ValuePickr Forum

Cera SanitaryWare Ltd

(Kiran) #1

Hi All,

This is my first post on ValuePickr. I blogged about Cera Sanitary ware at

http://kiraninvestsandlearns.wordpress.com/2010/12/01/cera-sanitaryware-ltd-cera/

I have attached the analysis. Let me know your thoughts.

Since I have recently started documenting my stock picks (or stock analysis), I will state some of the rules I abide by (most of the time a after all, I am prone to stupidity):
I look for stocks with a low P/E, low P/B, high ROCE (ROE, I think doesnat account for debt and hence a little skeptical), low D/E, good operating and NPM, consistent increase in Sales, EPS, OM and NPM over 3-5 yrs and finally low EV/EBITDA. If all this is good, then I look at the managementas track record. If all the above are satisfied, I then do a deep dive of the stock. As you realise by the above criteria, I hate losing money even if that means I overlook a few so-called multibaggers.

I use normal screeners to find such stocks. A list of screeners can be foundhere.

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One of the stocks that came under this purview was CERA.

A brief financial snapshot of CERA (courtesy ValuePickr):

CMP (01/Dec/2010): Rs. 158/-

Market Capitalisation 102.38

Face Value (FV) (#) 5.00

Shares Outstanding 0.62

Equity Capital (Rs. Cr.) 3.11

Foreign (FII) Shareholding (%) 2.70

Promoters Shareholding (%) 54.02

So, one of Walter Schlossas major criteria is satisfied: High Promoter holding. In this case > 50%.

Moving along,

Variable Current Industry Median

Net Profit Margin 8.21 6.57

Operating Profit Margin 17.47 16.86

Asset Turnover 1.49 0.82

Return on Assets 12.23 5.12

Financial Leverage 1.52 1.74

Return on Equity 18.56 12.13

Debt to Equity 0.52 0.70

Return on Capital 22.27 11.95

Interest Coverage 6.02 3.65

Quick Ratio 1.35 1.61

Current Ratio 1.93 2.37

Debtor Days 70.13 42.70

Inventory Days 131.65 113.60

D/E < 1, Interest coverage > 5, ROCE > 20% (almost double the industry median), ROE > 15%, healthy net and operating margins (close to industry median) a whatas not to like?

Variable Current Historical Average Industry Median

Price Close (Rs.) 164.60

Book Value per share 113.54 45.51

Cash flow per share 28.23 7.29

Earnings per share 21.08 4.99

Dividend per share 1.99 0.99

Sales per share 256.80 90.40

Free cash flow per share 21.77 0.53

Price to sales 0.64 0.56 0.69

Price to book value 1.45 1.32 1.19

Price to cash flow 5.83 6.23 4.02

Price to earnings 7.81 6.99 7.90

Price to free cash flow 7.56 -3.99 1.56

Dividend Yield 1.21 1.34 1.18

P/E < 10, P/B < 1.5 (I guess as of today, its close to 2), High P/FCF, Cash flow per share far higher than industry median a Awesome.
Letas look at the history of managementas performance, rather than a single snapshot (just to ensure we are not under the influence of some accounting shenanigans or one time fad market)

Variable FY05 FY06 FY07 FY08 FY09

Operating Profit Margin 10.98 15.45 17.74 16.74 17.47
Return on Assets 6.56 12.21 11.83 10.31 12.23

Return on Equity 10.43 20.88 19.23 17.21 18.56

Return on Capital 13.77 21.43 21.21 19.19 22.27
Interest Coverage 4.83 7.45 7.14 5.90 6.02
Again, whatas not to like in this. Excellent Return on capital, very good interest coverage etc.

What about cashflows, you say?

Variable FY05 FY06 FY07 FY08 FY09
Cash from Operating Activities (Rs. Cr.) 4.06 6.92 10.09 10.20 17.56

A healthy growth in Cashflows from Operating activities.
Everything looks great. So, is this a screaming buy?

