August 23, 2012 Cera Sanitaryware Ltd Strong growth prospects CMP: Rs. 353.50 Target: Rs. 394 Coverage Follow-Up: Hold Key Share Data Face Value (Rs.) 5 Equity Capital (Rs. Crs) 6.3 Market. Capitalization (Rs. Crs) 446.8 52-wk High / Low (Rs.) 373.9/158.0 Average Yearly Volume 4289 BSE code 532443 NSE code CERA Reuters code CERA.BO Bloomberg code CRS IN Shareholding Pattern (as on 30th Jun. 2012) Financials (Rs. Cr.) Others 41.62% DII 0.05% FII 2.97% Promoter 55.36% Particulars FY11 FY12E FY13E FY14E Net Sales 243.0 319.4 417.7 527.8 Sales Gr 27.0% 31.5% 30.8% 26.4% EBIDTA 50.9 60.2 64.5 80.2 PAT 26.5 32.0 33.6 41.6 PAT Gr 35.3% 20.7% 4.7% 23.9% EPS (Rs.) 21.0 25.3 26.5 32.9 Key Ratios Particulars FY11 FY12E FY13E FY14E Dividend(%) 50% 60% 60% 60% P/E 16.9 14.0 13.3 10.8 MCap/Sales 1.8 1.4 1.1 0.8 Interest Cov 15.6 13.1 11.5 10.9 ROCE 33.6% 31.4% 26.5% 26.4% RONW 26.5% 25.6% 21.8% 22.1% EBITDM(%) 20.9% 18.9% 15.5% 15.2% NPM (%) 10.9% 10.0% 8.0% 7.9% Debt-Equity 0.3 0.3 0.4 0.4 1 year Price performance Cera v/s BSE Midcap 1 0.5 0-0.5 Cera BSE Midcap Analyst: Prajwal Kanoi Ph: +91 33 4007 7408 M: +91 9836907373 Email: prajwal.kanoi@skpmoneywise.com Company Profile Incorporated in 1980, Cera Sanitaryware Limited (Cera), is promoted by Mr. Vikram Somany. Cera is one of the leading companies in the sanitary ware industry in India. Cera has launched sanitary ware and bathroom products with versatile colour range, innovative designs coupled with water saving modules (twin-flush model) etc., based on technology which is at par with international standards. Cera s plant is located at Kadi, Gujarat. Investment Rationale Strong brand image Cera s expansion into new markets, development of new products and generation of new capabilities has made it a versatile brand. Over the years, Cera has increasingly invested in enhancing its brand visibility. This is reflected in its increasing publicity and advertisement expenses which have grown at a CAGR of ~34% in FY08-12 period. We expect Cera to continue its brand building exercise going forward. Cera leverages its strong brand image to introduce new products and services in the market. Cera has a strong distribution network through which it channelizes its products and services to reach remote parts of the country. Capacity expansion to augment growth Cera is planning to increase its sanitary ware capacity from 2 million units to 2.7 million units which is expected to be completed by the last quarter of FY13E. Further, Cera has also entered into production of faucets with an initial capacity of about 2,500 pieces per day. Further, the company is expected to spend Rs ~120 crores in the next three years on increasing its capacity, developing products and strengthening its distribution network. This is likely to have a strong impact on the topline of the company in the near future. Strong growth of domestic sanitary ware industry In India, 72% of the population lives in rural areas and the remaining 28% in urban areas. Around 58% of India s urban population has access to improved sanitation and in rural areas, the coverage is considerably lower at 18%. The mismatch between existing sanitation facilities in India and the demand for same is likely to ensure sustained growth of sanitary