Cera Sanitaryware Ltd - Stock Valuation and Financial Performance

Market Cap: Rs. 6,970 cr

CMP: Rs. 5,359 | PE: 37x TTM

Click here for 10 year X-ray

Key Highlights:

• For Q2 FY23, 54% of the topline was from Sanitaryware, 34% from Faucetware, Tiles represented 10% and Wellness 2%.
• The gross margin has improved at 56% in Q2FY23 against 51% in Q2FY22 mainly due to replacement of imports from China by in house manufacturing and outsourcing of lower end SKUs to their vendors.
• Capacity utilization for Q2FY23 for Sanitaryware was at 115%, the highest in the past 10 years, for faucetware it was 116%.
• The faucetware expansion program to take capacity to 4 lakh pieces per month from current 2.18 lakh pieces per monthcommenced from July 2022. The total cost of project is INR 69 crore to be funded entirely from annual operating cash flow.
• No price hikes were taken as raw material prices were quite stable.

Management Outlook:

• Continued demand for new product launches, which are of the more premium category.
• Focus to remain on B2C sales, targeting the market segment which doesn’t time their purchase based on macroeconomic situation.
• Further expansion in gross margin based on in house production of higher margin SKUs, outsourcing of generic products, import substitution from China.
• Asset turn of 2-3 on new CAPEX worth INR 70 cr in faucet ware, same turnover on INR 129 cr CAPEX in sanitary ware.
• In-house in Q2 was 40% in Sanitaryware, outsourcing was 60%.
• In Faucetware, in-house was 48% and outsourcing was 54%. Versus last year, in-house in Sanitaryware was 41%, outsourcing was 59%. In Faucetware, in-house was 43% and outsourcing was 57%. The share from in house is poised to increase over the coming quarters based on better product mix. 

Cera Sanitaryware | Market Cap: 5788 Cr

CMP 4500 | PE 38X FY23

Results: Sales grew 28% and operating profit grew ~50% year on year respectively.

Click here for 10 year X-ray

Key highlights:

• Revenue Contribution: Sanitaryware (53%), Faucetware (35%), Tiles (10%) and Wellness (2%).
• There was 26% price hike in sanitaryware and 27% in Faucetware in overall basis..
• Capacity utilization stood at 103% in sanitaryware & 99% in faucetware. The focus is on debottlenecking in faucetware and automate the processes to enhance production.
• New developed products now contribute 20% of topline

Outlook:  As per the management, demand has been robust across all segments and products as customers are undertaking home upgradation and home improvements. Company is relying on in-house manufacturing rather being dependant on imports. Capex budget for FY22 is Rs. 17.2 Cr.

Cera Sanitaryware | Market Cap: 6760 Cr

CMP 5150 | P/E 41x FY23

Results: Sales grew 24.4% and operating profit grew ~50% year on year respectively.

Click here for 10 year X-ray

Key highlights:

• Revenue Contribution: Sanitaryware (52%), Faucetware (34%), Tiles (12%) and Wellness (2%).
• There will be 22% price hike in sanitaryware and 20% in Faucetware in overall basis. Two price hikes have already been made and the third will be taken in mid of November.
• Capacity utilization is close to maximum and during the quarter stood at 97% in sanitaryware & 90% in faucetware. The focus is on debottlenecking in faucetware and automate the processes to enhance production.

Management Outlook:  As per the management, demand has been robust since August’20 with reduced interest rate, reduced monthly home loan payments and as markets remain strong company will focus on getting products to market with timely availability.

The management has given the revenue target of Rs. 1500 Cr for FY22 and margins in the range of 14-14.5% depending on price hike and cost control measures.

Cera Sanitaryware | Market Cap: 6,030 Cr

CMP 4,636 | P/E 40x FY22

Recommendation | HOLD

Results: Sales grew 56% and operating profit grew ~200% year on year respectively.

Click here for 10 year X-ray

Key highlights:

• Segment-wise year on year growth: Sanitaryware (54%), Faucetware (69%), Tiles (50%) and Wellness (14%).
• Covid-19 second wave impacted the non-metro cities, smaller cities/ towns and rural areas (Rural forms ~60% of Cera’s revenues). However, demand scenario has been improving in June’21 and July’21 which has been growing at faster pace versus July’19 levels and trajectory is expected to continue.
• Cera is evaluating a brownfield expansion which will aid in own manufacturing of complex SKUs and outsourcing of standard SKUs.
• For sanitaryware and faucetware portfolio, company has taken second price hike of 4% and 10% respectively from Aug’21 (previously in Feb’21) in order to offset raw material cost inflation.
• Tile revenue grew by 50% year on year as Cera focuses on premium products and cash-and-carry sales.