I would definitely buy it for the long term. Maybe a value buy at current levels too. Screaming buy? Not too sure. Here are my reasons -

  1. Sanitaryware is a commodity market. Although we are slowly moving towards branding in Sanitaryware, we are still in the initial phases. Local players can chip away with low prices.

  2. Sanitaryware has a high correlation to the real estate market. With the current rumblings in the real estate market, I might take a small position now and increase my position if it corrects.

  3. HSIL (Hind Ware) has a better mindshare in terms of Sanitaryware. HSIL though quotes at 1.5 times Ceraas P/E. HSILas RoCE and RoE are almost half of Cera. And hence is not a buy in this industry. [Cera’s promoter by the way was in the same family as HSIL, but broke away to set up Cera]

  4. Can a commodity company command a higher multiple than 8-10? I am not too sure. I request you guys to pitch in.

Having said all that, a little more into what Cera wants to do in the near future:

aThe company, which enjoys 20 per cent share of Rs 1000 crore organised sanitaryware market in India, has already taken up substantial expansion in last four year involving an investment of Rs 53 crore.

Faucetsware plant of the company will be operational by September 2010. It is actively considering doubling the production capacity from 2,500 pieces to 5,000 pieces per day at Kadi. The cost of this capacity increase is likely at Rs 18 crore. Cera is also planning construction of a new fire clay plant entailing production of large wash basin. The approximate cost of this plant is Rs 3 crore.
_Cera is also planning to set up a new research and development centre and a display centre, costing approximately Rs 1 crore._It is exploring the possibility of registration of CERA brand or any other new brand for business development in Europe. The Company may also consider acquisition of the existing brand or any existing company in Europe, depending on the European market conditions.a

I believe given the managementas track record, they can do a good job of it. Cera is a definite buy, in my opinion and can safely deliver atleast 15% growth annually, if not more.

Disclosure: I donat hold any Cera stock as of today. And more importantly, this is not investing advice. Please do your due diligence before investing in Cera.

(Hitesh Patel) #2

Good detailed analysis.

Just a small correction to be made. Market cap of Cera is 197 crores and not 102 crores as you put up. Probably to do with the stock going ex bonus. Post bonus current equity is 6.33 crores. FV is Rs 5.

Coming to half yearly results, sales up to 113 crores (H1 FY 10 at 91 cr)

and net profits for first half at 12 cr vs 8.11 cr for H1 FY 10.

Half yearly eps is around 9.59 and second half usually being better for such companies, I think company could do eps for full year in excess of around 20-22.

Having looked at everything you put up, this looks a great buy for the following reasons:

1). Amazing consistency in last five years in terms of growth in sales and NP.

2). Above average profitability and balance sheet strength if you consider peers

3). For FY 11 if all goes as expected, the company can have ROE in excess of 20 comfortably.

4). The brand value of Cera does hold some promise. I see a lot of sanitary ware people stocking up cera goods. Although HSIL does seem to get higher marks in terms of people’s choice. But this brand strength has not reflected itself into growth in case of HSIL. Plus HSIL is also into glass bottle segment.

NEGATIVES:

There has been some selling by promoters since Feb 2010, although not too alarming.

The drubbing on real estate sector will rub off on this stock as well although Cera is well positioned to address the replacement/renovation market as well.

Low dividend payout.

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In my opinion, the current market correction offers a good entry point to long term investors in the stock. What I really like is the regular 20-30% growth year on year accompanied with similar growth in profits since fy 05. Difficult to find such companies which were not too much affected by the FY 09 meltdown as well. Few that come to mind are ajanta pharma and VST tillers.

Do you have the annual report/s of the company? I cant locate on website.

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(Kiran) #3

Thanks Hitesh.

My bad - the market cap is indeed 197 crores. I missed the stock ex-bonus capitalization part. Thanks for pointing it out.

Low dividend payout indeed is a concern. However, I do think it has some way to go (in terms of investments in capacity and branded stores) before they start paying out dividends. We may expect dividend to increase in the next few years (although, I would not bet my house on it :))

Ajanta Pharma and VST tillers - haven’t looked at Ajanta Pharma yet. Will look in now. Am invested in VST tillers - excellent company with good growth prospects.

