Cera SanitaryWare Ltd

Plz check fundoo professor under discussion Castrol.

Thanks!!

thanku Supratikā€¦

Interview with Ceraā€™s Founder/CEO. Inspiring guy. Good watch.

I met a Ceramic and Tap Fittings dealer pre-dominantly stocking Jaquar, Hindware, & Duravit. Dealer is based in central suburbs of Mumbai.

About Jaquar,its becoming more and more obvious that its a tough co. to beat in the market. Its king in faucet ware market (sales of 1200-1500 crs only from faucet ware,has got capacity of producing 60000 faucets/day including outsourcing) and is quite aggressively pitching its sanitary ware by pricing it at competitive rates thus not eating any brand premium,is gaining very good traction since its launch a year back. Currently importing all its sanitary ware from China and plans to set up its own factories in 3-5 years. Hindware has got a big blow after Jaquar entering sanitary ware as its being accepted whole-heartedly due to its brand equity built all along. The dealer even mentioned that people are stocking less of Hindwareā€™s sanitary ware. Jaquar is also aiming to be a complete bathroom solutions brand except tiles (A big plus as its not entering the super competitive market but everything else in bathroom,astute I must say). Jaquar scores big on brand loyalty among architects,the influencers. Got to know that a residential project sells faster Jaquar fittings are used. Has a high end brand Artis,that directly competes with American Standard/Toto/Duravit. Artis faucet ware is manufactured in India and sanitary ware is imported from Italy. Karia has high regards for management of Jaquar,says its very professional and agile. Jaquar gives only 21 days credit!

About Cera,the dealer doesnā€™t know much,he said wonā€™t stock because of better brands available. Heā€™s aware that its gaining traction in the market. Customers coming to him do know Cera vaguely but not much. Said it would be extremely difficult for Cera to do well in faucet ware,Hindware entered market before Jaquar but couldnā€™t do well,Jaquar is the king in faucet ware.

Overall,the dealer felt its not very easy to enter market and make a mark,Jaquar,Cera,Hindware,Parryware are all in quite established. Its all going to be a play on brand,a major deciding factor in buying decision. All foreign brands are even more established brands (some even 100+ years old) but they are playing in a different segment altogether,they do have products equal to Jaquar and HIndwareā€™s premium segment,but designs and all are very basic.

From whatever I understand Jaquar will crush the market now that it has entered into everything bathroom given its brand equity. The only big way Cera can do well is by being present in geographies where Jaquar is not present,which it is,basically Tier II and Tier III. But then,even Jaquar is expanding its reach. And secondly,to play at a price point below Jaquar (donā€™t know if that move will be profitable). So be at places where Jaquar wonā€™t come and wonā€™t be able to sell at its price points. What do you think?? How will things shape up for Cera??

Disclosure : Hold tiny position in Cera.

1 Like

Hi Nilkhil,

Interesting insights from conversation. All of us have experienced the importance of scuttlebutt and insights it brings for analyzing the business (a case in point: Kaveri and Astral!). However, it is important that while we infer/conclude from scuttlebutt we should ensure that our scuttlebutt cover a wider range of stakeholders across market segments and geographies. Thus, an opinion from Jaguar dealer or any such scattered scuttlebutts should be used as starting point to delve deeper into some of the aspects and ask more pertinent questions when we interact with more stakeholders.

Coming to the specific points raised, I think all of us by experience also would agree that for faucetware and fittings, Jaguar has tremendous brand recall and is undisputed leader. Hence, it will be an uphill task to compete with Jaguar and snatch away market share from the company. Also, if one looks at the response to Ceraā€™s faucetware range in last 1.5 years, its tepid. Even Cera management in its interview has admitted the same. Will Cera persist and continue its efforts to break into this market for few more years? will it be able to make dent into market share of Jaguar? I feel the odds are stacked against Cera.

Having said that, it is equally difficult for any new player to take away market share from existing and established players like Cera or Hindware. Over last one year whatever limited interaction that I have had with dealers in western India, two common inputs that I have got from most of the dealers

  1. There is a clear shift in preference towards branded sanitaryware hence organized sector is likely to increase its percentage in overall market

  2. Parryware is slowly losing market share while Hindware also is losing grip in some of the markets while Cera is inching upwards.

