CMP:
Rs. 1,639.25 ; Market Cap: Rs. 2,131.98 Cr; 52
Week High/Low: Rs. 2,960.90 / Rs. 1509.95
Total
Shares: 1,30,05,874 shares; Promoters : 71,20,639 shares –54.75 %; Total Public
holding : 58,85,235 shares – 45.25 %; Book
Value: Rs. 195.66; Face Value: Rs. 5.00; EPS: Rs. 41.85; Dividend: 125.00 % ;
P/E: 40.56 times; Ind. P/E: 34.31; EV/EBITDA: 15.74.
Total
Debt: Rs. 68.16 Cr; Enterprise Value: Rs. 2,170.61 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. The company announced its bonus
shares last July 2010 in ratio of 1:1. 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 CERA SANITARYWARE LIMITED is locally compared with Kajaria Ceramics,
Grindwell Norton, Acrysil India Ltd, La Opala RG, Asian granite India Ltd, Euro Ceramics,
Hindustan Sanitaryware India Ltd, Morganite Crucible India Ltd, Murudeshwar
Ceramics, Nitco tiles Ltd, Orient Bell Ltd, Regency Ceramics, Restile Ceramics,
Somany Ceramics, Kisan mouldings Ltd, and Globally compared with China Ceramics Co
Ltd of China, Ziyang Ceramics of China, Topps Tiles of China, China GengSheng
Minerals Inc of China, INTL DE Ceramica Com of USA, EGE Seramik of Turkey, Dynasty
Ceramics of Thailand, Ceramica San Lorenzo, CARBO Ceramics Inc of USA,
Fairmount Santrol Holdings Inc. of USA, Compagnie De Saint Gobain SA of France,
U.S. Silica Holdings, Inc of USA, Arab Ceramics Co of Saudi Arabia, Al Anwar
Ceramic Tiles Co of Saudi Arabia, Saudi Ceramics Co of Saudi Arabia, Saudi
Vitrified Clay Pipes Company of Saudi Arabia, General Comapany for Ceramic and
Procelain Products SAE, Forage Orbit Garant Inc of Canada,Ceramika Nowa Gala Sa
of Turkey, Usak Seramik Sanayi As of Turkey, Dvarcioniu Keramika AB of
Lithuania, Goh Ban Huat Berhad of Malaysia, Chang Yih Ceramic JSC of Vietnam,
Royal Ceramics Lanka Ltd of Sri Lanka, Konoshima Chemical Co Ltd of Japan, Roy
Ceramics Se of Germany, Troax Corp Publ AB of Sweden, Expedit AS of Denmark, Exel
Composites Oyi of Finland, Royal Ceramic Industry Public Co Ltd of Thailand,
CMC Joint Stock Co of Vietnam, Shabir Tiles & Ceramics ltd of Pakistan, 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 Sanitaryware
incorporated in the year 1998 is a pioneer in the sanitary ware segment in
India. Cera Sanitaryware Limited, India’s fastest growing company in the
sanitary ware segment in India. It has an extensive product portfolio that
includes high end showers, steam cubicles, and whirlpools, besides sanitary-ware
and faucets, such extensive product ranges has made CERA the primary choice of
customers looking for stylish products in a contemporary lifestyle. 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. CERA’s constant innovations have given several path
breaking contributions to the industry. Some of its innovations have become
benchmarks for the industry- like water-saving twin-flush coupled WCs, 4-litre
flush WCs, and one-piece WCs. Advanced technology has been the forte of CERA.
