Cera SanitaryWare Ltd

Stock Opportunities Not-so-Hidden Gems
121

Some good points being discussed here.

Actually if we look through the past 2-3 years, Cera has never been a margin expansion play.

OPM peaked in FY12 at 19.5% & has fallen 4% to 15.5% in the next 2 years.

What was driving the profits was exceptional sales growth because of which PAT grew despite margin drop.

This is the first quarter where even amazing sales growth wasn’t enough to prevent profit drop.

As Dhwanil mentioned, this could either be because of more ad spends (which should be good in the long term) or because of more competition in the sanitaryware &/or tiles business (which isn’t good).

As can be seen from this & last balance sheet, company seems to be pushing inventory to distributors which seems to be the main reason for great sales growth as well as margin fall… Maybe slowdown effect.

At 15+ PE & with risk of de-growth, it is getting to situation wherein risk- reward isn’t favorable.

Press release gives no explanation-

http://www.bseindia.com/xml-data/corpfiling/AttachLive/Cera_Sanitaryware_Ltd1_311013_Rst.pdf

Lets see the next few quarters closely.

I am planning to sell one-third of my holding & convert to something better.

122

Jatin/Dhanwil/Gyan/Mallikarjun,

Thanks for reviewing the results here. There are quite a few things that are unclear to me, that I want to clarify with the management. The management is very friendly and is willing to answer very specific questions. It’d be great if we all could work on the questions together here.

Mine are as follows:

(1) About the P&L – Things which took a toll on the profits are as follows:

(a) 2 Cr added cost of materials consumed. Out of which they have indicated 1.5 Cr was because of recent rupee depreciation. What is their forex cover? Do we expect to see this item the next quarter as well?

(b) 10 Cr additional purchases of outsourced stock. Some portion of this could have also been attributable to the above 1.5 Cr depreciation note.

© Inventory accumulation impact was around 10 Cr. 7.5 Cr clearance of inventory last year vs 2.5 Cr accumulation of inventory this year. Not being an accountant I fail to understand why this comes under expenses and P&L. I used to think this comes under cash flow and balance sheet.

(d) Depreciation increased by 1 Cr. Power costs increased by 2 Cr. This might indicate management has added new capacity and is not fully utilized yet. Need to confirm.

(e) Other expenses increased by 10 Cr (or 30%); How much of this is attributable to ad-spend?

Overall if we add back the 1.5 Cr (depreciation) + 10 Cr (inventory) + 1 Cr (depreciation) + 10 Cr (ad spend), we get a Profit Before Tax increase of over 100%, and picture looks super optimistic.

Of-course the challenge then is to figure out which of these additional expenses are healthy and which are toxic.

Do you guys have any specific comments on each of the above points?

(2) About the balance sheet – Balance sheet degradations are very real, as pointed out by Gyan Roy. Specifically it’s fishy that last quarter the company has not attached the balance sheet. We need convincing explanations for the following:

(a) 20 Cr increase in long term provisions & 5 Cr increase in short term provisions. Quite alarming.

(b) 20 Cr increase in long term loans and advances.

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

Really appreciate clarifications or alternate interpretations here. Please add any other queries you might have.

Thanks,

-Prasanna

123

dont you think sales growth is tougher than cost cutting.
I THINK SALES GROWTH IS COMMENDABLE. shouldnt take call one quarter.

124

Sales growth is relatively easy if not accompanied with equivalent cash flow. Quality of sales growth is more important than sales growth itself as sooner of later there is back pressure from recieveables.

Given the above, we should not apply this every quarter. I think real estate sector issues are driving the margins down but it should reverse soon and company should just focus on restoring business quality.

This one is a dark horse for next 10-15 years as almost every house needs newer bathrooms and sooner of later we will also need luxory bathrooms in our house lolz :-).

125

Hi Prasanna,

You have already covered most of the important points. Please add the following to the list.

a. Considering the margin pressures, are they planning to raise prices. Have they done it in near past, or is there any possibility of taking a price increase in the near future.

b. Which of the segments(Sanitary ware/Faucet ware/Tiles) are seeing margin pressure? Is it segment specific? Is it related to traded goods?

c. Profitability of Faucet ware/Tiles segment? Have we reached break even or we are still bleeding?

d. Long term/Short term provisions - Sources?

e. Will we see more increase in power cost going forward, considering the government is planning to raise the gas prices? How much reduction in margin we are expecting from the power cost rise.

Regards,

Gyan

126

Prasanna i am not good at analyzing balance sheet… Gyan and you have covered almost everything i guess…

Earlier they had passed cost to consumers due to rupee depreciation… Considering rupee has stabilized around 60-63 can we expect them to raise prices…

They were aiming to increase exports… Any info on that will be helpful… Why haven’t exports offset losses due to imports…

Since the space is heating up, what are their plans to emerge stronger…

Regards

mallikarjun

127

See, once the Sales Growth is in place you can still control costs. The thing is their margins are getting hurt, but understand the fact that you cannot have a linear margin growth. you need to spend time on brand building, take the occasional margin dip on the chin and grow your market share. After that you can get the margins back with price increases.

One quarter margin dip and people run like anything - thats not how you analyse stocks

128

Promoter buying continues.

http://www.moneycontrol.com/livefeed_pdf/Nov2013/Cera_Sanitaryware_Ltd_141113_SAST2.pdf

129

Cera at all time high, and…

…the promoter buying continues.

http://www.moneycontrol.com/stocks/reports/cera-sanitaryware-limited-750214.html

Adds to the comfort level in the Cera story.

