UNION BUDGET 2016-17 : HIGHLIGHTS !!!

GROSS DOMESTIC PRODUCT ESTIMATED TO GROW AT at 7.60 % for FY15 - 16

AT CURRENT PRICES THE ADVANCE GDP ESTIMATE OF 2015 - 16 IS ₹ Rs. 113,51,000 LAKHS CR AND AT 2011-12 PRICES ITS AT Rs. 105,52,000 LAKHS CR. 

FY16 FISCAL DEFICIT AT Rs. 5,32,281 CR.

FY16 TOTAL SUBSIDES AT Rs. 2,50,000 CR.

FY15 FERTILIZER SUBSIDIES AT  Rs. 72,968 CR.

FY16 FOOD SUBSIDIES AT  Rs. 1,35,000 CR.

FY16 OIL-PETROLUEM SUBSIDIES AT Rs. 26,900 CR.

FY16 NET MARKET LOANS OF Rs. 4,25,000 CR. 

THE CENTER'S EXPENDITURE 2015-16 IS PROJECTED AT Rs. 19,78,060 Cr.

INFLOWS (Rs. in Crs)	AMOUNT
CORPORATE TAX	4,93,923
INCOME TAX	3,53,174
CUSTOMS DUTY	2,30,000
EXCISE DUTY	3,18,670
SERVICE TAX	2,31,000
TAX OF UNION TERRITORY	4,791
GROSS TAX REVENUES	16,30,888

NON TAX RECEIPTS (Rs. in Crs)	AMOUNT
INTEREST RECEIPTS	29,620
DIVIDENDS & PROFITS	1,23,780
EXTERNAL GRANTS	2,862
OTHER NON TAX RECEIPTS	1,65,320
RECEIPTS OF UNION TERRITORY	1,339
TOTAL	3,22,921

DEBT RECEIPT (Rs. in Crs)

5,20,709

NON DEBT CAPITAL RECEIPTS (Rs. in Crs)	AMOUNT
RECOVERY OF LOANS & ADVANCES	10,634
MISC. CAPITAL RECEIPTS	56,500
TOTAL	67,134

* Out of the Tax Receipts the Center has to keep aside Rs. 25,000 cr for bank recapitalisation

OUT FLOW (Rs. in Cr)	AMOUNT
PLAN EXPENDITURE	5,50,010
NON PLAN EXPENDITURE	14,28,030
DEFENCE	1,62,759
SUBSIDIES	2,50,433
GRANTS TO STATES & UTs	1,18,356
INTEREST PAYMENTS	4,92,670
OTHER GENERAL SERVICES	35,003
ECONOMIC SERVICES	34,266
Central Assistance to States & Union	2,27,551
CENTRAL PLAN	1,76,076
LOANS TO STATE & UT GOVT	81

SOME MORE POINTS FROM BUDGET  

® Govt. committed to achieve Fiscal deficit target of 3.9 % of GDP for FY16 followed by fiscal deficit of 3.5 % for 2017.

® Direct tax proposals results in Revenue loss of Rs. 1,060 Cr and the indirect tax proposal results in gain of Rs. 20,670 Cr.

® Proposes to imply additional 10 % tax on gross amount of dividend received by the recipients that is individuals, HUF’s, and firms receiving dividend in excess of Rs. 10 lakhs per annum. 

® Proposes a 15 % surcharge on income above Rs. 1 Cr and proposes to raise the ceiling of tax rebate under section 87A from Rs. 2,000 to Rs. 5,000 for individuals with income not more than Rs. 5 lakhs.

® Individuals who do not own any house and also do not get any Rent allowance from employer gets deduction of Rs. 24,000 per annum from their income, hence this limit increased u/s 80GG from Rs. 24,000 per annum to Rs. 60,000 per annum. For first home buyers, additional exemption of Rs. 50,000 for housing loans up to Rs. 35 lakh, provided the cost of house is not above Rs. 50 lakh.

® Proposes to levy infrastructure cess at the rate of 1 % on purchase of luxury cars exceeding value of Rs. 10 lakh and 1 % on purchase of goods and services in cash exceeding Rs. 2 lakh. Farmers and notified class of persons will have an option of giving a form by which TCS will not be charged. To levy 2.5 % on diesel cars of certain capacity and 4 % on other higher engine capacity vehicles and SUV’s.

