Dr equity cera sanitaryware ltd

Cera Sanitaryware LtdCera Sanitaryware LtdMarch 2011

Updated 2013

Research Report

March 2011 1Un-Earthing Multibagger Stocks

www.drequity.in

Shri Vikram

Somany, MD

Late Shri Viduush

Somany, ED


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3March 2011Un-Earthing Multibagger Stocks

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Content Index

•Cera Sanitaryware Ltd – An Introduction

• Cera Sanitaryware Ltd – Business Overview

• Industry Overview

•Warren Buffett Filters Check

• Cera Sanitaryware Ltd – Financials

• Concerns• Concerns

• Conclusion


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Recommendation: Strong Buy

CMP: INR 170

FV: Rs 5

Mkt Cap: Rs 253Cr

BSE Code: 532443

NSE Code: CERA

Bloomberg Code: CRS:IN

Sector: Building Materials

Promoter Holding: 55%

Total Equity Shares: 1.26cr

Cera Sanitaryware – Investment Highlights


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SYNOPSISCera Sanitaryware Ltd is a pioneer of the first sanitary ware segments in India launching

innovative designs & water saving products.

Cera has added other products like kitchen sinks, mirrors and sensor products to its range under

Bathware.

The CAGR of company during last Five years has remained much more than industry growth

rate.

Together, the CERA Style Studios and CERA Style Galleries have made a great impact in

improving the retail experience for prospective customers, institutional buyers and influencers improving the retail experience for prospective customers, institutional buyers and influencers

of CERA.

Net Sales and PAT of the company are expected to grow at a CAGR of 30% and 24% over 2012 to

2015E respectively.

“In India Middle Class strata is undergoing great change, rising disposable

income, nuclearisation of families, aspiration for luxury goods will lead to great boom in the

Consumer Facing companies. Icing on the cake is the middle class population constitute more

than 50% of the total population, this will create an ever growing demand for such products.”

– Dr Equity


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Cera Sanitaryware Ltd – An Introduction

Cera Sanitaryware Ltd was launched in the year 1980 is a pioneer in the sanitary ware segment

in India. The first sanitary ware company to use natural gas, Cera has been on the forefront of

launching a versatile color range and introducing the bath suite concept. It also launched

innovative designs and water-saving products.

The twin flush model launched in India by Cera for the first time, reduces the water needs of

households considerably. WCs designed to flush in just 4 liters of water is another notable

innovation by Cera.

Cera Sanitaryware incorporated in the year 1998 is a pioneer in the sanitary ware segment in Cera Sanitaryware incorporated in the year 1998 is a pioneer in the sanitary ware segment in

India. The company has launched a wide range of bath suite concept.

Cera Sanitaryware sells its products through Cera Bath Studios, which provides

consumers, architects and interior designers a full view of ranges of wash basins, shower

panels, shower cubicles, bath tubs, shower temples, whirlpools, cp fittings etc.

Cera Bath Studios has pan- India presence, are located at

Ahmadabad, Bangalore, Chandigarh, Kolkata, Cochin, Hyderabad and Mumbai.

Manufacturing Unit Cera Sanitaryware manufacturing facilities are located at Kadi, Gujarat.


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The company has providing the following products for various purposes.

• Sanitary ware

• Faucets

• Wellness

• Kitchen Sinks

• Mirrors

• Personal Care

• Green Products

Products

The achieving the growth in the rapidly changing retail market in the country, Cera, has

launched its one of a kind Cera Bath Studios in

Ahmadabad, Bangalore, Chandigarh, Kolkata, Cochin, Hyderabad and Mumbai.

With the opening of the Cera Bath Studios, the discerning consumers, architects and interior

designers can have full view of the Cera’s premium ranges of WC’s, Wash Basins, Shower

Panels, Shower Cubicles, Bath Tubs, Shower Temples, Whirlpools, CP fittings etc.

Cera Bath Studios will complement its existing network of 600 dealers and 5000 retailers.

Several Bathrooms are displayed live, so that the customers can get a feel of Cera’s vast range of

products.March 2011 8Un-Earthing Multibagger Stocks

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Sanitaryware IndustryThe Indian sanitaryware Industry, estimated at around `1500-1800cr, contributes to ~8% of the

world’s sanitary production. In India, the organized market dominates the high-end products

segment but a majority share is still captured by the unorganized segment in the low-end

products segment. The industry has a sustained growth rate of 12-14% p.a. due to increasing

housing demand, purchasing power and consciousness towards hygiene. India is emerging as

the second largest sanitaryware market in the world and is expected to witness robust

growth owing to following:

Low penetration in Indian sanitation coverage

Considering India’s dense population, its sanitation coverage is only ~40%, which is considered

to be one of the lowest in the world, thus increasing risk of health hazards and epidemics. to be one of the lowest in the world, thus increasing risk of health hazards and epidemics.