Nope Hitesh, I was not able to find the latest annual report either (NSE/BSE/Company website et al). Report Junction has it, but it’s probably behind the pay wall.

Kiran

(Hitesh Patel) #4

Hi

I got a soft copy of the AR for fy 10 from a friend. I went through it and liked the company. What impresses me is the amazing consistency in growth. And with all the expansions set to contribute to further growth, I think this could be a good stock to own.

regards

(Vinod MS) #5

Hi, Hindware had a fantastic Q-3 with 177% growth in PAT. Current CMP is at the July levels. Kiran, are you still tracking this segment?

(Kiran) #6

Vinod,

Stellar results from HSIL, ain’t it? There’s been some battering down of HSIL stock since late November. I wonder what the reason is though.

I am still holding on to CERA. I think it has a higher chance of re-rating than HSIL although HSIL at these levels has started to look attractive. I am not pulling the trigger yet. Do you have a link to the conference call of HSIL. I wonder how they achieved so much growth.

From a macro-economy point of view, with interest rates rising et al, real estate is bound to slow down (atleast construction of new apartments, if not the prices of an apartment) and might impact HSIL and Cera (probably ‘will’ is the right word). Probably, we’ll get further downside to HSIL where we can enter? I have no clue. Bottomline, am not convinced of the return on the stock at these levels yet :slight_smile:

(Billu) #7

Well I wanted to invest in a sanitaryware company for the simple reason that whenever I went to “native place”, I’m seeing every house that remaking the toilet is fitting western toilets. The reason being that for arthritis patients, its easier to poo.

Now yes, western toilets can be made by small scale industries as well, but people want something aesthetic, if they can afford it, and if somebody is getting two toilets in their house, they sure can afford it. Hence I figure that since stylish toilets would be made better by big players, invest in big.

Now Cera and HSIL are two biggest, but HSIL is higher priced than cera, hence bought cera.

(Manish B Gajria) #8

Has anyone budgeted the China factor while investing such companies? I was in China two weeks ago and what I saw there was insanity. The choice of stuff - all building materials - sanitary ware, lighting, furniture, artifacts, flooring / tiles, marble and so on is just too much. Great choice and everything at 30% to 75% lesser, even after budgeting logistics and customs duties. Am sure this would have some effect on all the companies in these segments over a period. Plus, out of what I know from little interaction with building industry / builders, anyone who is doing buildings and hotels these days buys most of their supplies from China and just fit out this stuff in India.

Just a thought, worth mulling about.

Regards.

(TCX) #9

astonishing!! thanks for bringing a dimension to the China threat:)

(Kiran) #10

This China dumping threat has been continuing for the past 15 years. I still remember we excited about Rs.50/- walkmans that the Chinese were about to dump on our shores when we were back in school.

Almost everything and anything in manufacturing seems to have this China threat.

I have got to a state where the lines have blurred between a China dumping threat and an actual China threat. Can you give any example across industries where some company’s earnings got affected by the Chinese threat say for the past 10 years?

I can’t seem to recollect any. I am not trying to have blinkers and diss away this threat for Cera. The deal is, how do I objectively evaluate this threat? I am much at failing here. The bigger threat to Cera as I see is a real estate slowdown due to excess supply of apartments and office space. With interest rate hikes still quite a way to go, this seems to be the real problem for Cera’s earnings, although I am not complaining about the appreciation over the past 6 months.

Insights are invited please. How do you objectively evaluate a Chinese dumping threat, not only for Cera, but across any item manufacturing industry?

(Hitesh Patel) #11

hi

I agree with you kiran. too much emphasis is given to the china factor without actually looking into the numbers. For companies like cera just one look at the numbers should suffice to prove that its a great company. What remains is to buy it at reasonable valuations and one can easily make money.

(biju john) #12

all financial ratios etc look good and the potential seems to be there,would be good if somebody can give feedback on management(vision & integrity),have there been any management interaction with any members on this one

(Prabeesh) #13

Cera MD Vidush Somany died today. The stock is down by 10%. Will need to wait and see who is gonna take over his position.

