December 14, 2010 BUY MEDIUM RISK PRICE Rs.156 TARGET Rs. 240 CONSUMER SHARE HOLDING (%) Promoters 53.7 FII 1.0 FI 0.1 Body Corporates 6.0 Public & Others 39.2 Reuters Code Bloomberg Code BSE Code NSE Symbol Market Capitalization* Shares Outstanding* STOCK DATA CERA.BO CRS IN 532443 CERA Rs.1981.2 mn US $ 43.8 mn 12.7 mn 52 Weeks (H/L) Rs.193 / 76 Avg. Daily Volume (6m) 21,856 Price Performance (%) 1M 3M 6M (10) (7) (21) 200 Days EMA: Rs.146 *On fully diluted equity shares Part of Bonanza ANALYST Bhavika Shah +91 22 4093 5054 bhavika.shah@sushilfinance.com SALES: Devang Shah +91 22 4093 6060/61 devang.shah@sushilfinance.com Nishit Shah +91 22 4093 5074 nishit.shah@sushilfinance.com Cera Sanitaryware Ltd. (CSL) is a pioneer in the sanitaryware segment in India. CSL is mainly engaged in manufacturing & marketing of sanitaryware & wellness products. The company is currently expanding its existing capacities in sanitaryware and is also setting up its Faucetsware Plant, to manufacture faucets popularly known as CP fittings. It has a strong brand recognition and distribution network of 6000 dealers. With revenues grown at a CAGR of more than 25% since last 4 years, CSL today is the one of the fastest growing sanitaryware company in India. We believe that CSL s APAT would grow at a CAGR of 24.5% over next two years. Capacity expansion in sanitaryware & setting up its Faucetsware Plant CSL is currently in process of expanding its capacity from 2.0 mn pieces to 2.6 mn pieces in sanitaryware division. This is expected to be operational by around middle of FY12; hence FY12 will have benefit of increased capacity for part of the year. CSL is also setting up its Faucetsware Plant, to manufacture faucets popularly known as CP fittings, within the same premises with a production capacity of 2500 pcs per day. This will be ready for commercial production in Q4FY11. The company generally operates at 99% utilization levels and during FY10 it manufactured 1.8 mn pcs of sanitaryware. Going ahead, we expect its plants to continue to operate at optimum levels leading to a Revenue growth of 19% CAGR over the next 2 years. Enhancing product portfolio and strong distribution network CSL has been enhancing its product portfolio every year; it has one the largest distribution channels in India with 6000 dealers that help in better market penetration. CSL is also pursuing inorganic growth through Mergers & Acquisitions to expand its footprint and capture a larger global customer base. The company is in dialogue with leading players in the European faucets and sanitaryware segment with intension of acquiring two super premium brands. There is major growth on cards with Cera becoming a complete bathroom solutions company. Strong Consumer Demand to Drive Sanitaryware Market growth Indian Sanitaryware market is estimated at Rs. 13,000 mn, of which about 60% is organized market, where CSL enjoys a 20% market share. Strong growth in the housing sector as well as increase in income levels has lead to robust growth in the sanitaryware market in India. While the volume growth of sanitaryware in India has been pretty strong, the value growth has been even stronger mainly because of improved standard of living & changing consumer preferences leading to huge demand for higher end sanitaryware products. Going ahead, we expect the industry to continue to grow at a fast pace with the key growth drivers being (a) Allowance of 100% FDI in construction /housing sector, (b) rising income of middle class, (c) easy availability of cheap home loans, (d) replacement demand and (e) increasing focus of the government to improve sanitation facilities. OUTLOOK & VALUATION India s strong recovery from Global Economic Crisis has boosted growth in infrastructure sector. Infrastructure growth is expected to sustain and a correction of 25 30% in housing costs coupled with favourable interest rates will catalyze real estate growth. During H1FY11, CSL s Revenues grew by 23% YoY, its EBIDTA increased by 34% YoY where as its margins increased by 150 bps and its APAT grew by 49% YoY with an EPS of Rs.9.5 (post 1:1 bonus issue). Going ahead, we believe that the company s Strong Brand, wide distribution network, strategy to introduce new products, capacity expansion & increased demand will lead to strong growth in Revenues & APAT. We initiate our coverage on the company with a BUY rating and a target price of Rs. 240 (10x