Buy Cera Sanitaryware Ltd For Target Rs.6,304 by Motilal Oswal Financial Services Ltd
Volume-driven growth to sustain; margins to expand A mixed-bag quarter: Healthy revenue but soft margins
* Cera Sanitaryware (CRS) reported a mixed operating performance in 2QFY27, with healthy revenue growth offset by soft margins.
* Revenue grew 24% YoY and was a 7% beat on our estimate. Revenue was volume-led and driven by strong growth in sanitary-ware (up 24% YoY, 45% mix) and faucet-ware (up 38% YoY, 43% mix) segments.
* Gross margin stood at 44%, contracting 528bp YoY and 189bp QoQ.
* EBITDA grew 9% YoY (in line). EBITDA margin stood at 12.2%, contracting 203bp YoY and expanding 202bp QoQ.
* Consequently, PAT declined 1% YoY and missed our estimate by 6%.
* The net WC cycle remained under tight control (58 days vs. ~75 days YoY).
* The company maintained a healthy cash balance of ~INR9b.
Key highlights from the management commentary
* Guidance: The company expects strong volume traction to sustain in 2H, alongside an improvement in margins (13-14%), aided by the full passthrough of RM cost inflation.
* 2Q revenue growth was led by strong volumes in newer markets (UP, Bihar, Jharkhand, etc.), offsetting some weakness in traditional markets.
* 2Q revenue growth (up 27% YoY) levers: volume 16.6%, pricing 9.1%, mix 1.7%.
* 2Q sanitary-ware revenue (up 24% YoY) levers: volume 14.3%, pricing 6.7%, mix 2.7%.
* 2Q faucet-ware revenue (up 38% YoY) levers: volume 24%, pricing 10.3%, mix 1.9%.
* Th company took an 8% price hike in faucet-ware from Sep, following a rise in brass cost.
* Cumulative price hike: Sanitary-ware 12%, faucet-ware 24%.
* New project business contracts are being secured at better pricing.
* Project revenue contribution stood at 39% and is expected to remain stable at ~40%.
* Sanitary-ware capacity utilization stood at 82%, while faucet-ware capacity was increased by 100k units to 500k.
Valuation and view
After a mixed-bag results in 2Q, we reduce our FY27/28 earnings estimate by 5%/1% owing to lower margin expectations. We now estimate a 16%/19%/21% CAGR in revenue/EBITDA/APAT over FY26-28, with an EBITDA margin of 13-14%, in line with CRS’s guidance. However, a high cash surplus of ~INR9b and a strong annual FCF of ~INR1.5b will restrict RoE (~17%) and pre-tax RoCE (~24%). On a reasonable valuation of ~20x FY28E P/E, we reiterate our BUY rating on CRS with a TP of INR6,304, based on 26x FY28E P/E. A slower-than-expected recovery in sales and margins poses key risks to our positive view on the stock.
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