Cera SanitaryWare Ltd

Difficult to answer sitting in a RE crisis. The historical growth has been 20%+ and if we go by the current RoE (18%), the SGR is 15% or so. So for a well run company like Cera, expecting them to grow at SGR is not too much to ask. At least, they have done it in the past (i.e. At higher RoE and higher SGR).

My thesis is that they will eventually manage to derive additional value from the other businesses like Tiles and Kitchenware. Remember, they were not always this successful in Sanitaryware. It was a uphill battle for 20+ years. My sense is that they already know how to build brands and distribution networks. This should help them with their newer businesses as well.

But everything has a price. I believe Cera offers value at 2400-2500 levels. My average purchase price is also around the same levels. I wouldn’t want to risk paying higher.

I generally don’t recommend click-of-a-button Valuation tools. But sometimes, just to get a broad sense, I use this: http://www.moneychimp.com/articles/valuation/buffett_calc.htm

  1. 14.95% (Current SGR) upto 20 years, leveling off to 5% at 15% Cost of Equity gives us a value of Rs. 2,692.
  2. 10% 20 years, leveling off to 5% at 11.2% Cost of Equity (CAPM Cost of Equity) gives us a value of Rs. 2,799.

I prefer #1 method. But I personally think even 20 years does not do justice to the CAP Cera can actually have. So at the most, I can settle by claiming a lesser MoS and say that the final value is likely 2400-2500.

I haven’t re-valued Cera since the business has not changed much (As in, a proper full-blown DCF). But I would certainly like to once we get some clear resolutions for Real Estate.

1 Like