FY12E EPS of Rs.24) Y/E Mar. Please refer to important disclosures at the end of the report Sushil Financial Services Private Limited Office : 12, Homji Street, Fort, Mumbai 400 001. Revenue (Rs mn) APAT (Rs mn) KEY FINANCIALS APAT (% Ch.) Initiating Coverage Cera Sanitaryware Limited AEPS* (Rs.) P/E* (x) ROCE (%) ROE (%) P/BV* (x) FY09 1595.2 131.1 30.4 21.1 7.4 23.0 20.3 1.4 FY10 1913.6 196.1 49.6 31.2 5.0 26.9 24.6 1.1 FY11E 2288.2 250.7 27.8 19.8 7.9 29.1 24.7 1.7 FY12E 2702.9 303.9 21.2 24.0 6.5 28.4 23.7 1.4 * FY11E &FY12E is Adjusted Post 1:1 bonus issue. For private Circulation Only. Member : BSEL, SEBI Regn.No. INB/F010982338 NSEIL, SEBI Regn.No.INB/F230607435. Phone: +91 22 40936000 Fax: +91 22 22665758 Email : info@sushilfinance.com
Expanding capacity of sanitaryware from 2.0 mn pieces to 2.6 mn pieces. Capacity expansion in sanitaryware & setting up its Faucetsware Plant CSL currently has a capacity of 2.0 mn pieces per year (equivalent to 24,000 MTPA) in Kadi, Gujarat. It is in the process of expanding its capacity to 2.6 mn pieces per year (equivalent to 31,200 MTPA) by FY12. The current capacity of 2.0 mn pieces has been running at above 90% utilization. The expansion would cost about Rs. 350 mn (excluding the working capital requirement) and would cater to the growing demand of its sanitaryware business. Going ahead, we expect its plants to continue to operate at optimum levels. 35000 30000 25000 20000 15000 10000 5000 0 CAPACITY UTILIZATION OF SANITARYWARE FY07 FY08 FY09 FY10 FY11 FY12 Installed Capacity (MT) Production (MT) Source: Company & Sushil Finance Research estimates To benefit from the growing demand in the Faucetware business and to leverage on its wide distribution network, CSL is also setting up a Faucetsware Plant, to manufacture CP fittings with a production capacity of 2500 pcs per day with an investment of Rs 100 mn. Until now, the company was outsourcing its Faucets requirements. The plant is expected to go on stream from Q4FY11. Thereafter, the company plans to double the capacity from 2500 to 5000 pieces per day at a cost of Rs 250 mn (excluding the working capital requirement) in coming years. Sales & earnings to grow at a CAGR of 19% & 24.5% respectively over next two years. Overall, we expect CSL s Revenues, which includes sales from outsourcing of faucets, bath tubs, showers accessories, etc., to grow at a CAGR of 19% over next 2 years. We believe that this growth would be achieved through a combination of 12% volume CAGR and 6% CAGR in price realization, which would largely be through increased Revenues from high end products. In past, its realizations have grown due to introduction of new value added products to its existing range of products and also due to shift of consumer preference towards premium products. We have also included the sales of faucet business into our estimates for FY11 and FY12. And overall, we expect its earnings to grow at a CAGR of 19% over next two years. December 14, 2010 2
Enhancing product portfolio and strong distribution network Cera, the flagship brand of CSL has strong brand recognition in the bathroom segment. Owing to its strong recognition in the industry, the Company also has one of the largest distribution networks of 6000 dealers to cater to all the states and regions of India. To achieve the desired growth in the rapidly changing retail market in the country, Cera has launched its one of a kind Cera Bath Studios in Ahmedabad, Bangalore, Chandigarh, Kolkata, Cochin, Hyderabad and Mumbai. Product Range Sanitaryware Faucets Cisterns Wash basins Seat Covers Sensors Urinals Bath Accessories Source: Company Showers Kitchen faucets Bathroom faucets 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. At Cera Bath Studios, CSL displays several Bathrooms formats, so that the customers get a feel of Cera s vast range of products, which complement its business growth through its existing network. Exclusive dealership with Novellini CSL has entered into an exclusive dealership agreement with Novellini, Europe s largest manufacturer of shower enclosures, covering 32 products from the range of its shower enclosures, equipped panels, bath tubs and shower temples. Under this dealership agreement, Novellini products would be sold through Cera's exclusive 'bath studios' and its selected dealership network. Novellini, 190 mn company, is also planning to increase its portfolio in India over next few months and is planning to spend around 1 mn in India for marketing its products over the next 3 years. Highlights of innovative achievements by CSL CSL was the first sanitaryware company to use natural gas; Cera has been on the forefront of launching a versatile colour 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 litres of water is another notable innovation by Cera. December 14, 2010 3
