Cera SanitaryWare Ltd

Stock Opportunities Not-so-Hidden Gems
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http://kiraninvestsandlearns.wordpress.com/2010/12/01/cera-sanitaryware-ltd-cera/ Link: http://kiraninvestsandlearns.wordpress.com/2010/12/01/cera-sanitaryware-ltd-cera/

a _
I doesnat managementas

_ multibaggers.I _

foundhere Link: http://kiraninvestsandlearns.wordpress.com/2010/11/26/stock-screeners/ . _ Schlossas < 1, Interest coverage > a whatas < 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.

How to calculate Industry Median? Or where can you get the industry Median data?

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Promoter buying seen on last few days.

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Cera came out with stellar set of numbers today.

Revenue up by 30% y-o-y.

Net profit up by 50% y-o-y.

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The Board of Directors of Cera Sanitaryware Ltd at its meeting held on January 29, 2015, has decided subject to the approval of the members to offer and allot 3,51,000 Equity Shares of Face Value of Rs. 5/- each of the Company to India 2020 Fund II, Limited at a price of Rs. 2,011.50 per share on Preferential basis.

The Board approved subject to the approval of members to increase the aggregate limit of FIIs holding in the Company from 24% to 36%.

http://www.equitybulls.com/admin/news2006/news_det.asp?id=154414

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**Mr. Bharat Mody, strategic advisor of Co.add conf call.**highlights by Capital Mkt

  • The company net profit jumped 50% to Rs 16.16 crore on the back of 31% growth in top line to Rs 209.29 crore for Q3FY15. Operating margin improved to 14.2% from 12.9% corresponding previous quarter. On segmental revenue breakup, sanitary ware accounts close to 73% of total revenue, while faucet ware accounts nearly 16-17% of total revenue and tiles accounts 7% of total revenue. The wellness products such cubicles, bath tubs, steal shower etc. generates 3-4% of total revenue.
  • For nine months ended in December 2014, the company registered a net sales income of Rs 571.23 crore, 28% higher from Rs 445.50 crore in the same period last year. Operating margin improved to 14.3% from 13.4% corresponding previous period.The net profit jumped 40% at Rs 45.55 crore for 9MFY15.
  • The company has raised fund close to Rs 70 crore through a preferential allotment to expand the output of bathroom products, including sanitary ware, faucet ware and tiles.The company plans to expand capacities ready to meet the future demand due to the potential in the Indian market after the launch of Swatch Bharat mission by the Central government and the exploration of new markets in West Bengal and Odisha.
  • Currently, the company has capacity of 27 lakh units a year, which it plans to increase to 30 lakh units by the end of FY2015 and 33 lakh by the second quarter of fiscal 2015-16. Also, its faucet ware capacity is planned to be increased from the current 2,500 units a day to between 7,000-8000 units a day.The company is also looking progressively to acquire controlling stake tiles manufacturing business.
  • The company generates nearly 40-42% of total business from the southern region, which includes Kerala, Karnataka, Tamil Nadu, and Andhra Pradesh. Gujarat contributes 20%. Maharashtra and Rajasthan each contributes nearly 10-12%.
  • The sanitary ware industry is around 2700-3000 crore business, which also shared between both organized and unorganized players.The company market shares expanded to 23-24% from nearly 18% around four-years ago.
  • The Company had taken a small price hike between November and December 2014, which was about an average of 4% and around 12% in some product category, particularly faucet.
  • The company expects to grow 30% in next 3-5 years, through intensifying distribution spread and marketing efforts where the company have strong hold and through entering into new territories. Also, the company expects to maintain EBITDA margin around 14.5-15% and ROE positively above 20-22%.
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**

I don’t believe the below financial goals justify the present price of > Rs. 2000 and current PE of around 45. I think the entire sector is overvalued on high expectations of revenue boost from the Bharat Swacch initiative.

But wouldn’t that initiative drive sales of low-cost products, which companies like Cera/Kajaria may not be manufacturing or even if they quickly launch such low-cost products, they may yield a poor profit margin?

Mr. call.highlights by Capital Mkt **

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I fully agree with bomi.

