CERA SANITARYWARE LTD : ADVANTAGE OF BRAND RECALL !!!

Scrip Code: 532443 / CERA

CMP:  Rs. 705.35; Buy at current levels and on Declines.

Short term Target : Rs. 740.00; Medium to Long term Target: Rs. 800; STOP LOSS – Rs. 648.92; Market Cap: Rs. 892.61 Cr; 52 Week High/Low: Rs. 745.00 / Rs. 386.05

Total Shares: 1,26,54,874 shares; Promoters : 70,56,180 shares –55.76 %; Total Public holding : 55,98,694 shares – 44.24 %; Book Value: Rs. 141.85; Face Value: Rs. 5.00; EPS: Rs. 37.72; Div: 80.00 % ; P/E: 18.69 times; Ind. P/E: 14.57; EV/EBITDA: 10.20.

Total Debt: 54.94 Cr; Enterprise Value: Rs. 910.38 Cr.

CERA SANITARYWARE LIMITED: Cera Sanitaryware Limited was incorporated in 1980, and is headquartered in Kadi, India. The company was formerly known as Madhusudan Oils and Fats Limited and changed its name to Cera Sanitaryware Limited in November 2002. Cera Sanitaryware Limited manufactures and sells sanitary ware and faucet ware products in India. The company offers sanitary ware products, including EWC’s, kids range products, wash basins, urinals, cisterns, seat covers, sensors, and bath accessories; special needs products consisting of cranes, shower chairs, wall mounted and U shaped rails, wall mounted inverted rails, and corner and wall mounted grab bars; and faucets, such as fittings, basin mixers, showers, bath tub spouts, flush valves and cocks, angle cocks, taps, and accessories. It also provides wellness products comprising steam shower rooms, shower rooms and cubicles, shower partitions, indoor swimming pools, bath tubs, shower panels, and pressure pumps; kitchen sinks and mirrors; and personal care products comprising hand dryers, perfume sprayers with remote control, automatic soap dispensers, and hair dryers, as well as wall and floor tiles. Cera has emerged as the third largest player in the sanitary ware industry in India. The company enjoys 24 % market share in the organised segment. It has installed manufacturing capacity of 2.7 mn pieces p.a. in sanitary ware and 2,500 pieces per day in faucet ware in Kadi (Gujarat). As of May 2013, Cera has 1,000 distributors - dealers, 10,000 retailers and 12 major stock points across India. CERA’s subsidiary includes Madhusudan Industries Ltd; Madhusudan Holdings Ltd; Madhusudan Fiscal Ltd; Vikram Investment Co. Ltd; Cera Foundation; Swadeshi Fan Ind. Ltd. The company is locally compared with Kisan mouldings Ltd, HSIL, Kajaria Ceramics Ltd, Somany Ceramics Ltd, Bell Ceramics Ltd, Everest Industries Ltd, NITCO Ltd, Asian Granito India Ltd, Regency Ceramics Ltd, Responsive Industries Ltd and globally compared with Asahi-Seiki Manufacturing Company Ltd of Japan, Onex Corporaion of Japan, Sapura Industrial Berhad of Malaysia, Nansin Company Ltd of Japan, Masonite International Corp of USA, Owens Corning of USA, Nci Building Systems Inc of New York, Masco Corp of USA.

Investment Rationale:

Cera Style Studio : Indiranagar, Bengaluru

Cera Sanitaryware incorporated in the year 1998 is a pioneer in the sanitary ware segment in India. It’s also the first sanitary ware company to use natural gas, for its commercial needs, Cera has been on the forefront of launching a new and versatile colour range and introducing the bath suite concept. It also launched innovative designs and water-saving products. Cera Sanitaryware Ltd was awarded as Power Brand for 2012, this award is instituted by IIPM Think Tank and Planman Media in association with the Indian Council for Market Research. Cera launched India’s very first twin-flush model, which reduces the water needs of households considerably. Cera’s WCs are designed to flush in just 4 liters of water is another notable innovation by the company. The Sanitary ware industry is around Rs. 1,050 crore in India and is going through a metamorphosis, with several foreign brands eyeing India as a potential market and developers and traders looking at China as a source for cheaper Sanitaryware. Some of the foreign brands have commenced production in India, while some are establishing offices in India, apart from those who have already got well-established in this country in the past few years. Added to this is innumerable small scale industries located mainly in Gujarat, manufacturing low-end Sanitaryware. The Company’s brand CERA, with its impeccable legacy of over three decades, continues to grow, much above the industry rate, despite the competition from peer brands-both domestic and international. The Company’s well entrenched and loyal distribution network, nation-wide sales and service teams, immaculate product quality and continuous advertising and promotional activities through television, print, OOH and POP have helped place CERA in an enviable platform in the minds of the customers. The Company’s brand extension to other related categories like showers, faucets, PVC cisterns and seat covers, etc. has also helped in accelerating the growth. During the year 2012-13, the Company forayed into tiles in a modest way and launched digital wall and floor tiles, vitrified tiles in both soluble salt and double charge and also regular porcelain tiles. Management is optimistic on such brand extensions and are positive that this will continue in the coming years as well, which will help CERA to establish itself as a total home solutions brand. The industry structure remains unchanged with domestic and International brands continuing their efforts to gain the larger share of the pie of Indian market. Some of them have even set up their manufacturing bases. CERA has launched a wide range of bath suite concept. Cera Sanitaryware sells its products through Cera Bath Studios, which provides consumers, architects and interior designers a full view of ranges of wash basins, shower panels, shower cubicles, bath tubs, shower temples, whirlpools, cp fittings etc. Cera Bath Studios has pan-India presence, are located at Ahmedabad, Bangalore, Chandigarh, Kolkata, Cochin and Hyderabad, Mumbai. Manufacturing Unit Cera Sanitaryware manufacturing facilities are located at Kadi, Gujarat.The achieving the growth in the rapidly changing retail market in the country, Cera, has launched its one of a kind Cera Bath Studios in Ahmadabad, Bangalore, Chandigarh, Kolkata, Cochin and Hyderabad, Mumbai. With the opening of the Cera Bath Studios, the discerning consumers, architects and interior designers can have full view of the Cera’s premium ranges of WC’s, Wash Basins, Shower Panels, Shower Cubicles, Bath Tubs, Shower Temples, Whirlpools, CP fittings etc. Cera Bath Studios will complement its existing network of 600 dealers and 5000 retailers. Several Bathrooms are displayed live, so that the customers can get a feel of Cera’s vast range of products.