According to a recent report by UNICEF, 638 million people in India lack proper sanitation

facilities. The government of India is keenly focusing on improving the level of sanitation in the

country by introducing housing policies, sanitation policies, public toilets schemes, 100% FDI in

real estate, etc which are being termed as some of the major factors contributing for the growth

of sanitary ware market in India.

Change in lifestyle and awareness in population

Witnessing a paradigm shift in the change in middle and upper class lifestyles in small but

significant ways, rising per capita income, increasing awareness about health and fitness and

changing consumer mindsets will drive the demand for premium sanitaryware products. The

concept of making a clean and hygienic toilet is growing rapidly in those rural areas where a

toilet did not even exist until a few years ago.March 2011 10

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Wide exports horizon

Indian sanitaryware products are very competitive because of their low production cost, and

hence exports from India are also increasing every day. Seven foreign brands like H&R

Johnson, Roca and Kohler to name a few; have established their operations in India.


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Filter # 1

Track record of high returns on capital.

"Here's what we're looking for...businesses earning good returns on

equity while employing little or no debt." - Warren Buffett's letter to

shareholders, 1987shareholders, 1987


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13.63

21.08 20.2818.54

23.72

28.26

0

5

10

15

20

25

30

Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10

Return on Capital Employed

10.44

20.87 1917.23 18.58

22.17

15

20

25 Return on Net Worth

•As it can be seen from

the graph it has gained

both ROCE and RONW.

The company is growing

continuously year on

year without denting its

profitability.

•It has successfully sail 10.44

0

5

10

Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10

•It has successfully sail

through the global

recession.

•It has an average ROCE

of 21%, which is

excellent looking at the

current scenario and

financial environment.

Source: Dr Equity ResearchMarch 2011 13


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Filter # 2

...else pays it back to shareholders

"Most high return businesses need relatively little capital. Shareholders of

such a company usually will benefit if it pays out most of its earnings in dividends such a company usually will benefit if it pays out most of its earnings in dividends

or makes significant stock repurchases."- Warren Buffett letter to

shareholders, 1992.


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0.3 0.3 0.38 0.4 0.45 0.550.75

11.25

2.5

0

0.5

1

1.5

2

2.5

3

Dividend(Rs) per share adjusted for bonus

Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11

•Cera is continuously paying dividend since 2002. They have even increased the dividend

payout since 2003.

•As per buffet it clearly passes the filter of dividend payout. It also shows the credibility of

management towards minority shareholders.

•Cera has so strong cash flows that it maintains the expansion as well as the dividend

payout to shareholders.

Source: Dr Equity Research


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Filter # 3

A word on the management.

..."the certainty with which management can be counted on to channel ..."the certainty with which management can be counted on to channel

the rewards from the business to the shareholders rather than to itself..."- Warren

Buffett letter to shareholders, 1993.


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KEY Management Team:

Mr. Vikram Somany Chairman-MD

Mr. Vidush Somany Executive Director

Mr. M.K. Bhandari President (Works)

Mr. Atul Sanghvi Sr. VP (Marketing & Sales)

Mr. Vidush Somany, Executive Director of CERA Sanitaryware Limited, has been awarded many

acollades in his career from various government and private institutions. One of them is

Nirman Ratna 2010 by Gujarat Institute of Civil Engineers & Architects in the building material

and manufacturing category.

Mr. Vidush Somany took the reins of CERA Sanitaryware Limited in the year 2004 immediately

after his graduation in Business Administration from Franklin & Marshall College, USA. He carries after his graduation in Business Administration from Franklin & Marshall College, USA. He carries

the vision saw by his father to take the organisation to the next level and make it one of the

most successful bathroom solutions company in the coming years.

Mr. Vidush Somany, has drawn aggressive growth plan for CERA for the coming years, to take

the turnover to Rs.500cr from the current Rs.200cr.

On capital allocation, given Cera’s rising return ratios and that the management has not done

anything foolish so far. As far as integrity is concerned, again there are no indications from the

past that suggest any scrupulous activity from the management’s part.


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Filter # 4

Strong MoatStrong Moat


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Does the business has got the Moat?

•Yes, proven by the average gross profit margins of around 39% over the past 5 years

(>40% suggests a sustainable competitive moat). What is more, the company has

consistently grown its sales and net profit over the past 10 years. An overall clean

balance sheet adds to the comfort.

