Cera Sanitaryware – Buy

The sanitary ware market in India is widening and the companies engaged in this sector are therefore posting good results. Recently Cera Sanitaryware declared a healthy 32 per cent growth in topline and 20 per cent rise in bottomline. Another thing that caught our attention is that the company is also increasing its production capacity. In an interaction with the management of Cera Sanitaryware in Mumbai during the analyst meet on May 10, the one message driven home was that the company is assured about its growth prospects.

Cera Sanitaryware is a manufacturer of sanitary ware, faucets, kitchen sinks, mirrors, etc, the production of which is carried out at its plant at Kadi, Rajasthan. It accounts for 60 per cent of the total sales. Besides its own production it also outsources work to China which accounts for 20 per cent of the sales. The balance 20 per cent is done through contract manufacturing. It also has a gas-based captive power plant which has an assured gas linkage with Gail India and Sabarmati Gas.

The company has a wide range of products from lower to normal to premium categories. The next level of growth will be from the premium category of the products. One can see that despite the slowdown in real estate the company has been able to increase its sales by 32 per cent in FY12. This is also the case with the other sanitary ware stocks.

The demand has mainly been driven by the increase in spending power by the consumers who are now buying the premium brands. The current sanitary ware market is spread between the organised (60 per cent) and unorganized (40 per cent) players. The unorganized players are losing their market share as an increasing number of buyers are now moving towards branded products. Also, the energy (gas) component, which is a major input cost, is putting margin pressure on the unorganized players. According to the management, the organised sector is swiftly eating into the business of the unorganized players. Meanwhile, there is more than enough room for all the branded players so as not to face any threat of competition.

With its current capacity of 2 million pieces, the company will push it up to 2.7 million pieces by December 2012, thereby boosting the revenues. As such, there will be an increase in the number of faucets from 2,500 pieces to 7,500 pieces per day. In favour of the company is the fact that it has the ability to pass on an increase in prices to the customers. Its faucets’ realisation which remained below Rs 600 per piece is set to increase to Rs 700 or so per piece in the coming days.

The company had a debt of Rs 33 crore and cash of Rs 33 crore by September 2011 which makes it nearly a debt-free company. It has planned capex of Rs 100-120 crore from FY11-FY13, which will get funded by internal accruals and debts. However, the company also said that the peak debt will be about Rs 25-30 crore during this period. This means that the interest expense will be less in the coming years.

Cera Sanitaryware has also been very consistent in rewarding its shareholders. For the recent year it paid a dividend of Rs 2.5 on a face value of Rs 5. The management has said that it will keep rewarding the shareholders even in the future. It also gave a bonus share on each share held in 2010.

The stock has appreciated by 21 per cent in this year, thus beating the broader market. On the valuation front the scrip looks attractive with its PE of 10x which is in line with the industry leader HSIL trading at PE of 10.3x. The company has said that in the next year it will target revenues of Rs 450 crore, which will reflect 33 per cent growth in topline. On a conservative basis we arrived at an EPS of 28 and a target price of Rs 285 which gives an upside of 14 per cent. This is a good bet in the current volatile market.