ware industry. Moreover, the comparative advantage of Indian companies to produce sanitary ware products at low cost and robust growth of realty sector further augurs well for the sanitary ware industry in India. It is expected that sanitary ware industry in India will grow at 15-16% per annum. Valuation Cera is currently trading at a PE of 13.3x FY13E and 10.8x FY14E EPS. We recommend HOLD rating on the stock with a 12 months target price of Rs 394, at 12x FY14E earnings, implying an upside of ~12% from the current levels. SKP Securities Ltd www.skpmoneywise.com Page 1 of 5
Q1FY13 Results Review Exhibit: Q1FY13 Result Review (in Rs Crores) Particulars Q1FY13 Q1FY12 YoY (%) Q4FY12 QoQ (%) Net Sales 90.5 64.6 40.0% 100.2-9.7% Other Operating Income 0.0 0.0 NA 0.0 NA Total Income From Operations 90.5 64.6 40.0% 100.2-9.7% Total Expenditure 74.9 52.5 42.6% 84.3-11.1% Operating Margins (%) 17.3% 18.8% N/A 15.9% N/A PBIDTA 15.6 12.1 28.9% 16.0-2.0% Depreciation 2.2 1.9 15.0% 2.2 0.0% Profit before other income, interest & tax 13.5 10.2 31.5% 13.8-2.4% Other Income 1.6 0.9 68.5% 1.9-18.3% PBIT 15.0 11.2 34.6% 15.7-4.3% Interest 1.2 0.7 71.9% 1.2 6.5% PBT 13.8 10.5 32.0% 14.6-5.2% Tax 4.6 3.6 28.2% 5.3-13.4% PAT 9.2 6.9 33.9% 9.3-0.5% Earnings Per Share (Rs.) 7.3 5.5 33.9% 7.3-0.5% Exhibit: Net Sales and PAT Margins Net sales is expected to grow at a CAGR of ~30% in FY11-14E. PAT Margins are expected to fall from 10% in FY12 to ~8% in FY13E and FY14E. 600.00 500.00 400.00 300.00 200.00 100.00 0.00 FY11 FY12 FY13E FY14E Net Sales (LHS) PAT Margins 12.00% 10.00% 8.00% 6.00% 4.00% 2.00% 0.00% Source: Company, SKP Research Cera has a low debt-equity ratio of 0.3 in FY11 and FY12 which is expected to rise marginally to 0.4 in FY13E and FY14E respectively. Exhibit: Debt-Equity Ratio 0.45 0.40 0.35 0.30 0.25 0.20 0.15 0.10 0.05 0.00 Source: Company, SKP Research FY11 FY12 FY13E FY14E Debt-Equity Ratio SKP Securities Ltd www.skpmoneywise.com Page 2 of 5
Concerns Rising costs to put pressure on margins Increase in costs are on account of rising raw material costs (sand, sandstone, clays and chemicals) and depreciation of INR (as the company imports bathware products which are sold under the brand name of Cera ). Cera s total cost as a percentage to sales has increased from 85.4% in FY11 to 94.3% in FY12. Though we expect it to reduce to 86.8% in FY13E and 87.0% in FY14E, rising costs of the company will continue to put pressures on the margins of the company. These costs are on account of rising raw material costs (sand, sandstone, clays and chemicals) and depreciation of INR (as the company imports bathware products which are sold under the brand name of Cera ). Superior product quality and a well established brand, helps Cera to pass on the rising costs to its clients. Intense competition from domestic and foreign players Intense competition from unorganized sector, cheap imports from China and established brands like HSIL, Parryware Roca and Jaguar. Cera faces competition in the sanitary ware industry from players in both organized and unorganized sector. Further, cheap imports from China reduce Cera s ability to increase prices of its products. Competition from established brands like HSIL and Roca Parryware in the