® Proposes to give 100 % deduction for profits to an undertaking from a housing project for flats up to 30 sq. meters (322.917 sq.fts) in four metros cities and 60 sq. meters (645.835 sq.ft.) in other cities approved during June 2016 to March 2019 and is completed within 3 years of approval. Minimum Alternate Tax will apply to these undertaking. Service tax exemption to houses up to 60 square meters built under any scheme of the Central or State government including PPP schemes.     

® Presumptive taxation scheme u/s 44AD applicable to small & medium enterprises i.e. a non-corporate business with turnover or gross receipts not exceeding Rs. 1 Cr, at present these are free from maintain details books of accounts and getting audit done, hence are proposed to increase the turnover limit to Rs. 2 Cr, which would be paying 8 % tax on presumptive income. Presumptive taxation scheme on professionals with gross receipts up to Rs. 50 lakh with presumption of profit being 50 % of the gross receipts.

® MAT will be applicable for all the start ups that qualify for 100 % tax exemption. 100 % FDI in marketing of food products produced and marketed in India. Department of Disinvestment will be renamed as Department of Investment and Public Asset management. 

® The allocation of Rs. 1,000 Cr for new EPF scheme. Govt. will pay EPF contribution of 8.33 % for all new employees for first three years. Proposes to allocate Rs. 38,500 Cr for Mahtma Gandhi MGNREGA for 2016-17. Swacch Bharat Abhiyan to get allocation of Rs. 9,500 Cr. LPG connection to be provided under the name of the women members of the family and Rs. 2,000 Cr is allocated for 5 years for BPL families.

® Proposes to allocate Rs. 87,765 Cr to rural sector. And Rs. 2.87 lakh cr will be given as Grant in Aid to gram panchayats and Municipalities. A sum of Rs. 38,500 Cr allocated for MGNREGS. 100 % rural electrification by 1^St may 2018. Pradhan Mantri Krishi Sinchai Yojana will bring 28.5 lakh hectares under irrigation. A dedicated Long Term Irrigation Fund will be created in NABARD with an initial corpus of about Rs. 20,000 Cr. Proposes to allocate Rs. 35,984 Cr for agriculture and famers welfare.

® Proposes to allocate Rs. 5,500 Cr under Prime Minister Bima Yojana. Also proposes to reduce the loan burden on farmers a provision of Rs. 15,000 cr has been made in BE 206-17 towards interest subvention. And Rs. 850 cr allocated for 4 dairying projects. Proposes to allocate Rs. 19,000 cr under Pradhan Mantri Gram Sadak Yojana and will connect remaining 65,000 eligible habitations by 2019.

® Proposes to allocate Rs. 1,51,581 Cr for social sector including education & health care. Rs. 2,000 Cr allocated for initial cost of LPG connection to BPL families. New health protection scheme will provide health cover upto Rs. 1 lakh per family, for senior citizens an additional top up package up to Rs. 30,000 will be provided. Proposes to build digital repository for all school leaving certificates and diplomas and Rs. 1,000 Cr for higher education financing being allocated. Proposes to allocate Rs. 500 Cr for promoting entrepreneurship among ST/SC and Rs. 1,700 Cr for 1500 multi skill development centres.

® Proposes to allocate Rs. 3,000 Cr for nuclear power generation. Proposes to spend Rs. 27,000 Cr on roadways. Total allocation for road construction including PMGSY is Rs. 97,000 Cr and Rs. 55,000 Cr for roads & Highways development. Total outlay for infrastructure in budget 2016 now stands at Rs. 2,21,246 Cr.

® Proposes to impose Cess called Krishi Kalyan Cess @ 0.50 % on all taxable services, proceeds of which would be exclusively used for financing initiatives relating to improvement of agriculture and welfare of farmers. The cess will come to force with effect from 1 june 2016. Input tax credit of this cess will be available for payment of this cess. Shops to be given option to remain open all seven days in week across markets.

® New derivative products will be developed by SEBI in commodity Derivate market. Rate of Securities transaction tax in case of Options is proposed to be increased from 0.017 % to 0.05 %. Proposed that a person making payment to NRI who does not permanent establishment exceeding in aggregate Rs. 1 lakh a yr as consideration for online advertisement will withhold tax at 6 % of gross amount paid as Equalization levy. The levy will only apply to B2B transaction.

® Proposes to change the excise duty on branded readymade garments and made up articles of textiles with retail sales price of Rs. 1,000 and above from NIL without input tax credit or 6 %/ 12.5 % with input tax credit to 2 % without input tax credit or 12.5 % with input tax credit.

