Buy Cera Sanitaryware Ltd for the Target Rs 7,384 by Motilal Oswal Financial Services Ltd
Volume-led growth to continue; margins to improve
* Cera Sanitaryware (CRS) reported a weak operating performance in 1QFY27 driven by healthy revenue and weak margins.
* Revenue grew 16% YoY; however, it was hit by ~3% due to reclassification of dealer discounts adjusted in revenue from other expenses earlier.
* Sanitaryware/Faucetware’s 14%/25% YoY revenue growth was driven by volume (up 10%/18%), price hikes (up 2%/4%), and product mix (up ~2%)
* EBITDA fell 7% YoY, impacted by one-time employee wage settlement (INR63m in 1Q; ~INR180m in total). Consequently, PAT fell by 3% YoY.
* Working capital improved by 25 days to 50 days, led by inventory (down 12 days) and receivables (down 8 days). Cash balance stood at INR9.43b.
Valuation and view: Reiterate BUY
After weak margins in 1Q, we cut our FY27 earnings estimate by ~4%. However, we maintain it for FY28, expecting sustenance of healthy volume growth and recovery in margins. We now estimate a 14%/20%/22% CAGR in revenue/EBITDA/APAT over FY26-28 with an EBITDA margin of 14.6% in FY28, at the upper band of CRS’s guidance. A high cash surplus of ~INR10b and a strong annual FCF of over INR1.5b will restrict RoE (~17%) and pre-tax RoCE (~24%), though. We reiterate our BUY rating on CRS with an unchanged TP of INR7,384, based on 30x FY28E EPS. A slower-than-expected recovery in sales and margins poses key risks to our positive view on the stock.
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