sanitary ware and Jaguar in faucet ware segment further poses as a challenge to Cera. Valuation and Recommendation Cera is currently trading at a PE of 13.3x FY13E and 10.8x FY14E EPS. We recommend HOLD rating on the stock with a 12 months target price of Rs 394, at 12x FY14E earnings, implying an upside of ~12% from the current levels. Exhibit: One year forward P/E band 300 280 260 240 Price (Rs/Share) 220 200 180 160 140 120 100 12/7/2010 18/05/2011 26/03/2012 Series1 6x 7x 8x 9x 10x 11x Source: Capitaline, SKP Research SKP Securities Ltd www.skpmoneywise.com Page 3 of 5
Financials (in Rs Cr) Income Statement FY11 FY12 FY13E FY14E Balance Sheet FY11 FY12 FY13E FY14E Net Sales 243.0 319.4 417.7 527.8 Share Capital 6.3 6.3 6.3 6.3 Growth 27.0% 31.5% 30.8% 26.4% Reserves and Surplus 105.2 132.9 162.6 200.4 Total Income 258.4 361.2 426.9 539.4 Net worth 111.6 139.2 168.9 206.7 Total Expenditure 207.5 301.0 362.3 459.2 Total Debt 36.6 46.8 64.6 84.6 Operating Profit 50.9 60.2 64.5 80.2 Deferred Tax Liability (Net) 13.9 13.6 13.6 13.6 Operating Profit Margin 20.9% 18.9% 15.5% 15.2% Total 162.0 199.6 247.2 305.0 Growth 32.1% 18.3% 7.2% 24.3% Net Block 78.3 90.3 122.4 151.5 Interest 2.8 4.0 4.8 6.3 Capital Work in Progress 6.1 10.9 4.0 4.0 PBDT 48.1 56.2 59.7 73.9 Investments 7.8 1.1 9.3 17.5 Depreciation 6.5 7.7 8.8 10.9 Inventories 50.0 91.8 100.2 110.8 PBT 41.5 48.5 50.8 63.0 Sundry Debtors 38.8 45.5 50.1 60.7 Tax 15.0 16.5 17.3 21.4 Cash and Bank 36.2 31.3 34.4 43.3 PAT 26.5 32.0 33.6 41.6 Other Current Assets 0.7 0.7 0.8 0.9 PAT Margin 10.9% 10.0% 8.0% 7.9% Loans and Advances 20.7 23.1 29.2 39.6 Growth 35.3% 20.7% 4.7% 23.9% Total Current Assets 146.5 192.3 214.9 255.3 Shares Outstanding 1.3 1.3 1.3 1.3 Current Liabilities & Prov 76.7 95.0 103.4 123.3 EPS 21.0 25.3 26.5 32.9 Total 162.0 199.6 247.2 305.0 Cash Flow Statement FY11 FY12 FY13E FY14E Ratios FY11 FY12 FY13E FY14E Profit before tax 41.5 48.5 50.8 63.0 Valuation Ratios Add: Depreciation, Interest & Other Exp 8.7 8.9 13.7 17.2 P/E 16.9 14.0 13.3 10.8 Net Changes in WC, tax, interest -23.4-52.8-28.3-33.1 P/BV 4.0 3.2 2.6 2.2 Cash Flow from Operating Activities 26.8 4.7 36.2 47.1 EV/EBITDA 8.6 7.7 7.2 5.9 Change in Fixed Assets -21.7-24.4-41.0-40.0 EV/Sales 1.8 1.4 1.1 0.9 Change in Investments -7.8 6.7-8.2-8.1 Price/Sales 1.8 1.4 1.1 0.8 Change in Capital WIP 0.0 0.0 6.9 0.0 Dividend Yield 0.9% 1.1% 1.1% 1.1% Dividend Received 0.1 0.1 0.0 0.0 Earnings Ratios Interest Received 1.8 2.5 0.0 0.0 OPM 20.9% 18.9% 15.5% 15.2% Cash Flow from Investing Activities -27.5-15.2-42.3-48.1 NPM 10.9% 10.0% 8.0% 7.9% Issue of Share Capital 0.2 0.0 0.0 0.0 ROCE 33.6% 31.4% 26.5% 26.4% Change in Borrowings 4.8 9.3 17.9 20.0 RONW 26.5% 25.6% 21.8% 22.1% Interest Paid 0.0 0.0-4.8-6.3 Interest Coverage 15.6 13.1 11.5 10.9 Dividend Paid -1.8-3.7-3.8-3.8 Balance Sheet Ratios Cash Flow from Financing Activities 3.1 5.6 9.2 9.9 Current Ratio 1.9 2.0 2.1 2.1 Opening Cash Balance 33.8 36.2 31.3 34.4 Debt-Equity Ratio 0.3 0.3 0.4 0.4 Change in cash and cash eq 2.4-4.9 3.1 8.9 Debtors Days 53.3 47.5 41.2 37.8 Closing Cash Balance 36.2 31.3 34.4 43.3 Inventory Days 79.8 97.0 96.5 83.7 SKP Securities Ltd www.skpmoneywise.com Page 4 of 5
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