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Business Overview

* Cera Sanitaryware (Cera) is the leading manufacturer in India with capacity of 2.5mn pieces p.a. of sanitaryware and 3.0mn pieces p.a. of faucetware based in Mehsana, Gujarat. In sanitaryware segment, Cera holds 17% of organized market share while 4% in faucetware

* Over FY14-22, contribution from sanitaryware has gone down from 72% to 53% while at the same time contribution from faucetware and tiles have inched up from 16% to 33% and 8% to 12%, respectively

Investment thesis

* Increase in capacity of faucetware from 1.8L pieces per month in 1HFY22 to 2.5L pieces at end of FY22. Faucetware capacity was further expanded to 3L pieces by 1QFY23. The new brownfield capacity expansion will add another 1L pieces by 1QFY24 taking total capacity to 4L pieces per month. Greenfield plant for Sanitaryware with total capacity of 1L pieces per month (24-30 months from start date). Total capacity of Sanitaryware will reach ~3L pieces per month post this expansion. Total capex will be Rs2000mn.

* Given low interest rate cycle, GoI’s focus on affordable housing and conducive industry conditions we expect Cera’s sales/EBITDA/PAT to grow at CAGR of 18%/21%/25% respectively over FY22-24E. We expect EBITDA margins to improve to 16.6% by FY24E

Industry trends

* India is world’s second largest sanitaryware manufacturer after China with capacity of ~40 million pieces/year. The Indian sanitaryware market is concentrated in Gujarat, contributing 75% of the total sanitaryware output of India

* The Indian sanitaryware industry was worth Rs48bn in FY21, of which 75% is the organised market. Parryware India is the leader with the highest capacity in sanitaryware followed by HSIL and CERA Sanitaryware

* World ceramic sanitaryware import/export flows grew at CAGR of 6% from 2mn tons to 3.5mn tons over the period 2009-2019

Findings of our cash flow analysis at a glance

* CRS has shown consistent growth in its operating profits over the decade, multiplying nearly four times with the help of expansions however, the Covid pandemic led to a decline in FY20 operating profits

* The overall working capital strength has been stable over the last few years. However, higher inventory days kept the NWC days high in the range of ~120-130 days. FY22 though witnessed an improvement as NWC days decreased to 102 days from 120 days in FY21. This was led by decrease in debtor days from 64 in FY21 to 47 in FY22. Management however, has guided for some increase in inventory days to ensure optimum production as well as product availability.

* OCF to EBITDA conversion stayed ~70% on average over the decade though rose abnormally to 170% in FY21 due to favorable working capital movement however, fell to 40% in FY22 owing to higher inventory. Over the decade, total FCF generation stood at Rs5.3bn.

Valuation

* With uptick in real estate cycle, we expect CRS’ sales/EBITDA/PAT to grow at CAGR of 18%/21%/25%, respectively over FY22-24E.

* We value the stock at 35x FY24E, in-line to its last three year’s PE multiple to arrive at a target price of Rs6,725

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