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Near-term demand tepidness, 2HFY24 to be much better

We recently interacted with the management of Cera Sanitaryware (CRS). Key takeaways: 1) Demand scenario in Q2- TD has been tepid as higher overall inflationary conditions have resulted in some temporary slackness. CRS expects demand to be much stronger in H2FY24 and has reiterated its ~20% YoY revenue growth guidance for FY24. 2) Margins to remain steady at ~16% as raw material costs remain benign. 3) Brownfield expansion of faucetware facility has commenced production from Sep’23 and will likely be a major growth driver. 4) Land acquisition for the sanitaryware facility is in final stages; will likely happen in Q3FY24. We continue to like CRS, as it could potentially be a significant beneficiary of the ongoing uptick in the housing market, and model revenue/PAT CAGR of 16.4%/22.3%, over FY23- 26E with healthy return ratios (ROE of 20.2% in FY25E). We maintain our estimates and HOLD rating with a rolled over Dec’24E TP of INR 8,262 (earlier INR 7,928), set at unchanged 32x Dec’25E PER.

Near-term demand sluggish

As per our interaction with CRS’s management, demand for faucetware and sanitaryware has been sluggish in Q2FY24-TD as overall inflationary conditions have temporarily resulted in some slackness. Management believes the current lethargy in demand is temporary and H2FY24 will be much stronger, still guiding for ~20% revenue growth in FY24. The drivers of this demand will likely be uptick in housing market and continuous demand from home improvement market. Also, the commencement of the brownfield faucetware facility in Sep’23 will likely enable the company to see better growth due to favourable product mix. CRS management indicated that it is on track to achieve its guidance of doubling turnover in 40 months (from FY22) – aided primarily by growth in sanitaryware and faucetware segments. We have modelled revenue CAGR of 16.4% over FY23-26E. The land for the new greenfield sanitaryware plant should be finalised by Q3FY24, post which it will take ~18 months for the facility to commence production.

Margins to remain steady at ~16%

CRS has taken no price hikes across segments in the ongoing quarter (Q2FY24) as raw material costs continue to be benign and the company does not foresee any pressure on margins. Management indicated that current margins of ~16% are sustainable going ahead too, led by operating leverage and improved product mix. We have modelled margins of ~16.3%-16.5% over FY23-26E (vs. reported average operating margin of ~15.1% over FY12-FY23)

Valuation and view

We continue to like CRS due to its net cash balance sheet, wide distribution, strong brand and comprehensive product portfolio. These could strengthen its position to deliver high growth led by the ongoing uptick in housing market and increased demand from home improvement market. Maintain HOLD and await a better entry opportunity with a rolled over Dec’24E target price of INR 8,262 (earlier INR 7,928), set at unchanged 32x Dec’25E PER. 

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