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You are here : IndiaNotes >> Research & Analysis >> Companies >> Cera Sanitaryware Ltd. >> Research

Cera Sanitaryware Q3FY18: 18.5% upside potential over 18 months; Buy

SKP Research | 10 Feb, 2018  | Follow Author | Add to my Favourites 
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Company Background


Cera Sanitaryware Ltd. (CERA), promoted by Mr. Vikram Somany, is India’s third largest sanitaryware producer, with organised market share of ~23%, after HSIL (~40%) and Parryware Roca (~30%). It also manufacturers faucets and has presence in tiles. Recently, it has commissioned its first tile manufacturing facility in a JV with Andhra Pradesh based Anjani Tiles Ltd.


Investment Rationale


Topline to grow at a CAGR of ~17% over FY17-20E


- During Q3FY18, CERA reported net sales of Rs 2,908.8 mn, registering growth of 23.1% y-o-y, mainly on account of revival in demand, inspite of GST concerns. Contribution from sanitaryware, faucets, tiles and wellness products to the total standalone revenues of the company was ~53%, ~24%, ~22% and ~2% respectively, during the quarter.


- We remain positive on the long term prospects given strong brand equity and distribution network, changing consumer preferences towards premium lifestyle products, increasing disposable income, improving market conditions for sanitaryware segment and contribution from Anjani Tiles JV, and expect CERA’s net sales to grow at a CAGR of ~17% during FY17-FY20E to Rs 16,256 mn.


Margins expected to improve due to better product mix:


- EBIDTA margins during Q3FY18, declined by 270 bps y-o-y to ~14%, majorly due to adverse product mix in tiles segment as the company sold more of low margins products. Other expenses also rose by 180 bps to 26.8%.Going forward, we expect EBIDTA margins to stabilize at ~17% by FY20E, on the back of rise in contribution from high margin value added products in tiles segment and price rise taken by the company in the month of October 2017 (between 2.5% to 5% across all segments). The Company also took similar price hike last quarter.


- PAT margin was down by 180 bps to 7.9% in Q3FY18 from 9.7% reported in corresponding period last year. With improvement in segment margins and better product mix coupled with low debt levels, we expect PAT margins to touch ~10.4% in FY20E.


- Also, CERA’s focus on enhancing capacities through asset light model not only reduces its capital investments but also de-risks the balance sheet, enhances return ratios and provides faster access to capacities thereby, resulting in continuous low D/E ratio.


Capacity utilization of Anjani Tiles to cross 100% during FY19:


- To meet the growing demand for good quality ceramic tiles and as a product extension strategy to leverage its sales network, CERA has ventured into manufacturing of tiles through a JV with Andhra Pradesh based Anjani Tiles.


- CERA holds 51% stake in the project that is estimated to cost around Rs 680 mn, with the Company’s equity share of ~Rs 190 mn. The plant has an initial capacity of 10,000 square meters of tiles per day, which could be scaled up by upto 3 to 4 times, going forward. The facility has a potential to generate additional revenue of ~Rs 750-1250 mn at full capacity utilisation.


- The JV got commissioned in April 2016 and post demonetization, the capacity utilization stood at 60% for FY17 (fallen from the peak of 90% witnessed during Q2FY17). Total contribution from tiles segment reached ~22% in the total revenues of the company during the quarter.


VALUATION


- Better economic growth, leaving more disposable income for discretionary life style consumption, rapid urbanisation, changing customer preference towards quality branded products particularly amongst the growing mass affluents, increasing nuclear families and Governments’ thrust on “Housing for All” coupled with strong brand equity and recall and distribution network, augers well for the company. It has de-risked its growth strategy with an asset light business model, adopting a joint venture route in tiles.


- We have valued the stock on the basis of P/E - method of relative valuation – of 30x on FY20E earnings. With the introduction of FY20E numbers we have revised our rating on the stock and recommends buy with the target price of Rs 3,912 (~18.5% upside), in 18 months.


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Disclaimer: The author has taken due care and caution to compile and analyse the data. The opinions expressed above are only the views of the author, and not a recommendation to buy or sell. Neither the author nor IndiaNotes.com accept any liability whatsoever arising from the use of any of the above contents.




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