130

Apparently, the market pendulum for Cera seems to be swinging from “pessimism” couple of years ago to “extreme optimism”! But it’s not the only stock where this has happened. Re-rating of lot of steady performers is underway as it typically happens during the bull market. Time to be cautious and keep a tab on performance and valuation both…

I have always been impressed by company’s ability to do something different (and sensible too!). Looks like management is making this a habit. Have a look at the new product from the stable of Cera called “Cerenity”, mobile toilet seat sanitizer, claimed as first of its kind product for women hygeine. Here is the link

http://www.cerenity.co.in/Default.aspx

Seems very interesting to me, not that it changes anything materially for Cera in terms of numbers, but it does demonstrate that management is applying out of the box thinking for “total bathroom solution” and courageously wading into personal care category…

131

Like the concept of cerenity. It is clear that Cera is trying really hard to make a mark and market seems to be rewarding it.

132

Hi,

People/seniors tracking CERA closely…would it be advisable to book partial profits at current levels? Previously I have had bad experience with booking profits (early). I booked profits in ajanta around 600-700 levels (pre split) and was never able to buy again. So I am not sure if we should book profits in still growing companies where story remains intact…views/suggestions would be welcome.

I personally feel that valuations at this point are bit stretched…if some kind of a re-rating is taking place then I may be completely wrong.

133

*if we have strong conviction for the company then look for the technicals

if the company is in multi year BULL cycle ,look for the entry point.

50dma or 100 dma is the good entry point

if the growth is intact sell only when it breaks 50 week MA.

134

Read it here:http://asia.nikkei.com/Business/Trends/Shamsung-smartphones-strain-IndiaChina-ties

“In Gujarat’s ceramic industry, which mainly makes tiles and sanitary ware, local small and midsize players face the abyss. Low-priced ceramic imports from China are growing at dizzy annual rates of around 40%, posing a serious threat to local makers, which are also facing rising costs of fuel and materials.”

135

Hi Anil,

It is important to have a sense of valuation in the companies you are invested in. And, have some idea of the sell condition when you are buying. For growing companies, I follow a simple PE (sometimes PEG) ratio. But you need to have something in which you are convinced about.

Also, please remember, more money is lost while trying to be the last person to leave after the party ends. It is always better to enjoy the party, have your meal and get out while the music is still playing :wink:

Abhishek

136

Easier said than done.

If you like a stock for a 5 yr period (like Mayur, Cera, Astral etc) & expect it to grow at 20-30% CAGR, when would you sell it?

15PE, 20 PE, 25 PE, 30 PE or never (as long as growth stays)?

Finding it tough to answer this. What’s your take Abhishek?

)- Jatin

;))

Abhishek

137

While Valuations may be a bit stretched at current levels, it does not make sense to sell for following reasons :

a. EVen at Current Price, the Market Cap is 1.6 Times the Sales.

b. At present price levels, PE is 18 times FY 14 Earning. It Is not too expensive, for a company growing at roughly 30%+

c.Visibility and Sales are only increasing (along with Decent Margins). Company has invested a lot in Brand Building and it should only add.

d. Selling now, for a small temporary drop, may lead to short term taxes, Transactions costs, and chances of missing on a good stock, which may continue to do good (barring short term fluctuations).

Lets hang on till the numbers look good. Let price be a function of the numbers

138

As Munger said, Investing is simple, but not easy!!

I am not suggesting a particular PE to get out. What I am suggesting is that when one invests they should have a fairly good idea of when they will get out. It could be:

  • a particular PE
  • a particular price
  • a particular event (like drop in NPM/OPM for 3 consecutive quarters)

and so on…

Unless one knows the exit condition, the sell point will always be hazy. Also, one needs to be extra careful of good performing stocks because there is a tendency to project the past performance on to the future as well.

What I am trying to articulate is at the end of the day, it has to be an investor’s own decision to buy or sell. And he has to be very clear in his own mind why he is doing what he is doing. Sometimes, after selling, the price will shoot up. So be it. In the markets, we cannot be right all the time. This is what experience has taught me.

Abhishek

)- Jatin

Hi Anil,

It is important to have a sense of valuation in the companies you are invested in. And, have some idea of the sell condition when you are buying. For growing companies, I follow a simple PE (sometimes PEG) ratio. But you need to have something in which you are convinced about.

Also, please remember, more money is lost while trying to be the last person to leave after the party ends. It is always better to enjoy the party, have your meal and get out while the music is still playing ;))

Abhishek

139

I agree with Abhishek here. I have started a practice of writing down reasons why I purchased a particular stock and correspondingly parameters which would compel me to sell it. This way you do not have to worry about exit levels as it is decided beforehand by you.

As regards missing potential multibaggers, if one has had negative experience here, then one would do well to go back and revisit the sell parameters which may have been wrong in the first place. You can use this learning the next time you set the sell parameters.

This method helps me by ignoring broader market levels as well as the accompanying noise that follows.

140

For the Cera sceptics … :slight_smile:

http://rakesh-jhunjhunwala.in/index.php/2014/01/10/nalanda-capital-shows-confidence-in-cera-sanitaryware-and-buys-more-stock/

Disc : Cera is my 3rd largest holding, planning add more of it at cmp

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