Equity Research
July 9, 2018
INDIA
BSE Sensex: 35658
Cera Sanitaryware BUY
ICICI Securities Limited Maintained
is the author and
distributor of this report Conviction reinforced – Remains top pick Rs2,714
Reason for report: Company update
We organised Cera Sanitaryware (CRS) corporate day event last week at its Kadi
Sanitaryware
plant in Gujarat which included CRS’ sanitaryware and faucet plant visit, Cera
display center visit and meeting with its top management represented by Mr.
Target price Rs3,860 Kothari (CEO), Mr. Atul Sanghvi (Executive Director) and Mr. Bharat Mody
(Strategic Advisor). We were impressed with the strategies and plans rolled out by
the management for the next 2-3 years across various facets of its business. We
Shareholding pattern believe the company will show considerable pick-up in growth over the next 2-3
Sep Dec Mar years, led by a) scaling up of brand Senator which was launched in Apr’18 across
’17 ’17 ’18
Promoters 54.8 54.8 54.8 sanitaryware, faucets and wellness segments; b) expected traction in the low-end
Institutional
investors 17.3 17.5 17.3
sanitaryware segment through brand Jeet; c) distribution-led gains with focus on
MFs and UTI 10.1 10.5 9.1 increasing dealer network in select states where its presence is insignificant and
FIs/Banks 0.2 0.1 0.1
Insurance 0.0 0.0 0.0 scaling up in allied products like tiles and faucets by expanding its product range
FIIs 7.0 6.9 8.1
Others 27.9 27.4 27.9
(successfully launched wall tiles in Jun’18) and moving towards premiumisation.
Source: NSE We expect CRS to report revenue/PAT CAGR of 20.9/27.4% over FY18-FY20;
maintain BUY with a target price of Rs3,860 (30xFY20 earnings).
Price chart Key takeaways from interactions with management:
4000 Revenue growth and margin guidance: a) CRS maintains its guidance of 15-18%
3500 growth in revenues in FY18 led by recovery in core sanitaryware segment growth to
3000
10%+ and strong growth traction in allied products – tiles and faucets; b) expects
(Rs.)
150bps improvement in margins over the next two years primarily led by sharp
2500
recovery in margins in tiles segment due to favourable product mix and increasing
2000
premiumisation in sanitaryware and faucets segments.
1500
Capex guidance: Rolling capex of Rs1.8bn-Rs2bn over the next three years - a)
Jul-15
Jul-16
Jul-17
Jul-18
Jan-16
Jan-17
Jan-18
entering JV with one or two Morbi units in the tiles segment; b) capacity expansion in
the sanitaryware segment; and c) maintenance capex. FY19 capex estimated at
Rs1bn which includes i) Rs60mn for PVC Cistern JV, ii) Rs260mn for display centre
at Kadi and Ahmedabad office, iii) Rs50mn for acquiring land in Kadi, iv) Rs200mn
for tiles capex through JV model; v) Rs230mn for building staff colony at Kadi, and
vi) Rs200mn towards maintenance capex.
Outsourcing strategy to persist: CRS currently has 55% of its overall revenues
coming through outsourcing model. While outsourcing in Sanitaryware and faucets
stand at 40% and 50% of segmental revenues respectively, tiles is outsourced
completely through outsourcing/JV model. Management expects to maintain this mix
in outsourcing going forward.