Strong Consumer Demand to Drive Sanitaryware Market growth With the increase in standard of living & change in consumers choice & preferences there is a strong consumer demand for sanitaryware in India. The volume growth of sanitaryware in India is less as compared to the value growth mainly because of huge demand for higher end products. The demand for high value sanitaryware in India is growing at a fast pace. The key drivers for growth in the sanitaryware industry are: 100% FDI allowed in construction /housing sector, rising income of middle class, easy availability of cheap home loans, replacement demand, and increasing focus of the government to improve sanitation facilities. Replacement demand expected to pick up Fresh Demand Replacement Demand Developed economies 20% 80% India 93% 7% Source: Company Indian Sanitaryware market is estimated at Rs. 13 bn, of which about 60% is organized market. The organized market is governed by 7 players as shown below. HSIL enjoys the highest share of the organized markets followed by Roca & Cera. MARKET SHARE OF SANITARYWARE & FITTINGS (%) HSIL 2 13 18 26 41 Roca Bathroom Products Pvt. Cera Sanitaryware Neycer India & LLM appliances Others Sanitaryware companies have upgraded their manufacturing system and improved their quality by introducing high value product range in the market, which has been accepted and appreciated. Source: CMIE The market for sanitaryware in India comprises the institutional and individual segment. While institutional customers buy directly from companies and use material in construction projects like apartments, commercial complexes and shopping malls, the individuals buy from retail outlets for residential applications. Sanitaryware Industry in India for the last few years has shown very dramatic growth with major players increasing their production capacities. Companies have also upgraded their manufacturing system and improved their quality by introducing high value product range in the market, which has been accepted and appreciated. The December 14, 2010 4
demand for high value sanitaryware in India is growing very fast. Most Companies are now focusing on the premium & high end of the market where per ton realization is very good, which ultimately results in good profitability. In order to educate the customers in India to go for quality products and also for higher value sanitarywares, companies have adopted a very aggressive advertisement campaign. Companies have also strengthened their dealer network by offering showroom incentives and some of the companies have also gone for their own retail outlets in major towns. 400 300 200 100 0 INDIAN HOUSING SCENARIO 286 209 161 85 101 117 15 15 21 31 41 49 1961 1971 1981 1991 2001 2011 Number of houses (mn units) Shortages (mn units) Source: Company FINANCIALS OUTLOOK Sales to grow at CAGR of 19% over FY10 FY12 CSL s net sales have grown at a 25% CAGR of the past 4 years (FY06 FY10). We expect that on back of increased volumes, improving realization (which would be achieved through improved sales of premium products) and sales of faucets would lead to a net sales CAGR of 19% over FY10 FY12. Total Sales to grow at a CAGR of 19% over next two years on back of improved sales of premium products and expansion of plants. Sales (Rs. Mn) 3000 2500 2000 1500 1000 500 0 FY07 FY08 FY09 FY10 FY11 FY12 Source: Company & Sushil Finance Research estimates December 14, 2010 5
Improvement in margins expected on back of improved process innovation & efficient production planning. EBITDA margins expected to grow to 20% CSL has continuously improved its operational efficiencies by technological upgradation and process innovation which resulted in reduction of wastages in sanitaryaware division. Additionally margins were boosted by improved process innovation, efficient production planning. We believe that CSL will be able to improve its margins by 70 bps in FY11 and then further by 50 bps in FY12. 600 EBIDTA & EBIDTA Margins 25.0 500 400 300 200 100 0 FY07 FY08 FY09 FY10 FY11 FY12 EBIDTA (Rs. Mn) EBIDTA Margins (%) 20.0 15.0 10.0 5.0 0.0 Source: Company & Sushil Finance Research estimates APAT to grow at CAGR of 24.5% over FY10 FY12. APAT to grow at CAGR of 24.5% over FY10 FY12 After having factored incremental depreciation and interest on the expanded capacities and increased level of debt, we expect the APAT to grow at CAGR of 24.5% over FY10 FY12. 350 300 250 200 150 100 50 0 APAT & EPS FY07 FY08 FY09 FY10 FY11 FY12 APAT (Rs. Mn) EPS (Rs.) 35.0 30.0 25.0 20.0 15.0 10.0 5.0 0.0 Source: Company December 14, 2010 6
