Cera Sanitaryware: a good investment bet

https://www.thehindubusinessline.com/markets/stock-markets/cera-sanitaryware-a-good-investment-bet/article7020965.ece

Diversification, expansion into smaller cities have helped the company grow
March 22, 2015:

Cera Sanitaryware (Cera), which has been in news thanks to the government’s ‘Swachh Bharat’ mission, is a good investment bet.

The company has been growing at a compound annual rate of 39 per cent in the last three years, surpassing its peers, including HSIL.

Penetration into tier-II and -III cities, aggressive marketing of premium-end sanitaryware, and diversification into faucets and tiles have aided its growth.

Key factors

At the current market price of ₹2,583, Cera Sanitaryware trades at a valuation of 28 times its expected earnings for 2016-17. Though the stock is expensive relative to its peers (HSIL trades at 16 times and Kajaria Ceramics at about 22 times the likely earnings for 2016-17), it is a buy for two reasons.

One, the company is set to grow faster than its peers thanks to an ongoing capacity expansion. Sanitaryware capacity will increase from 2.7 million to 3.2 million pieces by FY16. Currently, the company is utilising almost 100 per cent in sanitaryware.

Cera will also increase its faucet capacity to 7,500 pieces a day (from 2,500) in the next two years.

In tiles, it intends to expand through joint ventures or by acquiring stakes in smaller companies.

The company has been making inroads into smaller cities, eating into the share of unorganised outfits in the faucetware space in the last few years.

Further, the Central government’s housing push should help as Cera is among the few large companies in the organised market. Its market share in the sanitaryware space is about 24 per cent, up from about 18 per cent three years ago, according to industry reports.

Growing sales

In the first nine months of 2014-15, the company has reported sales growth of 28 per cent. Profit has grown by 39 per cent, helped by lower power costs and savings in interest outgo.

In the December 2014 quarter, sales growth was at 30.6 per cent while net profit grew 50 per cent. The operating margin expanded by 1.3 percentage points to 14.2 per cent. Though raw material costs had increased, savings on power and fuel costs helped margins.

Power costs as a percentage of sales decreased to 4.6 per cent from 5.5 per cent in the December 2013 quarter.

This was helped by an increase in captive power generation with Cera’s windmill capacity being enhanced by four mega watts.

However, going ahead, there may not be too much improvement in margins as faucetware and tiles — the two segments where profit margins are lower — contribute more to sales.