Cera : Risks & Concerns
** Unorganized segment. ** sectorâs ** The brands **
3)Lower-than-expected volume growth lower profitability ** Any policy ** ** Any brass, **** Slowdown sector ** ** the demand. ** ** replacement share. **** in Ceraâs ** low.
8) The ** rupee-dollar ** Delays in capacity expansion
Amara Raja ** Increase : âlead pass through agreementsâ with OEMs, thereâs
Let me take the easy one first! Apparently, it seems you are able to read my mind! Well, on ARBL front, I am getting more and more convinced and hence actively thinking of increasing portfolio weight. However, I am still evaluating it with my current portfolio stocks to do the rebalancing. So, In spite of my efforts, I am not able to poke holes into ARBL story and conviction level is pretty high. Risks that you have mentioned, I can only say that on business front, company has been able to manage these risks and have come out with flying colors. So unless lead prices move up substantially or excide decides to do something silly, I am comfortable on business front. On the management side, if one reads about Galla family background, disclosures and transparency in the report, I would not consider Mr. Galla entering politics as big risk for the company.
So now moving on to Cera, I would like to share my views point wise for greater clarity.
Unorganized market: Indian sanitaryware industry has been slowly moving to a stage where brand/quality does play an important role in buying decision of sanitaryware products for increasingly larger segment (upper middle class, middle class and upper class). Benefits that you have mentioned are there for years and Cera and other organized players have grown despite the competition. Market share of unorganized players has been decreasing in the overall pie and has gone down from 70% to 50%. While l was moving around in Ahmedabad looking to buy new house, almost all newschemes had branded sanitaryware as feature. I think it does provide a pointer to general aspirational level!
Foriegn Players: In my opinion Cera is "value for money" brand andis not competing with Grohe, Kohler, American Standards for that matter. To give you an example, if you go to kohler website, you will find product similar to that of Cera available at 50-60% premium. For typical wall mounted EWC, average price for Cera is 13-14,000 while for Kohler it is roughly 19-20,000. Same for American Standards. Yes, Cera is planning to move up value chain, however their philosophy is deeply rooted in value for money and will remain so for a long time because that is their core strength. However, I do see Jaguar denting market share of Cera/Parryware/HSIL because its price points are comparable, it has good brand equity and well spread out distribution network. They have entered into the market recently hence, I would be curious to know how it affects the competitve landscape.
**Government Policy Change: **I am not sure what is the concern here, as imports are allowed in the sector and most of the companies import 30-40% of products from china. In terms of housing sector, I have not seen any government which has come out with policy that restricts housing sector in the entire country. So over a longer period, I see good prospects for indian housing sector, if India continues to grow at healthy rate of even 5-6%
**Slowdown in Housing Sector: **Yes, in short term, one may be staring at slow down however, on a longer term basis I do not see any structural slow down in Indian housing sector. Whatever projections that I have come across for indian sanitaryware industry's growth, it is projected to grow at 13-15% for next few years.
**Faucetware: **Yes, i too see this as threat especially if they go for large scale expansion. Jaguar is too strong a brand to compete as it has huge brand equity. I was going through the faucetwares products of both Cera and Jaguar and apparently, Cera's most of the offerings in the premium range are comparable to that of Jaguar. How far Cera will be able to compete with Jaguar remains to be seen. In the longer term, Cera's vision is to become home soultion provider which may also lead it to enter into new products which it may not be able to capitalize on.
Delay in capacity expansion: Typically, Cera's track record in execution is decent. Moreover, the expansions are gradual and capital outlay is not too large as compared to their cashflows. Secondly, most of these projects are not very complex to execute and hence likelihood of inordinate delay are limited.
**Acquisition: **Nothing has come through on this front inspite of management indicating about such deal for last one year. Secondly, post the demise of Mr.Vidush Somany, management may not be keen to pursue inorganic growth immidiately. However that said, if Cera indeed goes for large ticket acquisition (compared to its size), it will be a risk as 70% of acquisitions fail to add value and as you rightly pointed out it will the first one for Cera so odds will be stacked against Cera.
Now coming back to why I hold Cera, I believe that brand equity with distribution reach is the right way to build moat. However, currently Cera has limited moat but I see a possibility of such moat extending if they are able to leverage brand equity while increasing its reach and maintaing its "value for money" appeal. Coming to valuation part, at current price, most of the upside is captured. However, I am still not able to find very many companies which have a strong possibility of building long term moat due to good business and having decent management available at decent valuation. I still see company steadily growing at 20% rate for next few years which is not bad at all in current scenario. Moreover, if Cera is able to build the moat over next 5 years by smart positioning, it is likely to result into a good long term play.
Hope it covers most the points raised by you and clarifies on my thought process.