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Company Background

Cera Sanitaryware Ltd. (Cera), promoted by Mr. Vikram Somany, is India’s third largest sanitaryware producer with organised market share of ~23%. It also manufacturers faucets and has presence in tiles. Recently, it has invested in its second tile manufacturing facility in a JV with Morbi based Milo Tile LLP.

Investment Rationale

Topline to grow with a CAGR of ~10%

* During Q3FY21, consolidated net sales of Cera de-grew marginally by 2.9% y-o-y and 2.6% q-o-q to Rs 3,157.8 mn, caused by workers’ disruption in manufacturing activities at Kadi plant since September 28, 2020. Production activities for the quarter in respect of sanitaryware unit were materially affected while that of faucetware unit have been marginally affected. This has moderately impacted the financial performance of the company during Q3FY21. High complexity products which were manufactured in-house were impacted with sales loss of Rs 650 mn. Manufacturing activity of Kadi plant resumed on December 22, 2020. However, Cera witnessed strong traction across all markets and products, especially from Tier-II and below cities, which is sustainable going forward. The Company witnessed de-growth in sales by ~15% at Rs 7,859 mn during 9MFY21.

* Sanitaryware, faucetware, tiles and wellness segments contributed 45%, 28%, 24% and 3% respectively. Sanitaryware witnessed marginal growth of 5% during the quarter with ~20% in-house capacity utilisation as the plant was operational for just 8 days due to workers disruption. Faucetware grew by 7.7% and tiles de-grew by 6.6% during the quarter.

* Cera has taken 5-7% price hike in sanitaryware and 8-10% in faucetware from February 1, 2021 onwards due to increase in key raw material prices. Cera, last took price hike of 3% in August 2020 for sanitaryware and tiles segment, across all categories.

* Management said that importance of exports of sanitaryware has increased recently in the light of global and domestic anti-China wave post COVID 19 outbreak. Several enquiries are coming from abroad which were earlier getting their requirements fulfilled by China. Similar traction is witnessed in tiles as well. Most of the export demand is met by Morbi players, leaving the domestic market to be catered by organised players, leveraging their brand equity, resulting in reduced competitive intensity and better profitability. Till December 2020, Morbi has exported tiles worth ~Rs 73 bn which is expected to cross ~Rs 110 bn March 2021.

* We have factored in a ~2.9% dip in FY21E topline on the back of subdued Q1FY21 and expect demand momentum to sustain with a rise in economic activity. Going forward, we expect Cera net sales to grow at 19% and 14% to Rs 14.1 bn and 16.1 bn during FY22E and FY23E respectively.

EBIDTA Margins expected to stabilize in the vicinity of ~15%

* EBITDA margins remained flat at 13.7% y-o-y and improved by 100 bps q-o-q on the back of prudent management of operating efficiencies achieved due to cost control measures undertaken by the company. Employee expenditure and other expenses reduced by ~16% and ~19% respectively. The Company witnessed EBIDTA Margin of 11.2% during 9MFY21 vis-à-vis 13.3% corresponding period last year.

* Going forward, we expect EBIDTA margin to stabilize at ~14.5% by FY23E, on the back of rise in contribution from high margin value added products from the affordable housing segment, better cost control and structural shift towards organised players, which is expected to generate traction in the industry.

* PAT increased marginally by ~5.5% at Rs 299.3 mn y-o-y during the quarter on the back of rise in other income by 87% and decline in interest cost by 7.5%. With improvement in segment margins and better product mix coupled with low debt levels on the back of focus on working capital cycle, we expect PAT margins to remain around ~9.8% during FY23E.

VALUATION

* Better than expected rebound in building products and volume and focus of Morbi players towards export market, augurs well for organised players like Cera in gaining market share, which is sustainable going forward. Further, green shoots visible in residential real estate sector, bodes well for organised players. We expect Cera to emerge as a strong player with an asset light model, strong brand recall and deleveraged balance sheet.

* We have currently valued the stock on the basis of P/E of 30x, improving it from 28x in the previous quarter, on the back of the buoyancy in the building products industry. We recommend to ‘Hold’ the stock with a target price of Rs 3,616.

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