Peer Valuation FY12 (Rs. Mn) Net Sales EBIDTA EBIDTA Margins (%) Net Profit EPS (Rs.) Cera Sanitaryware 2702.9 540.2 20.0 303.9 24.0 6.5 Kajaria Ceramics 9747.0 1684.0 17.3 671.0 9.1 8.1 HSIL 12335.0 2393.0 19.4 964.6 14.6 9.0 Source: Sushil Finance Research estimates & Bloomberg Consensus estimates Risks & Concerns Fortunes of sanitaryware are highly linked to fresh demand in housing. A slowdown in the real estate sector may dampen HSIL s growth prospects. The prices of power & fuel and soda ash which together constitute major manufacturing cost may rise in future which could impact the earnings of the company. OUTLOOK & VALUATION India s strong recovery from Global Economic Crisis has boosted growth in infrastructure sector. Infrastructure growth is expected to sustain and a correction of 25 30% in housing costs coupled with favourable interest rates will catalyze real estate growth. During H1FY11, CSL s Revenues grew by 23% YoY, its EBIDTA increased by 34% YoY where as its margins increased by 150 bps and its APAT grew by 49% YoY with an EPS of Rs.9.5 (post 1:1 bonus issue). Going ahead, we believe that the company s Strong Brand, wide distribution Network, strategy to introduce new products, capacity expansion & increased demand will lead to strong growth in Revenues & APAT. We initiate our coverage on the company with a BUY rating and a target price of Rs. 240 (10x FY12E EPS of Rs.24). P/E (x) December 14, 2010 7
ANNEXURE Cera started its business in 1979 as a small plant with a capacity to manufacture about 1,000 pieces of sanitaryware per day is now the third largest sanitaryware company in India. Cera Sanitaryware Limited (CSL) now commands a 20% share in the Rs 1,000 crore organised market. Vikram Somany, chairman and managing director of CSL, started out on his own after a Split in the family business (run through Hindustan Sanitaryware). He chose sanitaryware as it was one business he felt comfortable with. Today Cera has 500 distributors and retails through 5,000 outlets in India. What set the plant apart from the rest is the use of natural gas in its kiln right since the inception. Those days most furnaces used coal or other fuel that left specks on the ceramic. V. Somany decided to use natural gas and that made a huge difference in quality. In fact, right from day one, Cera was focused on just one aspect quality. December 14, 2010 8
PROFIT & LOSS STATEMENT Rs.mn Y/E March FY09 FY10 FY11E FY12E Total Sales 1595.2 1913.6 2288.2 2702.9 Total Raw Material Cost 591.1 666.8 819.5 981.6 Power and Fuel Cost 49.8 63.3 95.0 111.6 Personnel Cost 236.5 254.7 296.7 344.2 Other Cost 422.6 568.2 630.6 725.2 EBITDA 295.3 360.6 446.3 540.2 Interest 39.7 25.3 27.3 32.8 Depreciation 59.3 61.0 68.4 82.0 Other Income 19.0 24.7 32.1 38.5 Extraordinary items 16.3 0.0 0.0 0.0 PBT incl OI 199.0 299.0 382.7 463.9 Tax 68.0 102.9 132.0 160.1 APAT 131.1 196.1 250.7 303.9 FINANCIAL RATIO STATEMENT Y/E March FY09 FY10 FY11E FY12E Growth (%) Net Sales 24.6 20.0 19.6 18.1 APAT 30.4 49.6 27.8 21.2 EBITDA 38.8 22.1 23.8 21.0 Profitability (%) EBITDA Margin 18.5 18.8 19.5 20.0 Adj. PAT Margin 8.2 10.2 11.0 11.2 ROCE 23.0 26.9 29.1 28.4 ROE 20.3 24.6 24.7 23.7 Per Share Data (Rs.) Adj. EPS 21.1 31.2 19.8 24.0 Adj. CEPS 35.5 40.9 25.2 30.5 BVPS 113.7 140.7 90.5 112.5 Valuations (X) PER 7.4 5.0 7.9 6.5 PEG 0.2 0.1 (0.2) 0.3 P/BV 1.4 1.1 1.7 1.4 EV / EBITDA 4.5 3.5 5.1 4.3 EV / Net sales 0.8 0.7 1.0 0.9 Dividend Yield (%) 1.3 1.6 1.0 1.1 Turnover Days Debtors days 64.5 60.9 58.0 58.4 Creditors days 92.9 100.9 109.0 109.6 Gearing Ratio Total Debt to Equity 0.5 0.3 0.3 0.3 Source : Company, Sushil Finance Research Estimates BALANCE SHEET STATEMENT Rs.mn As on 31 st March FY09 FY10 FY11E FY12E Equity Share Capital 31.1 31.4 63.3 63.3 Reserves 675.1 853.7 1082.2 1360.2 Net worth 706.2 885.1 1145.4 1423.4 Total loans 366.0 272.1 299.3 357.5 