Outlook:  As per the management, demand scenario has been picking up from mid-Jun’21 and July’21 performance. Company will focus on replenishing the channel inventory and ensuring product availability. Management expects 15% revenue growth and operating margins of 14% in FY22 given strong demand tailwinds.

MoneyWorks4me Opinion: We had recommended Cera Sanitaryware at Rs. 2700/share (alongwith Kajaria Ceramics) as we had anticipated pickup in demand as we were tracking pick up housing sales in US market. Bathware industry has long term growth of 12-14% CAGR with rise in urbanisation, popularity of apartment homes and Swacch Bharat campaign. Cera’s focus on premiumization, retail sales and expansion into allied segments like Tiles, Faucets augurs well for its growth over next 5 years. Cera’s execution track record and conservatism makes us confident that its strong profitability will sustain over medium to long term.
Based on our assessment, we have estimated Cera to grow at 15% CAGR and profits to grow at 17% CAGR over next 3 years. At current price, Cera trades at P/E ratio of 40x FY22 which we think is beyond the comfortable valuation territory. We recommend wait for better price to add.

For those subscribed to only Booster plan please note that our recommended allocation (%) to a stock is considering entire portfolio. So you need to assume your entire Equity portfolio before allocating to an individual stock.

Cera Sanitaryware | Market Cap: 5,700 Cr

CMP 4,382 | P/E 33x FY22

Recommendation | HOLD

Results: Sales grew 47% and operating profit grew 66% year on year respectively. However, if we consider Mar’19, growth is just 5%, though future outlook is good.

Click here for 10 year X-ray

Key highlights:

• The sanitary ware plant operated at a capacity utilization of 85% throughout Q4 because the plant closure in Q3 carried over into Q4 as well.
• The new products have contributed 20% to the overall revenues in Q4FY21. There is plenty of opportunity in sanitary ware and faucets as new products continue to be launched in these segments.
• Cera has taken two price hikes and may take another in Aug’21 for increase in brass prices.
• The raw material prices increased and an increase in logistics cost and the company increased prices of sanitary ware by 5% and faucets by 8% in Feb’21.
• The demand during the quarter was robust and project sites that opened up in Q2 were fully operational in Q3 & Q4.
• Advertisement expense as % of sales used to be 4%, but it is expected to vary in future and will be incurred based on requirement.
• Cera is expected to retain its dividend payout policy, ~15% of profit.

Outlook:  As per the management, the company is seeing healthy demand uptick especially in affordable housing segment. Tier 2 & 3 saw higher offtake compared to previous quarters. The company has 70% of demand from the end consumers and it has strong pricing power there. It plans to take next hike by August which is yet to be confirmed.

As the revenue grows the proportion of outsourced goods will continue to be increased as the company expects to get it done by outsourced vendors. It assures similar margin on outsourced products too.

The management is planning to ramp up inventory using its cash balance and it expects high demand. The higher end tiles are now a higher percentage of the total revenues and inventory days in this business has reduced to zero because sales is from JV partners and third party vendors. 

The company aims to achieve record revenue and profitability in FY22. Management gave a guidance of 17% CAGR growth for revenue going ahead. The capex for FY 22 is expected to be around Rs 26 crores.

MoneyWorks4me Opinion: We had recommended Cera Sanitaryware at Rs. 2700/share (alongwith Kajaria Ceramics) as we had anticiapted pick up in demand as we were tracking pick up housing sales in US market. Bathware industry has long term growth of 12-14% CAGR with rise in urbanisation, popularity of apartment homes and Swacch Bharat campaign. Cera’s focus on premiumization, retail sales and expansion into allied segments like Tiles, Faucets augurs well for its growth over next 5 years. Cera’s execution track record and conservatism makes us confident that its strong profitability will sustain over medium to long term.
Based on our assessment, we have estimated Cera to grow at 15% CAGR and profits to grow at 17% CAGR over next 3 years. At current price, Cera trades at P/E ratio of 33x FY22. We recommend wait for better price to add.