, coupled with earlier price increases in FY22, will negate raw material pressures and the company is likely to maintain margins at ~15-16% going ahead (average margin over FY12-FY22 has been ~15%). We have modelled EBIDTA/PAT CAGR of 16.6%/23.9% during FY22-25E, respectively. CRS management has guided for margin improvement of at least 50bps75bps in FY23.

* Valuations: CRS has a strong net cash balance sheet with healthy growth prospects led by an 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. However, we downgrade the stock from Buy to ADD due to ~29% run-up in stock price over the past 3-months with a rolled over Sept’23 target price of Rs6,143 (earlier: Rs5,657) set at an unchanged 32x PER. Key risks to our call: 1) Slowdown in demand from housing market, 2) continuous higher input prices, which may dent demand / profitability.

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