Market Cap Rs35.2bn/US$512mn Year to Mar FY17 FY18 FY19E FY20E
Reuters/Bloomberg CERA.BO / CRS IN Revenue (Rs mn) 10,066 11,853 14,248 17,327
Shares Outstanding (mn) 13.0 Rec. Net Income (Rs mn) 992 1,032 1,279 1,673
52-week Range (Rs) 4,300/2,701 EPS (Rs) 76.3 79.3 98.3 128.7
Free Float (%) 45.2 % Chg YoY 18.9 4.0 24.0 30.8
FII (%) 8.1 P/E (x) 35.6 34.2 27.6 21.1
Research Analysts:
Daily Volume (US$/'000) 514 CEPS (Rs) 93.3 100.2 128.1 160.4
Nehal Shah Absolute Return 3m (%) (5.1) EV/E (x) 20.7 20.3 15.7 12.4
nehal.shah@icicisecurities.com Absolute Return 12m (%) 35.0 Dividend Yield (%) 0.4 0.4 0.6 0.6
+91 22 6637 7235
Sensex Return 3m (%) 5.5 RoCE (%) 27.1 23.4 26.1 29.5
Jigar Shah
jigar.shah@icicisecurities.com Sensex Return 12m (%) 13.7 RoE (%) 20.3 17.9 19.2 21.2
+91 22 6637 7416 Please refer to important disclosures at the end of this report
Cera Sanitaryware, July 9, 2018 ICICI Securities
Scalability of business model: CRS is likely to witness scalability across its product
segments over the next 3-5 years:
Sanitaryware: While the company is currently utilising 98-99% of its existing
capacity in Kadi, the scalability in sanitaryware segment is expected to come
through incremental outsourcing. However, the mix of outsourcing will remain
largely at 40% of segmental revenues as it expects premiumisation in its Kadi
plant to increase to 50% of plant revenues over the next few years. CRS expects
double digit growth from the segment from FY19, led by a) distribution gains by
penetrating in under-penetrated states like Maharashtra, Tamil Nadu, West
Bengal, Madhya Pradesh, Orissa, Chhattisgarh and North Eastern states, and b)
intensified focus on brand Senator and Jeet over the next couple of years.
Faucets: The current faucet plant in Kadi has a capacity to manufacture 7,200
pieces of faucets per day which is scalable to 10,000-11,000 pieces per day. The
company is likely to maintain 40-50% of its revenues to come through outsourcing
in the near-term. CRS expects 18-20% growth in this segment over the next few
years led by distribution gains and widening the range of products it offers under
the segment at present.
Tiles: CRS currently operates in this segment through a mix of outsourcing and JV
model. CRS expects incremental revenues to come through JV model with the
company likely to enter some JVs in Morbi over the next few quarters. Growth is
likely to be above 30% over the next few years, led by a) fast increasing
premiumisation; b) its expected aggression in wall tiles with the recent launch of
Royal Collection range ceramic wall tiles, and c) distribution gains.
Scaling up of brand Senator: Post the successful launch of brand Senator in
Q1FY19, CRS is looking to expand the Senator range across sanitaryware, faucets
and wellness segments at regular intervals. It also expects to manufacture some of the
range in-house at its Kadi factory. CRS maintains its target of reaching a size of
Rs1bn in brand Senator by FY20.
Relaunching affordable brand Jeet in sanitaryware: CRS expects to target the
lucrative affordable housing segment through its brand Jeet which it launched last
year. While the company has still not commercially marketed this product, it expects to
relaunch the brand over the next 6 months once it is able to address few quality
related issues and completes the range.
Marketing tie-up with Isvea, Italy: CRS has a presence in the luxury sanitaryware
space through brand Isvea. CRS has a marketing tie-up with the Italian company for
marketing its products exclusively in India. CRS imports these products at a pre-
determined price while the mark-up on these products is at the sole discretion of CRS.
Brand spends to be maintained at 4% of revenues: CRS is unlikely to renew its
contract with its brand ambassador Sonam Kapoor. It however plans to deploy the
incremental funds in other ATL and BTL activities, creating additional Cera Style
Studios and Galleries and promoting its new premium brand Senator.
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Cera Sanitaryware, July 9, 2018 ICICI Securities
Only sanitaryware player to get APM gas at its Kadi plant: Currently ~45% of its
Kadi capacity runs on APM gas which it sources from isolated well located in the
region at Rs9/SCM which is at significant discount to its peers who draw LNG at
Rs30/SCM. This makes CRS a highly competitive player in the sanitaryware segment.
Zamac plant for manufacturing faucet handles: In pursuit of technological
upgradation, CRS commissioned Zamac handles unit at its Kadi unit for maintaining
consistency in supplies and ensure quality standards as well. This has enabled CRS
to completely substitute imports. CRS is the first and the only Indian faucet player till
date to commence this facility in-house.