®  Proposes to impose an excise duty of 1 % without input tax credit or 12.5 % with input tax credit on articles of jewellery (excluding silver jewellery- other than studded with diamonds an some other precious stones) with higher exemption and eligibility limits of Rs. 6 Cr & 12 Cr respectively.

®    Proposes to rename the Clean Energy Cess levied on Coal, lignite and peat as Clean Environment Cess and simultaneously increase its rate from Rs. 200 per tonne to Rs. 400 per tonne. To reduce the consumption of tobacco products, excise duty on various tobacco products other than beedi by 10 % to 15 %.

®    NRI without PAN are currently subjected to higher rate of TDS. It is proposed to amend the relevant provision to provide that on furnishing of alternative documents the higher rate will not apply.

® Investment limit for foreign entities in Indian stock exchanges will be enhanced from 5 & to 15 % on par with domestic institutions. This will enhance global competitiveness of Indian Stock exchanges and accelerate adoption of best in class technology and global market practices. Also the period for getting benefit of long term capital gain regime in case of Un-listed companies is proposed to be reduced from three years to two years. GAAR would be implemented from 1 April 2017. To promote use of refrigerated containers, it is proposed to reduce the basic custom duty to 5 % and excise duty to 6 %. Banks to be recapitalize with Rs. 25,000 Cr. General Insurance companies will be listed on Stock Exchanges.       

®    Proposes to provide complete pass through of income tax to securitization trusts including trusts of Asset Reconstruction Companies. The income will be taxed in the hands of the investors instead of trusts. However the trust will be liable to deduct tax at source.

®     Plan and Non-plan classification to be done away with from 2017-2018.  Will phase out the deduction under Income Tax, Accelerated depreciation wherever provided in IT Act will be limited to maximum 40 % from 1 April 2020. The weighted deduction under section 35CCD for skill development will continue up to 1 April 2020. Benefit of section 10 AA to new SEZ units will be available to those units which commence activity before 31 March 2020.

®    New manufacturing companies incorporated on or after 1 march 2016 to be given an option to be taxed at 25 % + surcharge and cess provided they do not claim profit linked or investment linked deductions and do not avail of investment allowance and accelerated depreciation. Lower corporate tax rate for next fiscal year for SME i.e Companies with turnover not exceeding Rs. 5 Cr in the financial year ending March 2015 to 29 % + surcharge and cess.

®    Proposes a 100 % deduction of profits for 3 out of 5 years for start-ups setup during April 2016 to March 2019. MAT will apply to such cases. A 10 % of tax on income from worldwide exploitation of patents developed and registered in India by a resident.

®    Non-banking financial companies shall be eligible for deduction to the extent of 5 % of its income in respect of provision for bad and doubtful debts. 

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 % ?) -  Click Here

*Reader Friends, grab a fresh hot cup of coffee, turn on your net & browse on to www.bhavikkshah.blogspot.in & take out few minutes to get to know the most interesting world of investment... Till then HAPPY INVESTING, don't forget to Share !!

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Disclaimer: 

This is a personal blog and presents entirely personal views on stock market. Any statement made in this blog is merely an expression of my personal opinion. These informations are sourced from publicly available data. By using/reading this blog you agree to (i) not to take any investment decision or any other important decisions based on any information, opinion, suggestion, expressions or experience mentioned or presented in this blog (ii) Any investment decisions taken if any would be his/hers sole responsibility. (iii) the author of this blog is not responsible.  

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VA TECH WABAG LTD: POISED TO BE A LEADER !!

Scrip Code: 533269 / WABAG

CMP:  Rs. 511.25; Market Cap: Rs. 2,784.15 Cr; 52 Week High/Low: Rs. 970.00 / Rs. 510.00

Total Shares: 5,44,57,891 shares; Promoters : 1,57,73,404 shares –28.96 %; Total Public holding : 3,86,84,487 shares – 71.03 %; Book Value: Rs. 125.92; Face Value: Rs. 2.00; EPS: Rs. 20.76; Dividend: 200 % ; P/E: 25.35 times; Ind. P/E: 24.79; EV/EBITDA: 12.68 times.

Total Debt: Rs. 180.64 Cr; Enterprise Value: Rs. 2,725.22 Cr.