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Mr. Bharat Mody, addressed the conference call.Key highlights by Capital Mkt

  • The company net profit jumped 14% to Rs 22.12 crore on the back of 15% growth in top line to Rs 250.44 crore for Q4FY15. Operatingmargin (OPM) decreased to 14.4% from 16.1% corresponding previous quarter. The decline in OPM was due to higher inventory build-up on anticipation of bigger turnover but turnover was slightly less. The company sanitaryware sales volume growth slowed to around 5-7% in Q4FY15.
  • ForFY15, the company registered a net sales income of Rs 821.67crore, 24% higher from Rs 663.69 crore in the same period last year. Operating margin was flat at 14.3%. The net profit jumped 30% at Rs 67.66crore.The company recorded a growth of above 51% of total business growth from the four states of southern region, which includes Kerala, Karnataka, Tamil Nadu, and Andhra Pradesh. Also around growth of almost 21% generates from western region which includes Gujarat, Maharashtra and Rajasthan. The northern region business also witnessed a growth of around 23%. The eastern region clocked a growth of around 25%.
  • The company generates nearly 42% of total business from the southern region. Western and northern regioneach contributes around 25%of total business, and central region contributes 3-5% and balance from eastern and north-eastern region.The Company has declared a dividend of Rs 6.25 per share (125% per fully paid equity share of Rs 5).
  • The sanitary ware industry is around 2700-3000 crore business, which also shared between both organized and unorganized players.Presently, the company is not planning to increase the prices. But seeing the increase in demand for building toilets, sanitaryware and ceramic items in the next two-three years, they might increase the price.
  • The company expects more orders in Q1FY16 compared to last year with pick up in Swachh Bharat Abhiyan. The company expects more than 25% growth rate for the FY16 and maintaining bottomline growth at 30%.Also, the company expects EBITDA margin to maintain above 15%.If Swachh Bharat Abhiyan and such campaigns takeoff then growth numbers will be much better.The company expects capex of around Rs 180 crore for next 3 years which will mostly funds from internal accrual.Currently, the company plans to increase sanitaryware capacity to around 32-33 lakh units by the Q2FY16. Also, its faucet-ware capacity is plans to increase from the current 2,500 units a day to between 7,000-8000 units a day by the end of Q1FY16.
3 Likes
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Cera Sanitaryware Ltd has informed BSE that the Company has entered into a marketing agreement with ECE Banyo, the owners of Italian Luxury Sanitaryware brand ISVEA for a period of 5 years, which can be extended later, exclusively for sales, distribution and marketing of ISVEA brand in India. Products of ISVEA brand are designed by well-known Italian designers. The launch of ISVEA brand by the Company in India is expected by July, 2015.

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Mr. Bharat Mody, strategic advisor addressed the call.Key highlights by Capital Mkt
Bathroom products maker Cera Sanitaryware has reported 15% increase in standalone net profit at Rs 15.67 crore for the first quarter ending June 2015. Net sales in the quarter under review went up 20% at Rs 194.26 crore.
The company witnessed growth in all segment in Q1, with highest growth witnessed in Faucetware, meanwhile modest growth also observed in Sanitaryware and Tiles segment.The company sanitaryware sales volume growth was 5% in Q1FY16. The company Faucetware and tiles registered value growth of 16-20% and 12-13%, respectively, quarter on quarter in Q1FY16.The company expects average sanitaryware realization will improves 15-20% or Rs150-200 per piece year on year.The Company power & fuel cost declined 12% in Q1FY16, due to significant use of alternative sources of energy and fall in gas prices. Natural Gas is available to the company at APM -Administered Price Mechanism arrangement which renewed on every five years.Nearly two-third of the Company sanitaryware capacity meets by APM gas. The APM contract presently at Rs 12.5-13.5 which expected to rise by 10% from contract renewal due on December 2015.The Company generates 40% of business form mass-market, 20-23% each from mid-market and upper-market, and remaining 15-16% from top premium products.The company have almost close to 1400 dealers and 14000 retailers. The company expects dealer and retailer will raise 20% in next 2 years.The company witnessed a growth slowdown across the region, with significant slowdown observed in northern region.The company expects to maintain a growth rate of 20-22% for the FY 2016. Also, the company expects EBITDA margin to maintain at around 15%.The company is utilizing 60-70% capacity of increased faucetware capacity of 7,000-8000 units a day. The company plans to increase utilization level to 100% by FY2017The company maintained rolling capex of around Rs 180 crore for next 3 years which will mostly funds from internal accrual.The company expansion plan of sanitaryware capacity to around 32-33 lakh units will takes 8-9 months to complete.