Deferred tax liab (Net) 136.7 131.9 138.5 145.5 Capital Employed 1208.8 1289.2 1583.3 1926.4 Gross Block 987.8 988.2 1438.2 1778.2 Depreciation 244.6 302.2 370.6 452.6 Net block 743.1 686.0 1067.6 1325.6 CWIP 2.1 21.6 30.0 40.0 Investments 0.0 0.0 0.0 0.0 Inventories 268.5 363.6 434.8 513.6 Sundry debtors 306.9 331.4 396.3 468.1 Cash and bank 216.4 340.5 197.4 220.2 Loans and advances 100.5 156.9 187.6 221.5 Other Current Assets 5.9 10.9 13.1 15.4 Total Current assets 898.2 1203.4 1229.1 1438.9 Total Current Lia. 435.5 622.4 744.2 879.0 Net Current assets 462.7 581.0 485.0 559.9 Misc Exp 0.9 0.6 0.7 0.8 Capital Deployed 1208.8 1289.2 1583.3 1926.4 CASH FLOW STATEMENT Rs. mn Y/E March FY09 FY10 FY11E FY12E PAT 147.4 196.1 250.7 303.9 Depreciation 58.2 57.6 68.4 82.0 Chg in Deferred tax 14.0 (4.7) 6.6 6.9 Chg in Working cap (17.4) 5.8 (47.1) (52.1) Chg in Misc Exp. 0.2 0.2 (0.1) (0.1) Cash flow from operations 202.4 255.1 278.5 340.6 Chg in Gross PPE (45.8) (0.5) (450.0) (340.0) Chg in WIP 6.8 (19.5) (8.4) (10.0) Chg in Investments 0.0 0.0 0.0 0.0 Cash flow from investing (39.0) (19.9) (458.4) (350.0) Chg in debt (25.0) (93.9) 27.2 58.1 Chg in Share Capital (4.1) 0.4 31.8 0.0 Chg in other reserves (10.8) 0.8 0.0 (0.0) Dividend (14.5) (18.4) (22.2) (25.9) Cash flow from financing (54.4) (111.0) 36.8 32.3 Chg in cash 109.1 124.1 (143.1) 22.8 Cash at start 107.3 216.4 340.5 197.4 Cash at end 216.4 340.5 197.4 220.2 December 14, 2010 9
Rating Scale This is a guide to the rating system used by our Equity Research Team. Our rating system comprises of six rating categories, with a corresponding risk rating. Risk Rating Risk Description Low Risk Medium Risk High Risk Predictability of Earnings / Dividends; Price Volatility High predictability / Low volatility Moderate predictability / volatility Low predictability / High volatility Total Expected Return Matrix Rating Low Risk Medium Risk High Risk Buy Over 15 % Over 20% Over 25% Accumulate 10 % to 15 % 15% to 20% 20% to 25% Hold 0% to 10 % 0% to 15% 0% to 20% Sell Negative Returns Negative Returns Negative Returns Neutral Not Applicable Not Applicable Not Applicable Not Rated Not Applicable Not Applicable Not Applicable Please Note Recommendations with Neutral Rating imply reversal of our earlier opinion (i.e. Book Profits / Losses). ** Indicates that the stock is illiquid With a view to combat the higher acquisition cost for illiquid stocks, we have enhanced our return criteria for such stocks by five percentage points. Additional information with respect to any securities referred to herein will be available upon request. This report is prepared for the exclusive use of Sushil Group clients only and should not be reproduced, recirculated, published in any media, website or otherwise, in any form or manner, in part or as a whole, without the express consent in writing of Sushil Financial Services Private Limited. Any unauthorized use, disclosure or public dissemination of information contained herein is prohibited. This report is to be used only by the original recipient to whom it is sent. This is for private circulation only and the said document does not constitute an offer to buy or sell any securities mentioned herein. While utmost care has been taken in preparing the above, we claim no responsibility for its accuracy. We shall not be liable for any direct or indirect losses arising from the use thereof and the investors are requested to use the information contained herein at their own risk. This report has been prepared for information purposes only and is not a solicitation, or an offer, to buy or sell any security. It does not purport to be a complete description of the securities, markets or developments referred to in the material. The information, on which the report is based, has been obtained from sources, which we believe to be reliable, but we have not independently verified such information and we do not guarantee that it is accurate or complete. All expressions of opinion are subject to change without notice. Sushil Financial Services Private Limited and its connected companies, and their respective directors, officers and employees (to be collectively known as SFSPL), may, from time to time, have a long or short position in the securities mentioned and may sell or buy such securities. SFSPL may act upon or make use of information contained herein prior to the publication thereof. December 14, 2010 10