Outlook and Valuation:

Cera Sanitaryware Ltd is a pioneer of the first sanitary ware segments in India launching innovative designs & water saving products. Cera has added other products like kitchen sinks, mirrors and sensor products to its range under Bathware. India accounted for 8 % of the world's sanitary ware production. The market size is estimated to be Rs. 1050 Cr. The branded segment accounts for a larger share of 60 % and is growing at a rate of 15 % - 17 %, whereas the market share of the non-branded segment has shrunk to 40 %, growing at a slower pace of 8 % - 9 %. The organized sector, comprising nine units, reported a production of 108,000 TPA against a total capacity of 118,000 TPA; the 250 units in the unorganized sector produced about 180,000 TPA against a total capacity of 220,000 TPA. The outlook for the tile industry appears to be positive over the medium term. This optimism stems from the likelihood of robust demand over the medium term. The real estate market is expected to grow at CAGR 15 % to 16 % over 2010 to 2015. Estimates suggests a shortage of an approximate 2.5 crore housing units in the middle and low income groups at the beginning of the Eleventh Plan. It is also expected that the medium housing segment will record around 25 % CAGR while luxury housing will experience a 33 % CAGR during 2009-13. The residence owners are looking for value-added products and the retail market is expected to grow from present 5 % to 10.4 % by 2012. The CAGR of company during last Five years has remained much more than industry growth rate. Together, the CERA Style Studios and CERA Style Galleries have made a great impact in improving the retail experience for prospective customers, institutional buyers and influencers of CERA. The growth also reflects CERA’s focused endeavors to retain its status as complete bathroom solutions provider to its customer base across India. The strategic planning in terms of product optimization and leveraging on Cera’s strong brand image with well supported penetrating distribution network continues to drive company’s high growth and carving out new standards for itself. CERA has expanded its production capacity to 2.7 million pieces per annum from 2.0 million pieces. Cera's entry into the Faucet ware business is a positive as it provides a significant scalable opportunity. Cera's faucet business is expected to grow at 29 % CAGR and is expected to be profitable durning FY13-15. The Company has also added other products like kitchen sinks, mirrors and sensor products to its range under Bathware. The CERA Style Galleries opened in several cities in collaboration with CERA dealers have been a success, with many more dealers coming forward for opening such Galleries. Already 50 CERA Style Galleries are functional all over the country. Together, the CERA Style Studios and CERA Style Galleries have made a great impact in improving the retail experience for prospective customers, institutional buyers and influencers of CERA. At the current market price of Rs. 705.35, the stock is trading at a PE of 16.99 x FY14E and 13.30 x FY15E respectively. The company can post Earnings per share (EPS) of Rs. 41.50 in FY14E and Rs. 53.00 in FY15E. CERA’s Net sales and PAT are expected to grow at a CAGR of 30 % and 24 % over 2012 to 2015E. CERA is confident of sustaining its growth in coming years with its business strategies of continuously upgrading product basket, leveraging on strong brand image, optimizing product potential capacity utilization and distribution network with all backed up by well structured sales & marketing plans. One can buy CERA with a target price of Rs. 740.00 for shorter term and for Medium to Long term investment it should be Rs. 800.00.

KEY FINANCIALS	FY12	FY13	FY14E	FY15E
SALES (₹ Crs)	320.90	489.30	646.30	790.00
NET PROFIT (₹ Cr)	30.80	43.40	52.60	67.00
EPS (₹)	24.30	34.30	41.50	53.00
PE (x)	23.70	16.80	13.30	10.40
P/BV (x)	5.20	4.10	3.10	2.40
EV/EBITDA (x)	13.30	9.50	7.60	5.90
ROE (%)	24.50	27.30	26.00	26.20
ROCE (%)	28.80	32.70	29.80	32.00

I would buy CERA SANITARYWARE LTD for the short term would be Rs. 740 and for the Medium to Long term for target of Rs. 800. As I always say, I am a long term believer in markets & I do respect the markets and will keep a strict stop loss of 8 % or ₹ 648.92 on every purchase. (Why Strict stop loss of 8 % ?) - Click Here

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