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Karvy Stock Broking is bullish on Cera Sanitaryware and has recommended buy rating on the stock in its research report dated July 22, 2015. The coverage is detailed and well done. Details here : http://www.moneycontrol.com/news/recommendations/buy-cera-sanitaryware-targetrs-2385-karvy_2138121.html

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Mr. Bharat Mody, strategic advisor addr the call.Highlights by Capital Mkt
Bathroom products maker Cera Sanitaryware has achieved 13% rise in top line to Rs 225.30 crore and a 14% increase in net profit to Rs 17.88 crore in the second quarter of the current fiscal ended on September 2015.The company witnessed growth in all segment in Q2, with highest growth witnessed in Faucetware, meanwhile modest growth observed in Sanitaryware and Tiles segment. The company registered growth of 44% in Faucetware, 16% in tiles, and 8% in sanitaryware in Q2FY16.The Company received 63% business from sanitaryware, 21% business from faucetware,13% from tiles, and balanced 3% from allied products. The Company expects sanitaryware business will reduce to 58% from present 63% in mid-term (3-5 years), but faucetware, tiles, and bathroom ware business will increase during the period.The company hasutilized 90% ofincreased faucetware capacity of 7,000-8000 units a day in Q2 FY 2016 and plans to achieve a 95% of capacity utilization by end of FY 2016.The company has maintained rolling capex of around Rs 180 crore for next 3 years which will mostly funds from internal accrual.The company plans expansion of sanitaryware capacity to around 32-33 lakh units from present capacity of 30 lakh units.The Company has entered into a joint venture agreement with Anjani Tiles for setting up a plant to manufacture high-quality ceramic vertified tiles, in Andhra Pradesh. The Company envisages building initial capacity of around 10000 sq meter per day with initial project cost of around Rs 68 crore. The commercial production is expected to start by end of FY 2016.
The Company also decided to open offices in Dubai and/or Sharjah in order to increase exports to West Asian countries.The company has taken price hike of around 3-7% across the products effective from 1st December 2015 to maintain healthy margin.
The Company maintains marketing expenditure of 4.5% as a percentage of sales. It includes media budgets, also includes marketing.The Company has lowered its revenue guidance to 18-20% for FY 2015 from previous forecast of 20-22% due to lack of demand for the products amid low replacement demand from consumers and sluggish growth in real estate sector. Also, the company guides to maintain EBITDA margin at around 15%.

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Cera foraying into gulf market http://profit.ndtv.com/news/corporates/article-cera-to-enter-gulf-market-open-showroom-in-dubai-1244060

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CRISIL latest report on Cera http://www.cera-india.com/CorporateFile/IER%20-%20Dec%202015%20Cera%20Sanitaryware%20Ltd.pdf

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Cera reported today its Q3 nos.

Topline grew 11% YoY
Bottomline grew 24% YoY

Management gives a full year revenue guidance of 900cr +.

Excerpts from the Management interview.

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Key points from Cera Q3 Concall

