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Strong growth momentum going ahead

Cera Sanitaryware reported standalone sales growth of 2% to Rs4.4bn. Sanitaryware and Faucetware combined contributed ~85% to the total sales. Sales growth in these two segments coupled with Wellness stood at 12.4% on YoY basis. Led by price hikes and better product mix (lesser contribution from tiles and higher from sanitaryware and faucetware), gross margins improved by 625bps to 53.5%. Led by gross margin expansion, EBITDA grew by 30% with EBITDA margin expansion of 400bps to 18.7%. Pre-tax profits grew by 31% and PAT by 20%. For FY22, sales/EBITDA/PBT/PAT grew by 20/48/51/47% respectively. Demand remained robust going into 1QFY23. Management has upped its growth guidance and maintained doubling of sales in next 3-3.5 years instead of past guidance of 5 years. Margins too are expected to expand by 50-75bps year on year over standalone EBITDA margins of FY22. We maintain Buy rating on the stock with 35x FY24E and target price of Rs6725. We increase our EPS estimates by 6/5% for FY23/FY24E.

Aggressive capacity expansion on cards

Cera has laid out aggressive capacity expansion plans for next 2-3 years. Currently Cera’s capacities are running at 110% utilization rates across both – sanitaryware and faucetware segments. Recently company expanded its faucetware capacity from 1.8L pieces per month in Sept’21 to 2.5L pieces per month in March’22. This capacity will further increase to 2.75L during FY23. Apart from this expansion, there are two major capacity expansion laid out by the management. Faucetware capacity will further expand from 2.75L in FY23 to 4L by end of 1QFY24. Total capex for this brownfield expansion would be Rs690mn with expected sales at peak to be Rs1500-1800mn. Second, in Sanitaryware segment, Cera will be doing Greenfield expansion with addition of 12L pieces per month over existing base of 25L. Under phase II expansion company will further add capacity of 24L pieces in faucetware and 12L in sanitaryware. Total capex for Sanitaryware expansion will be Rs1280mn. In FY23, Cera is expected to spend Rs1200mn.

Doubling of sales and margin expansion

Until last quarter, Cera guided for doubling of sales over five years’ time frame. However, with strong demand pipeline, management has upped its guidance of doubling the sales in next 3-3.5 years. Sanitaryware and Faucetware segments have grown at 30% and 41% respectively in FY22 over FY21. Similar growth momentum is expected going forward and CAGR sales growth of 20% is expected for next 2-3 years. Apart from this, with higher focus on sanitaryware and facuetware and high value tiles products, EBITDA margins are expected to expand by 50-75bps year on year over standalone FY22 margins.

Valuations remain attractive

Stock has corrected by 40% over the last few months while the business fundamentals have improved. We expect Cera’s sales/EBITDA/PAT to grow at CAGR of 18/21/24% respectively and EBITDA margins to expand from 15.8% in FY22 to 16.6% in FY24. Low interest rate cycle, sharp increment in salaries of IT and ITES sector and healthy uptick in affordable housing segment is expected to drive the growth momentum for Cera. We maintain Buy rating on the stock with 35x FY24E and target price of Rs6725. We increase our EPS estimates by 6/5% for FY23/FY24E.

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