                                                                                                                                         

VA TECH WABAG LTD: VA Tech WABAG Limited was incorporated in 1995 and is headquartered in Chennai, India. The company was formerly known as Balcke Durr and Wabag Technologies Limited and changed its name to VA Tech Wabag Limited in April 2000. Va Tech Wabag Limited provides solutions in the water treatment industry. The company offers life cycle solutions, including conceptualization, design, engineering, procurement, supply, installation, construction, and operations and maintenance (O&M) services. WABAG is one of the world’s leading companies in the water treatment field. WABAG’s key competences, which are based on over 90 years of plant building experience, lie in the design, completion and operation of drinking water and wastewater plants for both the municipal and industrial sectors. WABAG offers sustained solutions for special customer needs through a comprehensive range of services and innovative technologies. Their plants facilitate environmentally compatible wastewater disposal and secure access to clean drinking water for an increasing number of people. This allows them to make an important contribution to environmental protection and enhanced quality of life. The company came with an Initial Public Offer in September 2010 with 9.5 lakhs shares at the issue price of Rs. 1,310 a share raising Rs. 475 Cr. On August 2011 the company declared the sub division of shares from the face value of Rs. 5 to Rs. 2.00. The company declared bonus on February 7, 2015 in the ratio of 1:1. The Company has four business units: Municipal Business Group, Industrial Water Business Group, International Business Group and Operation and Maintenance Business. It provides a range of engineering, procurement and construction, and operation & maintenance (O&M) solutions for sewage treatment; drinking and industrial process water treatment; effluents treatment; and sludge treatment, desalination, and reuse for institutional clients, including municipal corporations, and companies in the infrastructure sector. The company operates primarily in India, Middle East and North Africa, central and eastern Europe, China, and south East Asia. It has overseas subsidiaries in Austria, Switzerland, Germany, Czech Republic, Romania, Macao, Algeria, Tunisia, Egypt and Turkey. It has a joint venture agreement with Zawawi Trading Company LLC in Oman. VA Tech WABAG is locally compared with Eco Recycling Limited and Ion Exchange, A2Z Maintainace, Thermax India, GE Water, Siemens Water, Voltas Ltd, Hindustan Dorr-Oliver Ltd, Wog Technologies, UEM India Pvt. Ltd, SFC Environmental Technologies and globally compared with Beijing Enterprises Water Group Ltd of China, HanKore Environment Tech Group Ltd, SIIC Environment Holding Ltd, Severn Trent PLC, Cia Saneamento Basico Do Estado SABESP,  Veolia Environment SA of France, Suez Environment of France, ITT Corporation of USA, United Utilities of UK, Severn Trent of UK, Thames Water of UK, American Water Works Company of USA, Nalco Company Water treatment of USA, GE Water of USA, Kurita Water Industries of Japan, Takeei Corporation of Japan, Daiseki Co. Ltd of Japan.

    

Investment Rationale:

VA Tech Wabag Ltd (WABAG) is an established EPC player in water management space. It offers complete life cycle solutions from project design to installation to operation & maintenance. WABAG is a multinational player in the water treatment industry with presence in India, the Middle East, North Africa, Central and Eastern Europe, China and South East Asia through principal offices in India, Austria, the Czech Republic, China, Switzerland, Algeria, Romania, Tunisia, UAE, Libya and Macau. It offers complete life cycle solutions including conceptualisation, design, engineering, procurement, supply, installation, construction and O&M services. The company provides a range of EPC and O&M solutions for sewage treatment, processed & drinking water treatment, effluents treatment, sludge treatment, desalination and reuse for institutional clients like municipal corporations and companies in the infrastructure sector such as power, steel and oil & gas companies. Till date, WABAG has executed 2,250 projects and is currently executing 72 projects. It is a technology‐focused player with R&D centres in Chennai, India, Vienna in Austria and Winterthur in Switzerland respectively. Wabag Austria and Wabag Wassertechnik own 157 patents, which include both process and product patents. WABAG has approximately 1,469 employees including 757 qualified engineers. In India, it has around 754 employees including 588 qualified engineers. The company benefits from association with the Wabag brand. In 2007, it acquired Wabag Austria, thereby taking over the Wabag Group. It has a project reference list of more than 2,250 over the past three decades. India is the second most populated country with over 1.2 billion people and the Official estimates of the Ministry of Water Resources (MoWR) have put total utilisable water at 1,123 billion cubic metres as against the current use of 634 billion cubic metres, which reflects the surplus. However, there exists a considerable temporal and spatial variation within the country with respect to water availability. The Indian population is 16 % of the world with 4 % of its water and 2.4 % of its land. The population is expected to increase from 1.2 billion in 2010 to 1.6 billion by 2030. The country’s urban component is expected to increase from 30 % in 2010 to 50 % by 2030 also the per capita income is expected to rise by US$468 to US$17,366 by 2050. The freshwater is crucial need for human wellbeing and sustainable socio-economic development. Global water demand in terms of water withdrawals is projected to increase by around 55 % by 2050, mainly because of growing demands from manufacturing, thermal electricity generation and domestic use. As a result, freshwater availability will be increasingly strained over this period, and more than 40 % of the global population is projected to be living in areas which will face severe water stress through 2050. Seawater and brackish water desalination for reuse represents good demand. The share of water derived from long-distance transfer, desalination and reuse is expected to rise from 1.8 % in 2011 to 5.7 % in 2030. Although the low-cost water resources will continue to remain the dominant source of supply, and the expenditure in developing new water resources could grow by 8.2 % over the period 2013-2018. Spending on water infrastructure by industrial users is expected to outpace the municipal water sector. While the natural resource industries are increasingly pursuing marginal resources, these involve significant wastewater treatment challenges. In other sectors, brand management and corporate social responsibility are driving investments in water-efficient technologies. Increasing population, economic development and urbanisation have led to higher demand for fast depleting fresh water. India has a robust investment opportunity of around Rs. 13.6 lakh crore alone in water sector, so there’s immense business opportunity in India for water solution companies like WABAG. This is coupled with strong international prospects across the water treatment space to bridge the demand-supply deficit, which is estimated to reach 39 % by 2020. WABAG operates on an asset light-EPC led model in water treatment projects across municipal & industrial segments. WABAG has a market share of 14 % in the Indian market. With growing concern on access to clean water and urgent measures to solve the issue of depleting water resources, the investment in water treatment is likely to increase manifold globally. Accordingly, WABAG is expected to benefit significantly by leveraging its Strong domestic presence and rising global footprint. The company’s strong book-to-bill ratio of 2.5 times provides revenue visibility for two years. This coupled with a strong execution track record is expected to lead to 17.1 % revenue CAGR in FY15-18E to around Rs. 3,898 crore while the margin is expected to expand by 0.80 % to 10.4 % over FY15-18E. The company garners a higher EBITDA margin of 13 % to 14 % across its India business, 8 % to 9 % across the India international business and 5 % to 6 % across the Europe segment taking overall EBITDA margin to 9.3 %. WABAG has the strongest portfolio of water treatment, waste water-desalination, etc., in India and unlike most EPC peers has in‐house technology, which is the key to its pole position. Its strong technological competence coupled with a large talent pool impart it the resources to successfully execute complex water projects. WABAG has its inherent skills and execution capabilities in this sector and is very well placed to capture a large pie from these upcoming opportunities. Increasing trend in adoption of desalination process to secure clean water is on its spree & is likely to open up lots of new opportunities for the companies like WABAG.

Outlook and Valuation:

