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Impressive recovery in core segments

Cera Sanitaryware’s (CRS) Q4FY21 performance was impressive and largely in line with our expectations (revenues up 39.2% QoQ at Rs4.3bn vs our estimate of Rs4.2bn) despite losing Rs300mn in Q4 revenues (Rs1bn in H2FY21) on account of workers strike in its core sanitaryware segment in the first half of the quarter. EBITDA margin at 14.6% was up 180bps QoQ led by strong margin recovery in the core sanitaryware and faucet segments, cost optimisation and cost control. Management also sounded upbeat on growth prospects guiding for 15-17% normalised revenue growth in FY22 with demand expected to improve in both retail and projects space in H2FY22. Impressive CFO in FY21 also resulted in sharp increase in cash on books to Rs4.8bn in FY21 vs Rs2.2bn in FY20. Maintain HOLD.

Valuation and outlook.

Factoring-in the Q4FY21 performance and impact of covid second wave, we tweak our revenue and earnings estimates by -2.2%/4.1% and -5.6%/9.5% for FY22E/FY23E, respectively. We now expect CRS to report revenue and PAT CAGRs of 23.7% and 46.9% respectively, over FY21-FY23E. We retain our HOLD rating on the stock with a revised target price of Rs4,513 (earlier: Rs3,660), valuing it at 27x FY23E earnings. Key risks: increase in competitive intensity in sanitaryware segment, and lower than expected demand in its core segments.

Revenues up 39.2% QoQ led by strong recovery across segments.

CRS reported 39.2% QoQ growth in standalone revenues to Rs4.3bn, largely in line with our estimates. This was largely due to recovery in core sanitaryware segment revenues (+46.2% YoY) and strong growth in faucet segment (62.3% YoY). CRS took price hike in sanitaryware (+5-7%) and faucets (8-10%) in Feb’21. Tile revenue grew 39.2% YoY and wellness revenues fell 10% YoY. The growth was visible despite losing Rs1bn in revenues due to workers strike in H2FY21. Management remains upbeat on growth prospects in the medium term citing higher demand across product segments in both retail and projects space. We expect CRS to report 23.7% revenue CAGR over FY21-FY23E also aided by the low base of last two years.

Standalone EBIDTA margin at 14.6% (I-Sec: 15%), up 180bps QoQ.

EBIDTA margin came in at 14.6% (I-Sec: 15%), up 10bps YoY and 180bps QoQ, led by superior mix, cost control and price hikes taken in core segments. Going forward, we expect EBITDA margin to rebound to 16.5% by FY23E from 12.9% in FY21 on the back of superior mix, cost-saving initiatives, price hikes taken in sanitaryware and faucet segments in particular, and operating leverage.

RoCE adjusted for cash to rise to 28.3% by FY23E vs 15.4% in FY21.

CRS posted significant rise in cash and equivalents to Rs4.8bn in FY21 vs Rs2.2bn in FY20. With lower capex and superior FCF generation over next two years, we expect its RoCE (adjusted for cash) to rise to 28.3% by FY23E.

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