I do not know the price points for Jaguar sanitaryware, but I feel it makes sense for Jaguar to position its product as ā€œpremiumā€ product considering the positioning of Jaguar brand of faucetware. On the other hand, Cera caters to mid market segment where their product is position as branded product with good quality at reasonable price. So, middle/upper middle class is the target market. I witnessed that many new housing complexes catering to middle income group have mentioned in their brochure that sanitaryware will be from Cera and fittings will be from Jaguar. It may be inferred that, developers do see as ā€œselling pointā€

As I have been observing sanitaryware brands wherever I travel, I noticed Cera sanitaryware in Intercontinetal, Mumbai (I think they refurbished their rooms/bathrooms). It was a pleasant surprise to me as in most of the five star hotels I have seen only American Standard/Kohler only. But, again this was one off instance and no inference/conclusion should be drawn.

So, personally, I feel that Cera, in sanitaryware market is on strong footing and will continue to grow while they may get sub par returns/business on faucetware. The key thing to monitor will be how prudently management deploys capital going forward. Will management be prudent to do a reality check and make only calibrated investment catering to new segments (other than sanitaryware) or will they be more driven by ambition of becoming ā€œbathroom solution providerā€ irrespective of the merits of capital allocation? If, management acts prudently, Cera can be a steady compounder for time to come.

1 Like

Hey Dhwanil,quite appreciate your views. Iā€™ll do some more reality check,mainly on the price points and get back. If Jaguar sanitary ware is priced more or less like Cera,the construction players will easily switch given the brand equity Jaguar commands. Plus,since its new,the pricing is quite aggressive to penetrate and the co. is giving discounts if both sanitary ware and faucet ware are Jaguar,quite an incentive for the construction player to switch.

good info Nikhil. as far as i know, jaguar is priced at a high premium. i have seen cera being used in some mass market apartments. i see more shops with CERA logo than the rest.

i personally feel, there is enough room for cera even with the competition. and a small market cap of 690 is also a feel good factor. ( i know this is not the right way to look at it)

disc: have a small holding in both cera and kajaria. medium level conviction stocks

Hi All

Recently been to Yamuna Expressway (Greter Noida - Agra ) and saw Cera in most of the toll plaza restrooms. :slight_smile:

Regards

Vikram

Thanku Nikhil, Dhwanil, Gautham and Vikramā€¦

@Gautham- First ceramic shop opened recently in our areaā€¦The hoardings were of Ceraā€¦

Nikhil Jaguar is a well established brand internationally i guessā€¦My friendā€™s dad had bought Jaguar faucets from dubai to their new homeā€¦

And has Dhwanil mentioned it will be an uphill task for Cera against Jaguar faucetsā€¦

In some video have seen management mention that Cera broke even in their first year of operationsā€¦ Hence believe they will be prudent in futureā€¦ But the story needs constant monitoringā€¦

disclosure - Invested. Views will be biased.

The thing to remember is , even the management has said time and again that their playing area is Tier 1 and Tier 2 cities (see video posted earlier).

Jaquar is definitely a premium brand, and they have also dropped their prices substantially to gain market share, but I dont think they will target Tier 1/2 cities so soon.

For now the thing to watch out is the sales growth and margin improvement. Also we need to focus on Strict Working Capital (Debtors + Inventory-Payables). Any change in the market is immediately felt on this. Customers will ask for more credit period, inventory will start piling up etc etc.

We also need to remember that a lot of money is being pumped in the rural areas (places where open sanitation prevailed), so definitely the market will grow too.

Visibility for Sanitaryware players

% of households with no toilets

Rural - 69.3%

Urban - 18.6 %

http://ibnlive.in.com/news/toilet-map-of-india/427047-53.html

( We even lack public urinals on a massive scale w.r.t population )

Just spotted the new cera ad with sonam kapoor on ndtv. The focus is solely on faucetware division. It should go some way in building the cera brand.

