Hi, I have following observations about Cera please share your views
after death of Vidush Somany management did not share any clear succession plan . Of course Mr Atul Sanghvi and other professionals are there in the management still there is no clarity about succession plan. ms Deepshikha Khaitan (Daughter of Vikram Somani ) is also there in board if we assume she is a candidate to carry forward. In that case Abhishek Khaitan, MD Radico Khaitan (Deepshika’s Husband) can manage the business indirectly. How do you assess this situation ?
CERA has moat of large distribution network , other brands like kajaria, HSIL also have large no of distributors and retailers then how we can say CERA has any specific advantage over others.
In last 2-3 years they have entered in 3 subsidiaries business and one joint venture, First they entered in Anjani tiles in 2015 as susidiary and now MILO tiles as joint venture.Is there any specific reason for not doing tiles manufacturing business on their own. Have you calculated the return (IRR) from these businesses ?
I think the most attractive proposition in Cera is that it is a business with a very large Competitive Advantage Period. Even when RE is in doldrums, the business is able to produce >15% RoE. Also, we know that the opportunity size is huge. Couple that with Cera’s brand recall and you have got yourself a business that can last very, very long. Even Ian Cassel puts Cera into the category of businesses that can ‘last for a 100 years’.
So while growth may very well moderate to 15%, it is the longevity of growth that is by far the more interesting component.
I generally don’t place too much weight on the management. I understand that a good management team is essential. But more important are the systems in place and work culture. If these are good, then a management only has the work of a moderator, not an administrator. So I am not too worried about who is going to lead Cera. But we should definitely be watchful in case the new management loses their long term vision for short term profits (Or generally any other mess ups).
Like I said earlier, I believe the opportunity size is massive. There is no need to wrestle market share from another organized player. There is plenty of market left to capture and second to that, there is a lot of market to be captured from the unorganized players.
As mentioned in the concall, it is easy for upscale brands like Cera to enter the low margin Tiles business. But it is difficult for a Kajaria to do the opposite. Cera has already captured 1% of the Organized Tiles market in a short time. You don’t see Kajaria capturing 1% or even 0.5% of the Sanitaryware market.
It is standard practice to do JVs when you are just starting out in a business. It is like putting on training wheels. Many companies do it.
I don’t think they have shown us a break up of Capex and Revenues for each venture. So it is difficult to judge them individually. The Tiles business overall has been doing well.
Despite the CAP etc. If the company’s earnings growth rate fall to less than 10%. Don’t you think there are better opportunities than this? Yes, agreed. I too like the business and the management. Where i believe i am going wrong is on the potential growth this co can achieve. Considering there are many other co’s in India which are already growing at more than 15%. Why not to allocate there? Just purely on the basis of opportunity cost without falling in love with this business. What do you think? It’s more of a legacy moat rather than a reinvestment moat (considering it will grow at nominal gdp levels)
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.
14.95% (Current SGR) upto 20 years, leveling off to 5% at 15% Cost of Equity gives us a value of Rs. 2,692.
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.
While I do agree that the organized market will continue to grow due to overall market growth and shift from unorganized to organized, I think the point you made above may be optimistic. While in previous times, the growth was being captured mainly by only 3 players: Cera, Hindware, Parryware (not counting other more premium players), going forward, I think growth will be split at the minimum to 4 players if we add Jaquar and possibly 5 or 6 if we were to add Kajaria & Somany as well. Thus growth rates for Cera would have to come down.
Again, I think this may not necessarily be true going forward. I think the main competitive advantage is in terms of the distribution network. I think newer entrants into sanitaryware will be having similar networks, and even stronger if we take into account Jaquar. Even otherwise, I think we may be overstating the depth of this competitive advantage. Most of the distribution is done through multi-brand outlets and not unique single-brand outlets. I visited a few of these smaller unorganized stores a month or so ago. I think there is not much differentiation between brands there, all products are showcased together and the dealer pushes the products where he gets the most margins. With more competitive intensity, it is likely that margins will flow to dealers rather than to the brands. In few talks with the dealers, it was clear that Kajaria was trying to give higher margins to dealers and Somany was trying to push products at a lower price.
Again, though I think Cera is a good company that will continue to grow, I think it will find it hard to grow at previous rates given changing industry dynamics which will necessitate a correcting PE multiple
Real Estate is not completely down, many incomplete projects are getting completed rapidly. Plus, there is frenetic activity happening in affordable housing but all that does not seem to have rubbed on Cera at least. The movement from Unorganized to Organized due to happen after GST is another expectation belied. Or maybe the current results are after benefitting from these tailwinds, else sales would have been even lower.
The company operates in a mature product category where the long run natural growth rate for the industry should be around the nominal GDP growth rate. A better company may do better than that, but not too much better. Business has no entry barriers, so competition will keep product prices down.
Brands are not important, I would categorize this product largely as a commodity only. People don’t really show off their sanitaryware or faucets, it is not an iPhone. May be at a very premium end yes, but there the market size is very small.
If Cera had a moat, margins would be high or at least rising but no such trend is visible. Growth rate is coming down, 10 year Sales CAGR > 5 CAGR > 3 CAGR > TTM (from Screener) and almost same trend is seen in profits too.
All in all, Cera became a multi bagger when it started out small. But as it grows, it will slowdown. Benefit of high ROE gets diluted when one buys at many multiples of Book Value. I think valuation should be much lower for it to become a strong buy again. Or a dream period like 2003-07 should return. Right now, it is nowhere in sight.