Expansion of distribution network: CRS currently has a network encompassing
2,300 distributors, over 11,000 retail points and 9 Cera Style display studios. The
company plans to double the distribution footprint over the next three to four years and
aggressively add Cera Style studios in key Tier I cities going forward. CRS has
already created 25 distributors for brand Isvea and 100 for brand Senator.
Existing range in sanitaryware segment: CRS has over 2,000 SKUs in sanitaryware
segment comprising EWCs, wash basins, urinals and Orissa Pans. These also include
140-150 products under brand Senator and over 200 products under brand Isvea.
Strong service back-up in faucets: CRS has created a strong service desk in
faucets with 300 in-house staff on the direct payroll of the company. This is expected
to aid scaling up the faucets business over the next few years.
Working capital remains under control: CRS maintained its working capital days in
the 103-106 range over FY15-FY17. Despite the increasing growth constraints in
FY18, the company has seen its working capital days swell by 10% to 113 days in
FY18. CRS plans to reduce this count to 100 days over the next two years.
Price hike in sanitaryware finally comes through: While CRS initiated a price hike
ranging between 2.5-3% in faucets in Feb’18, there was a delay in taking price hike in
its sanitaryware segment. However, the hike (ranging between 2.5-5%) finally
happened in June and impact of the same is expected to be visible Q2FY19 onwards.
PVC Cistern JV: CRS is likely to spend Rs60mn in FY19 in setting up a PVC Cistern
unit through a 51% JV. This will be done to ensure consistent quality and costs
savings.
3
Cera Sanitaryware, July 9, 2018 ICICI Securities
CRS Sanitaryware plant visit
3D printing machine making plastic moulds – Cera being 1st manufacturer to use this technology
POP mould made using plastic moulds POP workshop
Glazing robots Largest Kiln deployed by Cera
4
Cera Sanitaryware, July 9, 2018 ICICI Securities
CRS Faucet plant visit
3D machine making plastic moulds
Hi-tech machinery for manufacturing dies using Brass Ingots used as basic raw material having
plastic moulds 60% copper content and less than 1.5% lead
content
Die casting using sand cores
5
Cera Sanitaryware, July 9, 2018 ICICI Securities
Grinding machine In-house making of Zamac (zinc and manganese
alloy) handles for faucets
Electroplating process – Nickel and chrome coating on brass surface
6
Cera Sanitaryware, July 9, 2018 ICICI Securities
Cera display centre visit: Senator range of products displayed at CRS Kadi plant
Senator range of EWCs and wash basins
Senator range of printed wash basins
Source: Company data, I-Sec research
7
Cera Sanitaryware, July 9, 2018 ICICI Securities
Financial summary
Table 1: Profit & Loss statement Table 4: Cashflow statement
(Rs mn, year ending March 31) (Rs mn, year ending March 31)
FY17 FY18 FY19E FY20E FY17 FY18 FY19E FY20E
Net Revenues 10,066 11,853 14,248 17,327 Operating Cashflow 1,384 1,310 1,666 2,086
Operating Expenses 8,350 10,080 12,099 14,590 Working Capital Changes (347) (850) (102) (638)
EBITDA 1,716 1,774 2,276 2,862 Capital Commitments (713) (470) (1,000) (750)