Here it is-

http://www.youtube.com/watch?v=HwsDxKnjiOs Link: http://www.youtube.com/watch?v=HwsDxKnjiOs

These guys look very keen on improving brand visibility.

Just saw Star Plusā€™ popular serial Nach Baliye 6 promoā€¦ Cera is the main sponsor.

http://www.adgully.com/nach-baliye-6-goes-bigger-and-bolder-with-a-tinge-of-romance-55909.html

Ceraā€™s Q2FY14 results are out today.

Around 40% increase in the sales figures. PAT margin for HY show decrease from around 9% to 7% odd levels on YoY basis.

Q2FY14 PAT margin is around 6.3%.

Quick reading says that most expense heads are growing at an ok pace. Purchases are growing faster because they are outsourcing more. This segment anyway has lower margins.

WC has been managed well even with increased sales. In absolute terms it has not gone up as much.

I was expecting margins to dip but probably not as much as this.

Disclosure - Invested and intention to continue the position.

Q2 results

Net Sales- 42.5%ā€¦ Net profit- down 3.67 %ā€¦ EPS- 8.40

Info from notes

As part of companyā€™s initiative to reduce pollution and power cost, 2 wind turbines of 2.850 MW is commissioned at Surendranagar and Jamnagar

Due to rupee depreciation, cost of imports increased by 1.62cr

Most of the OPM degradation is driven by change in inventory. If not for that, results would have been spectacular. But, there are certain other numbers in the balance sheet that deserve closer attention.

1). Long/Short term provisions have jumped sharply from 14 crore to 39 crore. Not sure if this is normal or points to large write offs of products pushed to the dealers/retailers.

2). Trade receivable has jumped up from 56 crore to 88 crore. (Should be OK considering 42% jump in sales)

3). Long term loans and advances are up sharply from 9 to 32 crores.

4). Trade receivable at 88 crores is much higher than trade payable at 26 crores.(Paying in cash to buy the products, but not able to recover that in timely fashion from Dealers/retailers)

Are all these indicating that company is pushing a lot of stuff to the dealers and retailers who are not able to sell?

Disc. Staying invested.

In my opinion, margin squeeze was on the cards and was indicated by management as well. Looks like company is focusing on growing topline. Overall, the results on the face does not look spectacular, especially considering the expectations that have been buil in price of the stock. Few points worth mentioning here though.

)- Looks like company is focusing increasingly on improving visibility through higher Ad spend across print media, entertainment channels, movies etc. Hence, I anticipate that ad spend would have increased significantly. First of all, stars/sponsorship donā€™t come cheap and incremental spend of 4-5 crore is substantial change on the expense side. However, this may be termed as investment also. The key question is, how effective this spend is likely to be in increasing visibility (sales) and positioning (margins).

Another perspective is that if additional advt spend is not required to maintain baseline growth 15-20%, one should ALSO consider the performance without this cost (and the picture can change substantially!) to get more realistic picture (Ref. Prof. Bakshiā€™s note on Relaxo)

)- Another thing, very evident is that the sanitaryware space is becoming increasingly crowded. Though, Ceracaters to niche"value for money", I am sure increased competition will eventually mean lower pricing power. Also their overall sales mix is changing and contribution fromproducts where it is a new entrant (faucets/tiles) is increasing.Naturally, these newareaswhere Cera is trying toenter willhave lesspricing power and hence lower margins.

Overall, looks like companyhasfocused on the strategyto achieve scale, even if it comes at the cost of reducedmargin. Will it work or can it backfire? Itā€™s up for discussion!

Thanks & Regards

Dhwanil

Good points - Dhwanil

As long as the company is capital efficient, I am ok with slightly lower margins. If they can sweat the brand expenditure better, its good. The only way they can do that is increase sales. But if profit margins and RoE keep decreasing too much we might have to review the story

Just a thought - If you check Bajaj electricals AR, its a very interesting picture. Apart from fans, they donā€™t manufacture anything at all. Most consumers in India would be surprised if you told them this fact. The appliances division RoEs are very high. Projects division is a low RoE business.

The next few quarters will be interesting to see.