(Disc: Held previously, but no exposure at present)
I don’t go by P/E multiples. But the thumb-rule valuation I did is based on a 15% Growth Rate, much lower than their historical Growth of 22%+.
Secondly, while it is true that competition is growing, I don’t think a Kajaria or Somany can pose any substantial threat to Cera, Hindware, Parryware or Jaquar. In fact, as mentioned in the concall, it is the other way around. Cera was able to ramp up their Tiles production so fast in just 2+ years that they were able to capture 2% of the Organized Tiles market.
My thesis is that the Sanitaryware market will grow at a mediocre pace / become a cash cow, while the newer segments like Tiles and Kitchenware will create incremental value. Put together, it is a story of Cera transforming itself from a bathware player to a home styling player. As and when it looks like this is not going to happen, I may be inclined to sell. But currently, I think the company is doing an excellent job at that.
The Morbi cluster ban will only accelerate this plan.
I was going through an interesting conversation among boarders about Cera current and future growth trajectory .
Just wanted to add new perspectives to it. Apart from company’s current state of business, the investor’s objective also plays a pivotal role in deciding about fresh investment.
Broadly a learned and long term investor plays one of the two key roles in the stock markets as stated below:
Momentary investor : One who buys the scripts in abundance at reasonable valuations and exits the ideas at or near peak (presumably dependent on his investment policy as to when a script looks expensive to him). Generally he is value-savvy and rotates from one script/sector to another dependent on available valuation comfort.
Hoarder: He is an investor who initiates a buy and steadily accumulates the script only during cyclical/temporary business slow down or in event of any market panics/ stock specific bad news leading to significant price declines. He chiefly believe in his idea of holding onto the script over longer periods irrespective of incoming news flow (with special focus on business quality not taking a hit).
Citing Cera’s current positioning, sales growth has surely declined over short to medium term. However, one also needs to decipher the reasons behind it, whether it is due to company specific issues or industry related. Certainly here, prolonged real estate slowdown continuing for more than 5-7 years (or even more in select pockets) is one major reason of slowdown in building material businesses directly (institutional sales) and indirectly (replacement market also taking a hit due to dampening sentiment about appreciating nature of real estate).
Cera seems to be going with the flow, making no major moves to dole out discounts and credit line to its distributors to gain market share as demand has largely been moderated/postponed. If a company believes in the ideology of remaining financially prudent amid industry slowdown and ramp up capacity (by disbursing cash) only post signs of materialistic greenshoots in the real estate sector, then there is no harm in this philosophy. On the lines of Cera, it is quite evident that Cera competitors are also undergoing earnings stress amidst demand issues.
Therefore, conclusively, for investor type 1 Cera might appear to be a sell/reduction, but for type 2 should be an accumulation opportunity. How much to accumulate is purely a function of investors investment policy and risk appetite. As it is said that most important thing to be a successful investor is knowing when to buy and how much to buy.
Flat Q3 results from CERA. Might be positive considering the adverse economic environment specifically in real estate. Notwithstanding the higher competition, the chairman is positive of doing well in economic upswing phase… we dont know when that upswing would happen though.
Gulf anti-dumping levy to hit ceramic tile producers
The GCC today imposed anti-dumping duty on ceramic tile imports from India and China from 6 June 2020 for five years. The duty on India is in the range of 17.6% to 106% with most companies at 41.2%; for China, this is between 23.5% and 76% with most players at 23.5%. The comparatively higher duty on India will dent competitiveness and potentially affect 35-40% (~Rs 40bn) of total exports from ceramic hub Morbi to Gulf countries, creating possible pricing pressure in domestic markets.
Anyone know where the 19 warehouses of Cera are located?
Cera is paying significantly higher (3-4x in some cases) than competition for insurance and freight movement, location of these warehouses might help us understand why that’s the case.
Edit:
Cera works on a just in time model which helps it reduce inventory and respond fast to changing design preferences etc. This also means that it has to ship more often and this is why the increased costs
Cera has been investing a lot in automation of glazing process and other processes. Does cera do the glazing of outsourced products also or does it just buy from third party or its jv and sell via its dealer?
An interesting management interview (starting @19 min mark). Here is the summary.
July sales equivalent to last year sales
Touchless sales have gone up, Faucetware priced between Rs. 10’000-25’000 has witnessed demand growth from 100/month to 6000/month, this has higher margin
Has anyone studied about the threat of imports?
In a concall 3-4 years back, the management said that exports are difficult because sanitaryware are bulky items and prone to scratches etc. This hypothesis of the management doesnt seem to be true and hence the question
Asia exports about 60% of the worlds sanitaryware, with the top 3 exporters being China, India and Thailand. China exported 80% of Asias exports in 2015 and 45% of the worlds(1.33 million tonnes)
Top 4 global exporters:
China
Mexico
Turkey
India
NAFTA was the largest importer, followed by Asia…
At first glance, it would seem stupid to suggest that there can be a threat of import to one of the largest exporters, especially for CERA which is strong in tier 2 and tier 3 markets (meaning an even smaller threat). Add to it to the the present negative sentiment against the biggest import threat (China) but would love to hear if someone has done some research on this.
Specifically, how much does the transportation cost add to the cost of the product.
Another question is, will the distributors in Tier 3 towns switch to a different supplier if they were offered higher commissions? What’s stopping distributors from switching?
If anyone has done some research on it, could you please share?
i never considered the threat of imports and i have no idea about this. can someone throw some light on this
Cera operates at the lower end of the pyramid and for sanitary ware, one needs good customer service - which takes time to build as per management. But i fail to understand why would someone need customer service for a sanitary ware and what kind of customers need this. Any thoughts on this
