Rationale for adding Cera Sanitaryware to the Little Champs portfolio
Saurabh Mukherjea has explained that Cera is the no. 2 player in the mass-affluent segment of the sanitaryware and faucets market in India. It’s a pan-India brand, with maximum revenues from the south (40% of total revenues) – a geography that is likely to continue growing faster relative to other regions. The company has grown revenues at 11% CAGR over the last 5 years, while earnings over the same period have grown at a CAGR of 16%, while maintaining an average RoCE of 20%.
The company’s moats are built on strong distribution, continuous product innovation and introduction and an established brand image. The company has also been focusing on deepening these moats, with regular capacity expansions, steady new product introductions, and investments in manufacturing capabilities that go towards improvement in product quality and finish. Working capital cycle has come down an average 111 days during F18-20 to an average of 77 days during F21-23, he stated.
He pointed out that over the next few years, a strong a demand environment for Cera’s products is expected. Cera is a mid-to-late cycle play on residential real estate. In the March 2023 quarter, new project launches in the top 7 property markets in India were at a decadal high. Large players such as DLF and Godrej Properties have reported record new sales bookings in F23 (up 107% and 56% respectively). These new launches would be ready for bathroom fitouts in the next 18-24 months and will translate to a surge in demand for bathware.
Research Reports on Cera Sanitaryware
Prabhudas Liladhar has recommended a buy of Cera Sanitaryware for the target price of Rs. 8,926. The rationale is as follows:
“Margin improved, guidance upward revised
Cera Sanitaryware (CRS) upward revised its revenue growth guidance between 19-21% from 17-19% and expects 16%+ margins in the near term, given strong demand outlook from replacement (accounts 65% its revenue) and expansion in geographical penetration. CRS’s Q2FY24 Revenue/PAT was 3.1%/3.0% above our estimates with healthy performance from faucetware segment & margin expansion of 60bps YoY. The company delivered revenue CAGR of 9.1% over 4years in Q2FY24 and strong growth guidance for H2FY24 considering seasonally better quarters. EBITDA margin improved to 16.5% and is expected to be at current level in near terms.
We believe demand scenario to remain healthy and capacity expansion in faucetware division will add to growth in coming quarters. Hence, we expect positive momentum to continue. Management guided revenue of ~Rs29bn by Sept-25 with ~16%+ sustainability in EBITDA margin. We estimate Revenue/EBITDA/PAT CAGR of 17.5%/18.2%/18.5% over FY23-26E. We upward revise our FY26E earnings estimate by 1.5% and maintain FY24/FY25E earnings. Maintain ‘Accumulate’ rating with revised TP of Rs8,926 (earlier Rs 8,857) valuing at 35x Sep’25 EPS“