Its state-of-the-art manufacturing plant has been following the highest
standards of quality with an emphasis on sustainability since its inception in
1980. CERA has raised its production capacity of sanitary-ware from 2.70
million pieces to 3.0 million pieces per annum, CERA plans to maintain its
leadership status in the industry, while catering to increasing demands with
satisfaction. Foraying into a new arena, CERA also launched an array of stylish
wall and floor tiles. The range includes HD digital wall tiles with matching
floor tiles; digital glazed vitrified tiles, and vitrified tiles with nano
technology. India ranks third in world ceramic tile production after China and
Brazil and is growing at an annual growth rate of 15 % contributed largely by
urbanisation, and boom in the retail industry. Ceramic production today is a sizeable
contribution to the India’s GDP with a turnover of Rs. 18,000 crores at 60 Cr sq
mts p.a. Tiles. The industry was earlier highly dominated by the unorganized
players based out in Gujarat. But with stringent pollution control norms by the
Gujarat Pollution Control Board the industry in getting more organized. The unorganized
players have started to enter into JV with the organized players assisting them
in manufacturing activities. Also India is currently witnessing a change in
preference towards high end polished vitrified tiles which is leading to higher
demand growth for the organized players. India has not grown much in terms of
exports of ceramic tiles and currently consists of less than 0.5 % of the global
market. India exports ceramics to markets across Europe, Asia, US and Africa and
the key export markets are UAE, Saudi Arabia and Malaysia. The Indian tile
Industry is expected to witness better days over the medium-term. This optimism
is based on important realities like increasing urbanisation, reduction in Interest
rate and policy driven growth. Over the last two decades, India’s urban
population have increased from 21.7 Cr to 37.7 Cr and this is expected to reach
60 Cr or 40 % of the population by 2031. By then, India is expected to have 68
cities with population of more than 10 Lakh and this would drive housing
demand. Also with the recent reduction in interest rates will also help demand
in housing sector. The Government’s decision to develop, Housing for all by
2022, Swachh Bharat campaign, Smart City Mission is expected to create an
interesting growth opportunity for the Indian ceramic tile industry. The company is
also making huge investment in promoting its single brand ‘CERA’, which the
company uses for all its products. The promotional expenses have grown at a
CAGR of 36 % since FY11 and it constitutes 4 % of the total revenue. To give
brand visibility, the company has appointed Sonam Kapoor, Bollywood fashion
icon, acclaimed actress, as the company’s brand ambassador. Going forward, the
company is expected to come out with a new brand for the premium segment and
would use CERA brand for the mass and mid segments. Brand loyalty and strategic
marketing network have paid dividend to the company in terms of robust revenue
growth of 36 % CAGR in the last four years. The company has strong pan India
presence with 1400 dealers and 14000 retailers targeting both its retail and
institutional customers. And to supplement its network the company also has 20
stock points across the country. The company has also initiated touch and feels
experience to its customers by setting up bath studios. In order to target
premium and luxury customers, the company has exclusive display centre, Cera
style studio which are located in the prime locations across the major cities.
Cera style galleries are the display and sales touch points owned and managed
by its trading partners. Cera style centres are the display centres targeting
smaller trade retail partners. The company has increased its Cera style studios
from just one at Ahmedabad in FY06 to 10 by the end of FY15. The company is
also fast growing its Cera style galleries and expects to touch 200 galleries
in the near future. With Cera style centers, the company is penetrating into
the tier 2 cities such as North-East and West Bengal. In South, the company has
dominant position in Kerala and is now building up its positioning in Tamil
Nadu and Andhra Pradesh. Over FY11-15, Cera has gained market share and maintained above industry growth rate
in the sanitary ware segment- segmental sales have recorded a CAGR of 27 %,
vis-Ã -vis 14 % to 15 % growth reported by the industry. Currently, replacement
demand forms 7 % to 8 % of total sanitary ware demand in India vis-Ã -vis 80 %
in developed nations. Considering the rapid growth seen by the industry over
last couple of decades, it is expected that the replacement demand to be a key
growth enabler going forward. Along with the higher brand consciousness and
income levels will have help organised players like Cera in the sanitary ware
segment to gain steady market share from unorganised players which we can
witness by the growth in market share of organised sector from 50 % to 65 %.
Although it is expected that the branded segment to continue to record faster
growth than the industry, penetration levels are likely to stabilise, owing to
limited headroom. Even as growth moderates from historic levels, Cera is likely
to sustain its growth trajectory, and can record 20 % CAGR over FY15-18,
against an industry growth expectation of 13-14%. This is expected to be driven
by factors like established market position and introduction of new products.
Outlook and Valuation:
Cera Sanitaryware is a
complete building solution provider and have raised itself from a provider of
single sanitaryware product in the 1980’s to now vast range of product
portfolio and today it has become a complete building product solutions
provider by offering products like sanitaryware, faucetware, wellness &
allied products and tiles. In the sanitaryware segment, the company has strong
positioning in the mass segment which accounts of almost 60 % of the organized
sanitaryware market. The company has in-house manufacturing facility for
sanitaryware and faucetware at Kadi, Gujarat. Currently, the facility has an
installed capacity to produce 3 million pcs of sanitaryware and 2.34 million
pcs of faucetware. The company is also engaged in contract manufacturing for
sanitaryware and faucetware and outsourcing activities for wellness &
allied products, Vitrified and Ceramic Tiles. Over the years, the company has
built-up strong marketing network to promote and sell its products. As on March
2015, it has 1400 dealers and 14000 retailers. All the products of the company
are sold under single brand ‘CERA’, and it enjoys strong positioning in the
mass segment. It has strong positioning in the southern market, with 40 % of
its total revenue coming from south. Over the years, it has gradually increased
its market share in the sanitaryware from 18 % in FY09 to 23 % in FY15. The
company is also growing higher than most of its peers and industry. The company
started the faucet business by trading activity and today it has built-up huge
capacity to encash the opportunity in the under-penetrated faucetware market. India’s
sanitaryware and bathroom fittings industry is undergoing a transition phase.
