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We interacted with Mr. Vikas Kothari-CFO & Mr. Deepak ChaudharyGeneral Manager at CERA SANITARYWARE Ltd & following are the key highlights form the same:

* Though there are no material green shoots in demand yet, management is confident that demand should revive H2 onwards. Incrementally, FY26E & FY27E should be better owing to strong construction cycle.

* Project segment (35-36% of biz) has grown in double digits & management stated that this is a lead indicator for revival in demand from retail segment. Hence, company is confident of growing in single digit for FY25E.

* Management stated that construction works in Tier-2 & Tier-3 cities is growing at a similar pace as compared to Metro & Tier-1 cities, which should translate into demand for Sanitaryware & Faucets. ? CERA has taken price hike of 6% in faucets from 1st Sept 2024, and 1% in sanitaryware w.e.f. 15th Sept 2024, primarily to mitigate the rise in cost of brass. Similarly, peers have also taken price hikes.

* Margins in sanitaryware across product segments are similar however, margins in premium faucets are much better Vs margins in mass markets.

* For sanitaryware expansion, majority land has been acquired & balance (15%) acquisition has been slow due to multiple small parcels of land. This will be completed by Nov’24. In phase-1, company will set-up capacity of 1lac/month which will be doubled in phase-2.

* The construction on land will not commence in FY25 as currently demand is soft and there is inventory built-up in the system. This has resulted into marginal drop in utilization as well.

* Overall management reiterated their guidance achieving turnover of Rs29Bn by FY27E with EBITDA margins of 16-17%.

Real-estate industry has witnessed strong launches and new constructions which should ideally lead to healthy demand for CERA’s products viz Sanitaryware and Faucets. Hence, we reckon CERA’s performance to improve from H2FY25E. Incrementally, we believe that growth should accelerate over FY26E-FY27E owing to strong tailwinds of real-estate industry. We have maintained our Revenue/EBITDA/PAT growth estimate of 9%/10%/8% respectively over FY24- FY26E. With healthy topline growth and focus on premiumization, we believe CERA will deliver operating margins of 16%/16.5% for FY25E/FY26E, respectively. Notably, CERA has announced a buy-back of Rs1.3Bn (cash + current investment as on March’24 was Rs8.14Bn) at a price of Rs12,000/share.

At CMP, CERA trades at P/E(x) of 37.5x on FY26E EPS of Rs220 (on FY27E EPS of Rs244, stock trades at P/E(x) of 33.8x). We continue to value the company at P/E(x) of 40x on FY26E EPS, maintaining our target price of Rs8,809. Given the recent correction in stock prices, we upgrade our rating from REDUCE TO NEUTRAL.

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