WABAG is a global technological leader in the entire water treatment field managed by professionals and technocrats. The company has a unique business model with strong in-house research. The company has an excellent system for efficient equipment procurement, better engineering & designs. The company also enjoys higher margin in this sector due to close monitoring and cost control. The company runs an asset-light business model by outsourcing the capital-intensive construction business and focusing on delivering the optimum water technology solution. India has low per capita water supply of 146 litres per day versus 500 litres per day in developed nations, this hints huge potential. Also, with rising stringent norms for waste‐water treatment, the scope for WABAG becomes enormous; especially when only less than 30 % of industrial waste‐water is treated before release. The company has made significant inroads in China, Saudi Arabia, Egypt, Spain and Turkey which are important key emerging markets. Company has being clocking in high growth in water and waste‐water treatment. WABAG being an asset‐light business model, which imparts it’s capability to take on larger volume of projects and generate higher RoCE. The company has identified critical areas which are mostly retained in‐house, while non‐critical, low‐value add work is outsourced. WABAG reported flat revenues at Rs. 628.9 Cr on consolidated basis. While domestic revenues surged by 26.6 % to Rs. 371.3 Cr which reflects 59.0 % of total revenues, overseas revenues declined by 20.8 % to Rs. 257.6 Cr owing to - execution slowdown in Nepal project due to local conditions; 11 % depreciation in Euro, and many projects are at initial period of execution. WABAG’s key projects are now contributing significantly to its revenue in Q3FY16 which includes APGENCO’BOP water management project to about Rs. 98.9 Cr, Petronas RAPID ETP, Malaysia of about Rs. 42.1 Cr, PHED Habra, and West Bengal to about Rs. 40.2 Cr, Suplac, Romania about Rs. 34.2 Cr and Istanbul Turnkey O&M project contributed around Rs. 32.8 Cr. While rest of its key overseas project remains in engineering stage and are expected to start contributing from current quarter onwards. WABAG has also set up a separate team for project closure, which will lead to focused attention on closing projects. Wabag strengthened its positioning in Turkey market by bagging third order of Rs. 150.1 Cr from the Turkish Ministry of Environment and Urbanization in the last quarter. Resultantly total order inflow in 9MFY16 stood at Rs. 3360 Cr. Order backlog stands at INR 64.1 bn (book/ bill of 2.5x), which along with framework contracts worth INR 15.4 bn, provides strong revenue visibility. Wabag’s RoE and RoCE is expected to improve from 15.0 % and 17.4 % in FY15 to 18.4% and 21.2 %, respectively, in FY17E. The return on invested capital (RoIC) is expected to improve from 26.5 % in FY15 to 31.9 % in FY17E. Going ahead, Wabag’s growth to come from a revival in industrial capex across Indian and global markets. WABAG being the only listed Indian player with presence across the value chain of water spectrum is the best play on water scarcity theme. Rapid urbanisation, dwindling fresh water reserves, widening demand-supply gap, depleting groundwater level and increasing thrust of government on water & infra sectors, will keep the water treatment business thriving for a long time. Superior return ratios like its RoCE of +20 %, cash rich balance sheet, asset light business model and technological & locational advantage places it above its peers. It is expected that the company’s surplus scenario is likely to continue for the next three years, & will keep its growth story in the coming quarters intact. It is expected that over 2013-2016E, the company can to post a CAGR of 23 % and 21 % in its top-line and bottom-line respectively. At its CMP of Rs. 511.25, the stock trades at 24.81 x FY16E EPS of Rs. 20.60 and 16.92 X FY17E EPS of Rs. 30.20. It is expected that the company’s surplus scenario is likely to continue for the next three years keeping its growth story in the coming quarters also. 

KEY FINANCIALS	FY15	FY16E	FY17E	FY18E
SALES (₹ Crs)	2,428.40	2,690.20	3,341.20	4,131.30
NET PROFIT (₹ Cr)	111.80	111.70	164.20	236.00
EPS (₹)	20.60	20.60	30.20	43.50
PE (x)	28.10	28.10	19.10	13.30
P/BV (x)	3.50	3.20	2.80	2.40
EV/EBITDA (x)	13.90	14.00	9.60	7.20
ROE (%)	12.80	11.80	15.50	19.30
ROCE (%)	19.20	17.00	23.80	29.50

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 % ?) -  Click Here

*As the author of this blog I disclose that I do not hold VA TECH WABAG LTD in my any of the portfolios.

*Reader Friends, grab a fresh hot cup of coffee, turn on your net & browse on to www.bhavikkshah.blogspot.in & take out few minutes to get to know the most interesting world of investment... Till then HAPPY INVESTING, don't forget to Share !!

*Dear Reader friend, if you enjoyed this article, please do share it with your Friends and Colleagues through Facebook and Twitter, and drop in your valuable thoughts in comment box..

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Disclaimer: 

This is a personal blog and presents entirely personal views on stock market. Any statement made in this blog is merely an expression of my personal opinion. These informations are sourced from publicly available data. By using/reading this blog you agree to (i) not to take any investment decision or any other important decisions based on any information, opinion, suggestion, expressions or experience mentioned or presented in this blog (ii) Any investment decisions taken if any would be his/hers sole responsibility. (iii) the author of this blog is not responsible.  

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RETURN ON CAPITAL 

CERA SANITARYWARE LIMITED: WITH GROWTH WITH STYLE !!!

 

Scrip Code: 532443 / CERA

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-à-vis 14 % to 15 % growth reported by the industry. Currently, replacement demand forms 7 % to 8 % of total sanitary ware demand in India vis-à-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-à-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

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