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We recommend ?BUY? on CERA SANITARYWARE LTD for a target of INR 3077 – valuing the company at P/E 25x of FY21E Earning.
INVESTMENT RATIONALE:
Largest Market Share, Deep Customer Connect and Elevated Brand Promise
- Robust Financial Position
- Wide Product Portfolio incorporating Design Excellence and Deep Technology Imprint
- Wide Distribution Network and Comprehensive Marketing Infrastructure
- Experienced Proficient Leadership with zero attrition in Senior Management over last decade
- Zero Debt Company, Free Cash Flow Positive with Robust Cash Position
- Industry leading RoCE, Consistent cash generation each year
Currently 2,700 Style Centre operational, 136 CERA Style Galleries and 14,000 + Trade Partners. Over 600 CSCs planned in the next 2 financial years
VALUATIONS AND VIEW:
CERA is an attractive stock for growth-seeking investors, with an expected double digit earnings growth in the upcoming year which is expected to flow into an impressive return on equity of 24% over the next couple of years. The stock price is available at a discount value compared to industry average. We value the business at 25x FY21E EPS and recommend a BUY rating on the stock with a target price of INR 3077 per share.
RISK & CONCERNS:
- High Competition
from other players: The company remains exposed to stiff competition from
larger established companies and small regional players which have mushroomed
across the country and has added to competitive intensity of the industry.
Hence, the biggest challenge for the industry players would be scaling up their
regional presence to a national level while maintaining highest quality
standards. However, an established brand name enables CERA to have an edge over
its competition. - Impact of Overall
Real Estate Market Downtrend: Currently the real
estate market in India is going through a touch time and as the inventory level
is its high, new launch of projects are in its low peace. The future growth in
Indian real estate market will have some bearings on the overall demands of the
CERA?s product. - Change in
Government Policy: Any drastic change in Government policy may affect the
Company.
COMPANY BACKGROUND:
CERA Sanitaryware Limited,
India?s fastest growing company in the segment. Cera Sanitaryware (Cera) is
among the top 3 players in the Indian sanitaryware industry having a stronghold
over the mid and premium segments. An extensive product portfolio that includes
high end showers, steam cubicles, and whirlpools, besides sanitaryware and
faucets, has made CERA the primary choice of customers looking for stylish
products in a contemporary lifestyle.
Advanced technology has been the forte of CERA. Its state-of-the-art manufacturing plant has been following the highest standards of quality with an emphasis on sustainability since its inception in 1980. The CERA plant was the first to use natural gas ? the purest fuel that gives extra sheen on products. Production capacity of sanitaryware has raised from 2.70 million pieces to 3.0 million pieces per annum. CERA plans to maintain its leadership status in the industry, while catering to increasing demands with satisfaction.
Businesses
- Manufacturing, selling, and marketing of Sanitaryware, faucets, Tiles,
Water heaters, BIM Products and Others
INDUSTRY OVERVIEW:
Sanitaryware industry expected to grow at 10%-12%:
Indian sanitaryware market is expected to post a 10%-12% volume CAGR over FY20-FY22E,
recovering from 7%-8% growth witnessed in the past two years. Luxury segment
(15% of the market) is expected to grow at 15% while the mass and premium
segments (40% and 45% of the market, respectively) are expected to grow 8%
& 7%, respectively. The rising growth rate is the result of higher housing
approval under Pradhan Mantri Awas Yojana and strong replacement demand among
other factors.
22% CAGR likely in faucet and tile segments: We expect CERA to grow its faucet and tile business at 22% CAGR each over FY20-FY22E. Higher growth in these businesses is because of their low base and should help support growth in the sanitaryware segment. 85% of Cera?s tile sale volume consists of low-margin soluble salt category, and the remaining is premium category PVT/GVT tiles. The company is working to reverse this ratio over which should result in margin expansion for the segment as well. Cera is well placed to deliver growth with ongoing tile capacity expansion, product diversification, premiumisation and distribution channel expansion. The company also enjoys tailwinds from growing urbanization, better housing affordability and shrinking unorganized entities.
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