The consumers are now moving from low-end basic product to middle and high end
premium segments. This is in conjunction with the growing urbanization and ever
increasing middle-income segment. As per the National Council for Applied
Economic Research (NCAER), the middle-income segment has grown from 1.1 Cr households
in 2001-02 to 3.1 Cr household by 2010-2011 and is expected to grow to 5.3 Cr by
2015-16 and 11.4 Cr by 2025-2026. This shift will benefit the industry players
in terms of higher margin and ability to pass on the cost increase to the
consumers. The total size of the Indian sanitaryware and bathroom fittings
industry is at Rs. 9,500 Cr in FY15, of which the sanitaryware accounts for
roughly Rs. 3,500 Cr and is growing at an average rate of 20 %. The remaining
Rs. 6,000 Cr is attributed to bathroom fittings, also growing at an average
rate of 18 %. The outlook for the industry is robust on the back of country’s
very low sanitation coverage, housing shortage and potential for the
replacement market. The contribution from the replacement in this sector in
India is very low at 8 % in comparison to 80 % in the developed economies. In
the sanitaryware industry, the organized market is 65 % while the unorganized
market is about 35 % and in the bathroom fittings, the organized market share
is around 45 % and the unorganized market is about 55 %. According to the
report on world health statistic by World Health Organization (WHO), the
sanitation coverage in India is very low at 36 %. This in itself shows the
growth potential for the industry in a country which has a population of over
125 Cr and is expected to grow to 135 Cr by 2021, as per census 2011. Further,
the growth would be boosted by the government initiatives such as affordable
housing, Swachh Bharat Abhiyan and development of 100 smart cities. In Union
Budget for 2015-16, the finance minister has announced 100 % sanitation by October
2019 with a provisional amount of Rs. 3,625 Cr, including Rs. 1,000 Cr for
urban sanitation. It has also allocated Rs. 10,025 Cr for rural housing and Rs.
4,150 Cr for Urban housing with an objective of providing housing for all by
2022. In the recent union cabinet meeting, the government has approved
development of 100 smart cities along with the new urban renewal mission with a
planned outlay of Rs. 1 Trillion. CERA has for the additional capacity, for
both faucetware and sanitaryware, alloted the total capex is approx Rs. 100 Cr,
which would be funded from the amount raised through preferential issue and
remaining from internal accruals. Recently, the company has raised Rs. 70.6o Cr
by way of preferential allotment of 3,51,000 equity share at Rs. 2011.5 per
shares. On November
23, 2015 Anjani Tiles Limited, Andhra Pradesh has allotted 51,00,000 Equity
shares at par out of the total 1,00,00,000 Equity Shares of the Company to Cera
Sanitaryware Limited and now Anjani Tiles Limited has become a Subsidiary
Company of Cera Sanitaryware limited. The company has been using full utilization of its existing
capacity and post expansion; the company will continue to make full utilization
of its increased capacity also. It is expected that margins to consolidate in
the range of 14 % in the next two years, while the company is positioning
itself in the premium segment and expanding its capacity and achieving full
utilization of the expanded capacity. The revenue contribution from the faucet
business has increased from 14 % in FY13 to 17 % in FY17E, with the increasing
capacity the contribution is expected to increase further. Recently, the
company has also expanded its business activities in the tiles business through
contract manufacturing with the unorganized players. The products launched by
the company in the tiles business have been widely accepted and as a result,
the contribution from the tiles business has also increased from just 2 % in
FY13 to 13 % in FY15. The diverse product offering has helped the company to
achieve higher revenue growth, even when the economy and the industry were
under pressure. Lately, the company is also evaluating opportunities for
entering into a joint venture for the manufacturing of sanitaryware and/or
Tiles. Faucetware industry size at Rs. 6,000 Cr and is double the size of
sanitaryware. The contribution of the organized market is 45 % and is growing
rapidly. The company already supplies to the industry in the mass segment
through outsourcing but now the company is targeting the premium segment and in
this direction, the company has increased its production capacity by 166 % to
2.43 mn pcs p.a i.e approx. 6,658 pcs. per day from 0.91 mn pcs p.a i.e 2,500
pcs per day. The plant located at kadi, Gujarat is further expandable to 10,000
pcs per day. Currently, jaguar has dominating in this segment with almost 40 %
market share. The company is going aggressively on branding and expects to
garner 3 % market share in the near future. Meanwhile, it has also expanded the
sanitaryware production capacity from 2.7 mn pcs p.a to 3 mn pcs p.a in FY15.