•The company is expanding its capacity and spending huge amount on advertising and

marketing which we believe will reap in huge benefits in the coming years.

•The management is aggressively advertising and •The management is aggressively advertising and

have appointed DIA Mirza as brand ambassador.

•Brand CERA with its legacy of over 3 decades has

built a great reputation of the companyin the

minds of the consumers. During these years Cera

has diversified itself in to showers, PVC

cisterns, faucets, seat covers and now planning to

enter Tiles.


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•Company is also rewarding its distributors with regular incentive plans. It has a nation

wide large distribution network which serves as a strong moat for the company. Cera

has launched its one of a kind bath studios in major towns of India. It has a network

base of 5000 Retailers and 500 Dealers across nation.

•Gross profit margin suggests the true profitability of a company’s operations. Buffett

would generally like a company earning >40% margin, but this is true largely of

consumer goods companies . As for Cera, the average GPM for the last 10 years has

been around 37%, which is good.

Source: Dr Equity ResearchMarch 2011 20


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Filter # 5Filter # 5

Huge Opportunity


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Indians income has been rising since last

10 years which is kicking off the demand

for the products.

Further increase in income level has given

a push to the higher value products. Now

the consumer is much concentrating on

the wellness and status.

They want there bathroom to be more

luxurious than earlier years.

There are a lot of families which are

moving towards nuclear families which in

turn needs better housing so as the

sanitary ware demand is surging.

India’s housing shortage of 26.53 mn

homes is expected to increase further. To

fulfil the demand there is an ongoing

need for the sanitary ware.

Source: Mc KinseyMarch 2011 23


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Huge population of India with under penetrated sanitation coverage (around 40%) is a big

opportunity itself. Icing on cake is the replacement demand (very low at 7% compared with 80%

in developed countries, is expected to pickup with urban growth) which will further create

demand in the industry.

Moreover, a burgeoning middle class, rising per capita income, increasing awareness about

health and fitness, changing consumer mindsets, easy availability of home loans will drive the

demand for premium sanitary ware products.

Lot of government policies have been initiated for better and hygiene public sanitation in rural

and urban areas.

Poor sanitation coverage in India reflects vast potential for growth opportunities for the Poor sanitation coverage in India reflects vast potential for growth opportunities for the

sanitary ware industry.


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Investment RationaleCompany’s emphasized focus on marketing:

CSL intends to widen its reach by opening more retail formats of ‘Cera Style Galleries’ which

display the complete range of Cera products. These studios have been set up in metros and tier

2 cities which will help interior designers and customers to have a real look of the products.

CSL had a massive media campaign employing the celebrity endorsements approach to unveil its

new re-designed logo. The former Miss Asia Pacific turned actress, ‘Dia Mirza’ is the brand

ambassador of Cera for the next two years.

Expansion of product portfolio to complete the package:Expansion of product portfolio to complete the package:

CSL in its latest analyst meet announced its entry into the tiles segment which is a logical

extension of its product portfolio, thereby enabling customers to fulfil their entire bathroom

products needs.

As per the management, the company is to launch high-definition digital wall tiles with matching

floor tiles, besides digital polished glazed vitrified tiles which would be completely outsourced.

Being a complimentary product of CSL’s product portfolio, it would be easy to penetrate the

market through the existing distribution channels. Entering in to the tiles business through

(Asset Light Business Model) outsourced model de-risk the balance sheet.


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Increased contribution of sanitaryware in total domestic Expenditure:

Owing to the change in lifestyle of people, the role of sanitary products is no more

restricted to basic necessity but has become a status statement; thus influencing individuals’

spending budgets and improving the proportion expended on these amenities. Increase in

disposable incomes of people has been a vital factor supporting the changing lifestyle of

people. Also, requirement of personal space and privacy are gaining inevitable

place, subsequently leading to nuclear families.

Capacity expansion of sanitaryware:

CSL has already expanded its capacity of sanitaryware unit from 24,000MT (2.0mn pieces p.a.)

to 32,400MT (2.7mn pieces p.a.). Moreover, the company is planning to further expand this

capacity to 3mn pieces p.a at a cost of `100cr by January 2013. This development will enable the

company to en-cash the opportunity arising out of increasing demand. company to en-cash the opportunity arising out of increasing demand.

CSL started production at its faucet ware unit at Kadi in September’10. It has setup this plant

with an initial investment of `10cr, met by internal accruals, with a current capacity of 2,500

pieces per day. This capacity is planned to be doubled in the current year to 5,000 pieces per

day at a cost of `40cr as said by the management.