I see no activity in this thread have people stopped following Cera?

(Sukhvinder) #14

Its really sad news as he was just 31 yrs.

Passing away Vidush - next gonna future MD, is a big blow to company. This company now seems to be in a bigtroublenow as who will take fwd after Vikram Somany’s term is complete. huge fall in stock price is justified seeing a big gap in senior mgmt position now as basically cera is family owned business.

(Dhwanil Desai) #15

bigtroublenow

Yes, It is indeed sad to hear about untimely demise of Mr.Vidush Somany. May his soul rest in peace. He was spearheading the growth of the company. Mr. Vikram somany is the founder promoter and has been instrumental in building the company from scratch. Hence, to conclude that exit of Mr. Vidush somany is going to alter the fortune of the company greatly in the times to come may not be appropriate. However, succession strategy needs to be evolved and clarity on that aspect is going to emerge in few quarters as we know who is going to fill in the shoes of Mr.Vidush Somany. In terms of pure probability, chances of current management selling off majority/substantial stake to some other industry players in the longer run has increased. However, currently one has to be watchful of how things move at organizational level.

It would be interesting to know what is the take by other community members.

Best Regards

Dhwanil Desai

(Hitesh Patel) #16

Sad news indeeed. Imagine the shock for the family. May god give strength to the bereaved family to bear this loss.

Regarding stock tanking 10% I guess this provides good opportunity for those wanting to buy and who could not buy it bcos of the run up.

Basic premise is that this business was not built and scaled overnight. Similarly it is not going to lose its steam immediately.

One has to look at the characteristics of the business. Looks like a business which is not too complicated to run.

Refer to Lynch lingo – A business any idiot can run – I think in absence of Vidush Somany the heir apparent, now the onus probably will go to someone else who has to be reasonably able to run this wonderful business.

(Abhishek Basumallick) #17

With the untimely death of Mr. Vidush Somany, the MD of Cera, there are a lot of questions in the mind of investors. Here are possibilities:-

  1. There will not be any significant long term impact to the performance to the company. Mr. Vikram Somany, the founder and CMD of the company will continue to drive the company.

  2. If there are no natural successors, then Mr. Vikram Somany may decide to sell out to another company at a later point in time.

  3. If there are other potential natural successors, then Mr. Vikram Somany may continue at the helm or hand over to a professional CEO, till the successor is groomed.

Whichever scenario plays out, the business may see short-to-medium term weakness as it adjusts itself on the loss of its prime mover. The valuation is also not cheap.

Adventurous investors can continue to hold with a stop loss around 320-325 levels. I would suggest gradual profit booking of atleast 50% of your positions and then waiting to see how the business actually pans out. At this moment the risk-reward is NOT in favour of the long term investor.

Disclosure: I am invested in Cera Sanitrayware and HSIL and my views are likely to be biased. Please do your own due diligence before investing.

(Darshit) #18

Hi guys, anyone attending the AGM on 12th. Also the company is doing analystmeet today in mumbai todiscussthe successor thing and its long term plan, will update it with the details. I dont think in the medium term their is going to be any impact on theperformance of the company.

(Dhwanil Desai) #19

Recently, I was in Mahabaleshwar for vacation and Stayed at Keys resort. It was a top notch resort probably the best in Mahabaleshwar (ranked 1st by tripadvisor). And to my surprise, all the sanitarywares werefrom Cera and that too their “snowwhite” products. It is a relatively newly built resort may be around late 2010-2011. Till now, at all privileged places, I have noticed big brands like kohler, american standards and parryware. It was the first luxury hotel where I saw Cera gaining foot hold. To me, it does imply that Cera is slowly moving up the value chain in terms of its brand equity in premium segment.

Best Regards

Dhwanil Desai

(Manish Palande) #20

Hi,

Any updates from the analyst meet held by the Company in Mumbai yesterday?

Regards,

Manish Palande