% margins 17.0% 15.0% 16.0% 16.5% Free Cashflow 325 (10) 565 698
Depreciation & Amortisation 221 271 387 412 Cashflow from Investing
Gross Interest 78 98 132 87 Activities (397) (215) - (300)
Other Income 139 144 155 176 Issue of Share Capital - - - -
Recurring PBT 1,555 1,549 1,912 2,539 Inc (Dec) in Borrowings 171 81 (232) (150)
Less: Taxes 582 488 631 838 Dividend paid (183) (183) (228) (228)
Less: Minority Interest (19) 29 2 27 Change in Deferred Tax
Net Income (Reported) 992 1,032 1,279 1,673 Liability 50 (3) - -
Extraordinaries (Net) - - - - Chg. in Cash & Bank
Recurring Net Income 992 1,032 1,279 1,673 balance (34) (330) 104 19
Source: Company data, I-Sec research Source: Company data, I-Sec research
Table 2: Balance sheet Table 5: Key ratios
(Rs mn, year ending March 31) (Year ending March 31)
FY17 FY18 FY19E FY20E FY17 FY18 FY19E FY20E
Assets
Per Share Data (Rs)
Total Current Assets 5,489 5,724 6,586 7,773
EPS 76.3 79.3 98.3 128.7
of which cash & cash eqv. 566 236 341 360
Cash EPS 93.3 100.2 128.1 160.4
Total Current Liabilities &
Dividend per share (DPS) 12.0 12.0 15.0 15.0
Provisions 3,159 3,028 3,684 4,213
Book Value per share (BV) 416.9 470.8 551.6 662.8
Net Current Assets 2,331 2,696 2,902 3,560
Investments 871 1,086 1,086 1,386
Growth (%)
Net Fixed Assets 3,450 3,650 4,263 4,601
Net Sales 9.7 17.8 20.2 21.6
Capital Work-in-Progress 2 - - -
EBITDA 21.5 3.4 28.3 25.7
Goodwill - - - -
PAT 18.9 4.0 24.0 30.8
Total Assets 6,653 7,432 8,251 9,546
Cash EPS 21.6 7.4 27.9 25.2
Liabilities
Valuation Ratios (x)
Borrowings 837 918 686 536
P/E 35.6 34.2 27.6 21.1
Deferred Tax Liability 394 391 391 391
P/CEPS 29.1 27.1 21.2 16.9
Minority Interest 222 67 67 67
P/BV 6.5 5.8 4.9 4.1
Equity Share Capital 65 65 65 65
EV / EBITDA 20.7 20.3 15.7 12.4
Face Value per share (Rs) 5 5 5 5
EV / Sales 3.5 3.0 2.5 2.0
Reserves & Surplus* 5,136 5,991 7,042 8,487
Less: Misc. Exp. n.w.o. - - - -
Operating Ratios
Net Worth 5,201 6,056 7,107 8,552
Raw Material / Sales (%) 43.5 44.8 44.7 43.9
Total Liabilities 6,653 7,432 8,251 9,546
Employee cost / Sales (%) 12.1 12.2 13.0 13.0
*Excluding revaluation reserves SG&A / Sales (%) 0.0 0.0 19.5 19.5
Source: Company data, I-Sec research Other Income / PBT (%) 8.9 9.3 8.1 6.9
Effective Tax Rate (%) 37.4 31.5 33.0 33.0
Table 3: Quarterly trend Working Capital (days) 103.5 113.1 102.0 97.0
Inventory Turnover (days) 54.2 59.6 56.0 54.0
(Rs mn, year ending March 31)
Receivables (days) 80.0 82.5 75.0 72.0
Jun-16 Sep-17 Dec-17 Mar-18 Payables (days) 30.7 29.1 29.0 29.0
Net revenues 2,346 2,957 2,909 3,609 Net D/E Ratio (x) 0.0 0.1 0.0 0.0
% growth (YoY) 9.8 18.2 23.1 16.1
EBITDA 331 461 406 510 Profitability Ratios (%)
Margin (%) 14.1 15.6 14.0 14.1 Net Income Margins 9.7 9.0 9.0 9.8
Other income 25 22 19 47 RoACE 27.1 23.4 26.1 29.5
Extraordinaries (Net) - - - - RoAE 20.3 17.9 19.2 21.2
Net profit 193 273 231 306 Dividend Payout 18.4 17.7 17.8 13.6
Source: Company data, I-Sec research Dividend Yield 0.4 0.4 0.6 0.6
EBITDA Margins 17.0 15.0 16.0 16.5
Source: Company data, I-Sec research
8
Cera Sanitaryware, July 9, 2018 ICICI Securities
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