Huge fresh demand on the back of construction sector growth:

In India, the construction sector is growing at a robust pace because of rapid urbanization. For

the domestic sanitaryware industry, ~93% of the demand is fresh demand, while the remaining

is from replacement segment. With regards to the above facts, development in construction

sector is bound to register humungous growth in demand for sanitary ware and eventually for

CSL.March 2011 26


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Benefit from unmatched distribution network and high brand visibility:

Owing to continuous marketing activities creating high visibility of the brand, the advertisement

cost of CSL is consistently moving northwards. CSL has a strong foothold in the north east and

central India while it is eyeing southern states like Andhra Pradesh, Tamil Nadu and Karnataka to

establish its footings.

Relatively slowly changing industry :

It’s a relatively slow changing business (makes it easier for us to hold it for long term in

comparison to education or technology stocks where the trends change very fast and thus a

company doing well today may end up on a losing side in a very short period of time).

No Institutional holding:

There’s no institutional holding in Cera, probably because of low liquidity. There is a very high There’s no institutional holding in Cera, probably because of low liquidity. There is a very high

probability the stock can get re-rated to higher PE multiples once it comes in sight of smart

investors.


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Filter # 6

and now Valuations...and now Valuations...


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Earnings Power Value (EPV)

The formula for EPV of a company is:

EPV = Adjusted Earnings x 1/R

Here, ‘R’ is the cost of capital.

CSL posted an adjusted EPS (earnings per share) of Rs 31.18 in March FY10. If the company’s

profits were to stagnate and remain at Rs 31.18 per share going forward, and applying the EPV

formula here, we multiply Rs 31.18 with 1/15% (15% being my assumption for the opportunity

cost of capital)

This gives us a value of Rs 208 per share, which is CSL’s intrinsic value as per the EPV calculation.This gives us a value of Rs 208 per share, which is CSL’s intrinsic value as per the EPV calculation.

And the current market price of the share is INR 170.


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Filter # 7

Margin of safety

Having ascertained that Cera Sanitaryware Ltd is one of the contenders for Having ascertained that Cera Sanitaryware Ltd is one of the contenders for

becoming a part of a portfolio that Warren Buffett would love to own, let us have a

look whether there is sufficient margin of safety in the company's current stock

price and whether one should invest in the stock at the current levels.


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Buffett always insist on the Margin of Safety of 25% from the current share price. Because an

analyst can go wrong in estimating the fair value of a company. That is why Buffett always look

for a fair amount of Margin of Safety.

Cera’s current share price stands at Rs. 170, while Fair Value comes at Rs. 208. So there is a

margin of safety exist in the current share price.

There is a 22% undervaluation calculated at the current price compared to its fair valuation

which offers a reasonable level of Margin of Safety.

Margin of Safety

which offers a reasonable level of Margin of Safety.


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Name Of Shareholder

No. Of Shares

held

Shares as a % of Total No. Of

Shares

HSBC Bank (Mauritius) Ltd A/c Jwalamukhi Investment Holdings 1122769 8.87

Vijay Kishanlal Kedia 315000 2.49

Shareholders with more than 1% stake

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Sajan Kumar Pasari 245140 1.94

Dolly Khanna 144183 1.14

Nalanda India Equity Fund Ltd 277882 2.2

Total 2104974 16.63

Source: BSE India


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Concerns1. The main risk associated in the sanitaryware segment is from the unorganized and local

players. The unorganized sanitaryware manufacturers enjoy the benefit of nil excise duty

and sales tax and hence their products are ~70% cheaper than the organized sector

products. Increase in excise duties from 8% to current 12% will make products from

organized players more expensive.

2. Advent of foreign brands in India is also becoming a threat since increased purchasing power

may lead to shift in consumer preferences to bigger brands.

3. Changes in government policy related to housing construction, imports etc are bound to 3. Changes in government policy related to housing construction, imports etc are bound to

impact the industry.

4. Further slowdown in the housing segment will impact fresh demand for sanitary ware.


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Conclusion from Head Equity ResearchLooking at the industry structure and the business model, we have arrived at the conclusion to

buy this gem.

This company possess enormous competitive advantage which can be evident from the analysis.

Management is clean and clear in there vision and integrity.

At this level share price gives us enough margin of safety and the way company has grown in the

past if it continues to do same it will create huge wealth for all the stakeholders.past if it continues to do same it will create huge wealth for all the stakeholders.

Cerebral Advisory Services Pvt Ltd


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situation or specific requirements of individual users.

Disclaimer

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