Cera Sanitaryware Research Report By CRISIL

As a natural extension of its core sanitary ware product portfolio, Cera Sanitaryware Ltd (Cera) has expanded into faucets and tiles over the past few years. While sanitary ware remains its mainstay, the other businesses are gradually attaining critical mass. In its quest for higher growth, the company is taking several strategic steps across segments, including 1) enhancing presence in the untapped premium segment of sanitary ware, 2) launch of products with innovative designs in faucets across price points, and 3) commission of a tiles manufacturing plant in South India through a joint venture (JV) with Anjani Tiles. We expect these initiatives to augment the company’s strong fundamentals and boost growth. While the next few quarters are expected to be challenging, we expect growth to revive in FY18, driven by recovery in demand and the aforementioned measures. Keener competition across product segments remains a threat. We maintain our fundamental grade of 4/5.

Sanitary ware: Premiumisation efforts gathering pace

With well-entrenched positioning in the mass- and mid-market segments of sanitary ware, Cera is looking to bolster its presence in the fast-growing premium segment. It has entered into a marketing-and-distribution agreement with ISVEA, an Italian luxury brand. The company is focusing on high-value products in its portfolio, as reflected in steady growth in realisations. We believe this strategy complements the company’s strong presence in the mass- and mid-market segments and augurs well for future growth.

Faucets on steady ground; the new plant in South India to augment growth in tiles

Notwithstanding a slowdown in the faucets segment, we remain positive on the company’s growth prospects, given its right steps: (1) launching new products at competitive price points versus Jaquar, the market leader; (2) expanding the distribution network; and (3) bolstering after-sales service. These measures are likely to enhance the brand image and fuel growth. In addition, the newly commissioned tiles plant in the south, where organised players have limited presence, also augurs well for future growth. We expect these segments to continue to boost Cera’s growth.

Operating margin likely to expand, but remain below the historical peak of 18-20%

We see limited scope for operating margin expansion, as the benefit of lower gas prices is likely to wane gradually. However, the downside risk to margin is limited, given that premiumisation in sanitary ware, operational efficiency (owing to advance technologies such as 3D printing and automation in faucets) and operating leverage (on higher volume) are likely to offset the impact of higher gas prices.

We raise our fair value estimate to ₹2,862 per share