  • 11.5% increase in topline and 24% increase in net profits
  • EBIDTA margin growth: due to fuel and power cost reduction; on gas front, there is substantial reduction in prices.
  • The over all market is Subdued and continues to remain subdued even now. No uptick is seen at the moment.Slowdown is more visible in commercial sector as compared to housing sector.
  • Overall contribution to topline from various segments: Sanitaryware - 49%; 14% Allied products; 21% from faucets; 13% tiles and 2-3% welness products
  • Employee cost increase is due to expanded capacity both in faucets and sanitary ware; Also inducted few people in sales and distribution channel to deepen brand’s presence
  • In Q4: hope to maintain 15% kind of growth
  • Manufacturing Vs Outsourcing : Faucet:50:50; Sanitary ware: 28% manufactured in house; 13% imports; 7% domestic outsourcing; 14% allied products total outsourcing ; Tiles: 100% outsourcing
  • Gas pricing: 42% on APM gas prices have reduced from 12.5 to 11.25. Company has renewed agreement at 11.25 for 3 years in December 2015 ; non APM gas prices has come down to Rs. 28 per cubic meter from Rs 44 a year ago
  • APM gas supply is likely to continue in medium term as it comes from isolated fields and hence there are no other users of gas. Company has contract for 33000 cubic meter per day supply agreement but due to depletion of fields over time, it only gets 12,000 cubic meter per day. Rest of the demand is met through purchase of non-APM gas
  • Capex plan: 40 Crores incurred in 9 months FY16 + additional capex of 8 crores in Q4 FY16; Sanitrayware capacity expansion plan (3 million to 3.3 million) is deferred at the moment due to subdued market condition. It will be reviewed after 6 months.
  • Demand scenario: no noteworthy change in demand scenario in last quarter. it continues to remain subdued
  • Price hike: Company took price hike from 2-7% across products/region in December 2015. Inspite of subdued demand, company went for price hike as it had not taken any price hike in 15-18 months and it was prudent to pass on part of additional cost during this time to consumers. Company decided not to chase growth at the expense of margin.
  • Faucet segment growth is very high: Jaguar is very strong however dealers/distributors want option hence Cera being a well established brand is well received. Low base also helps. In faucet, there is clear shift from unorganized to organized. 60-62% market is still unorganized.
  • Institutional activity has come down while retail has remained resilient. Subdued market has impacted tier 2, tier 3 market also though with a lag.
  • Cera is only focused on bathroom products at the moment and will not look for entry into any other product segment
  • Tiles JV will be functioning from March. It will have 10,000 square meter capacity and will be almost 100% utilized from the first month as company is selling more than 12,000 square meter tiles. This will mean 75-125 Crore of turnover for JV. Margins will be in 15% range and will match that of likes of Kajaria’s. Company is currently outsourcing tiles manufacturing hence the margin from tiles segment for Cera is in single digits. After production from JV will start, margins will improve and will be reflected. The plant can be scaled up to 3 times capacity at the same location
  • Credit terms of 60 days for all products and sticking to it even in subdued market. Relaxing the credit term may have yielded higher growth however company does not want to chase growth at the cost of risking the bed debt due to lower credit quality. Will continue the same credit policy going forward as well
  • Ad expenses spend: brand has to be reinforced hence spending will continue=at 4-4.5% of topline
  • Faucet: growth of 50% in 9M. Using 55% capacity of faucets. Sanitaryware: 98% capacity utilization
  • Gas price reduction: 44 to 28, reduced during last quarter. Will get reflected in margins in Q4 as well.
  • Sanitaryware industry growth: very subdued growth - 5-6% for category of products in which CERA is present. However, there is very strong growth in very low end products used for Swachh Bharat. However, company is not present in this segment.
  • Anjani tiles: capacity utilization: 75-125 Crore sales potential FY17. Outsourcing will continue in tiles for north west market
  • Distribution in south: 3 years back, Cera was only strong in Kerala, but now have penetrated in Karnataka & Andhra Pradesh reasonably well. They have taken away market share from Parryware and other players in southern market
  • Scale up in other parts of the country: In far east market , company has made dent. 3-4 years ago there was zero contribution from this market. Now it contributes 5-7% of the topline.
  • HSIL & Parryware are the two main competitors; Chinese products are not major threat due to lack of consistency in supply and higher freight cost.
  • Increasing the distribution reach: will intensify presnece in south and strengthen the foothold and deepen the network. Thereafter will focus on increasing penetration in eastern market.
  • Very low debt and net cash of 30 Crore+. Company continues to generate free cash.
14 Likes
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Chinese products hurting domestic manufacturers badly http://www.business-standard.com/article/economy-policy/vitrified-tile-makers-continue-to-lose-30-market-share-amidst-chinese-dumping-116031200393_1.html

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Cera came out with decent Q4 nos. few days back.

http://corporates.bseindia.com/xml-data/corpfiling/AttachHis/D6C44914_DFDC_4407_8A14_B827F8BD7163_134810.pdf

Sales of the company for the Mar’16 quarter are up 12% to Rs 280.59 crores. For the full year the sales are up by 13.6% to Rs 933.68 crores.

Although 13% growth is lower than 25-30% traditional growth it has outperformed the overall industry and peers.

While the employee costs have gone up, other costs like power, transportation cost, etc have decreased and on the back of slight improvement in gross margins, the EBITDA margins of the company have expanded to 17.15% in Mar’16 against 14.41% in Mar’15.

The company has announced a dividend of Rs 9/- per share for FY 16.

For FY17, the management expects a 20% growth in topline with improved margins.

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I checked out the Annual Report for FY16.

In a business such as Cera’s, it is important to see how sales numbers are reported. Cera’s brokerage, commission and discount on sales went up almost 25% from Rs.54 crores in FY15 to Rs.68 crore in FY16. If one nets this off from sales, the sales growth for the full year is only 7.69% (Rs.866 crore in FY16 vs. Rs.804 crore in FY15 after deducting brokerage etc.).

Also, the company’s advertising expenditure actual fell from Rs.33 crore in FY15 to Rs. 26 crore in FY16. Cutting back on advertising expenditure is a standard way of improving the bottom line in difficult times. However, in Cera’s gameplan of building premium brands and moving into high margin products, this can prove harmful in the long run and is not sustainable.

It is thus clear the year has been a difficult one for Cera. Swachh Bharat Abhiyan does not seem to have boosted the topline as was being expected, or may be market is adequately supplied from imports. Real Estate sector is also unlikely to revive anytime soon.

Only when GST becomes a reality, situation will improve as the organized sector is expected to benefit at the cost of unorganized.

Thankfully, capex for the year was low, and the cash position of the company has improved. They should increase the dividend.

Disc.: Invested

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Hi everyone,

Please find the latest results attached.

Thanks,
Kunal

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