The company is also planning to increase the sanitaryware capacity to 3.3 mn
pcs by FY16E. In the last couple of years, the company has reported healthy
growth in its sanitaryware business and has gained market share from 18 % in
FY09 to 23 % at the end of FY15. The company has recently entered into a
marketing agreement with ECE Banyo, the owners of Italian Luxury Sanitaryware
brand ISVEA. As per the agreement, Cera will exclusively sale, distribute and
market ISVEA brand in India. Already the company imports some premium
sanitaryware products from China and Turkey. The
company operates with two sources of energy, natural gas for running the kilns
and electricity for running the machineries. The company has long term gas
supply agreement with GAIL, which meets 70 % of the company’s requirement and
the balance is supplied by Sabarmati Gas Ltd at market price. Because of the
long term contract, the company is barred from the short term price fluctuation
and thus brings cost efficiency. Besides, natural gas is also less costly than
regassified LNG/LPG gas, which is used by its peers like HSIL and Parryware.
Recent decline in the natural gas prices in the international market is giving
added advantage to the company. During FY15, the company has added wind turbine
of 4 MW taking the wind turbine capacity to 11.825 MW. During the year, the
company also installed 1MW of solar energy. With this, the company has captive
power capacity of 12.825 MW. The captive power plant meets almost 90 % of the
company’s electricity requirement. In FY15, the power generation increased by
65 % to 10361993 KWH as compared to FY14. This will further help the company to
stabilize the power cost Full capacity utilization and
robust sales growth have helped the company to report higher return ratios. In
FY15, the company has added huge capacity and in the next two years, the
company is expected to incur more capex to enhance its capacity. Thus the
return ratios are expected to remain stable in the near future and will
gradually improve as the company achieves optimal utilization. The RoNW (%) is
expected to improve to 24.7 % by FY17E from 23.5 % in FY15, the RoCE (%) is
expected to improve to 32.4 % by FY17E from 31.4 % in FY15 and the Return on
Asset (RoA) is expected to improve from 12.3 % in FY15 to 13.8 % in FY17E. The domestic
faucet ware industry offers a large, scalable growth opportunity. The faucet
industry offers a larger and more scalable growth opportunity than sanitary
ware, as spends on faucets are typically 2-3x that of sanitary ware. Estimated
size of the faucets industry is Rs. 50-52 bn, as compared with Rs. 28- 30 bn of
the sanitary ware industry. The small players has market share of 3 % as of
FY15 and Cera is aptly positioned to capitalise this opportunity. Moreover,
presence of branded players is expected to grow faster than that of other
segments, owing to higher share of unorganised players of 55 %, vis-Ã -vis 35 %
in sanitary ware and 50 % in ceramic tiles. On Financial side, CERA’s net profit jumps
to Rs. 20.10 Cr as against Rs. 16.16 Cr in the corresponding quarter ending of
previous year, an increase of 24.43 %. Revenue for the quarter rose by 11.58 %
to Rs. 233.53 Cr from Rs. 209.29 Cr, when compared with the prior year period.
Reported earnings per share of the company stood at Rs. 15.46 a share during
the quarter, registering 21.06 % increase over previous year period. Profit
before interest, depreciation and tax is Rs. 37.37 Cr as against Rs. 31.15 Cr
in the corresponding period of the previous year. At the current market price of Rs. 1639.25,
the stock is trading at a PE of 27.97 x FY16E and 19.75 x FY17E respectively.
The company can post Earnings per share (EPS) of Rs. 58.60 in FY16E and Rs. 83.00 in FY17E. 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.
| KEY FINANCIALS | FY15 | FY16E | FY17E | FY18E |
|---|
| SALES (₹ Crs) | 821.66 | 919.32 | 1,234.50 | 1,537.60 |
| NET PROFIT (₹ Cr) | 67.66 | 76.22 | 107.90 | 140.00 |
| EPS (₹) | 52.03 | 58.60 | 83.00 | 108.00 |
| PE (x) | 32.58 | 28.92 | 21.00 | 16.20 |
| P/BV (x) | 6.27 | 5.15 | 4.40 | 3.60 |
| EV/EBITDA (x) | 17.62 | 15.40 | 12.20 | 9.50 |
| ROE (%) | 19.24 | 17.81 | 23.30 | 24.70 |
| ROCE (%) | 33.96 | 33.42 | 31.40 | 35.20 |
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 % on every purchase. (Why Strict stop loss of 8 % ?) - 
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*As the author of this blog I disclose that I do hold CERA SANITARYWARE Ltd in my investment portfolio.
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