Dr equity cera sanitaryware ltd

Cera Sanitaryware LtdCera Sanitaryware Ltd
March 2011
Updated 2013
Research Report
March 2011 1
Un-Earthing Multibagger Stocks
www.drequity.in

Shri Vikram
Somany, MD
Late Shri Viduush
Somany, ED
March 2011 2
www.drequity.in

3March 2011
www.drequity.in

Content Index
•Cera Sanitaryware Ltd – An Introduction
• Cera Sanitaryware Ltd – Business Overview
• Industry Overview
•Warren Buffett Filters Check
• Cera Sanitaryware Ltd – Financials
• Concerns• Concerns
• Conclusion
March 2011 4
www.drequity.in

Recommendation: Strong Buy
CMP: INR 170
FV: Rs 5
Mkt Cap: Rs 253Cr
BSE Code: 532443
NSE Code: CERA
Bloomberg Code: CRS:IN
Sector: Building Materials
Promoter Holding: 55%
Total Equity Shares: 1.26cr
Cera Sanitaryware – Investment Highlights
March 2011 5
www.drequity.in

SYNOPSIS
Cera Sanitaryware Ltd is a pioneer of the first sanitary ware segments in India launching
innovative designs & water saving products.
Cera has added other products like kitchen sinks, mirrors and sensor products to its range under
Bathware.
The CAGR of company during last Five years has remained much more than industry growth
rate.
Together, the CERA Style Studios and CERA Style Galleries have made a great impact in
improving the retail experience for prospective customers, institutional buyers and influencersimproving the retail experience for prospective customers, institutional buyers and influencers
of CERA.
Net Sales and PAT of the company are expected to grow at a CAGR of 30% and 24% over 2012 to
2015E respectively.
“In India Middle Class strata is undergoing great change, rising disposable
income, nuclearisation of families, aspiration for luxury goods will lead to great boom in the
Consumer Facing companies. Icing on the cake is the middle class population constitute more
than 50% of the total population, this will create an ever growing demand for such products.”
– Dr Equity
March 2011 6
www.drequity.in

Cera Sanitaryware Ltd – An Introduction
Cera Sanitaryware Ltd was launched in the year 1980 is a pioneer in the sanitary ware segment
in India. The first sanitary ware company to use natural gas, Cera has been on the forefront of
launching a versatile color 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 liters of water is another notable
innovation by Cera.
Cera Sanitaryware incorporated in the year 1998 is a pioneer in the sanitary ware segment inCera Sanitaryware incorporated in the year 1998 is a pioneer in the sanitary ware segment in
India. The company has launched a wide range of bath suite concept.
Cera Sanitaryware sells its products through Cera Bath Studios, which provides
consumers, architects and interior designers a full view of ranges of wash basins, shower
panels, shower cubicles, bath tubs, shower temples, whirlpools, cp fittings etc.
Cera Bath Studios has pan- India presence, are located at
Ahmadabad, Bangalore, Chandigarh, Kolkata, Cochin, Hyderabad and Mumbai.
Manufacturing Unit Cera Sanitaryware manufacturing facilities are located at Kadi, Gujarat.
March 2011 7
www.drequity.in

The company has providing the following products for various purposes.
• Sanitary ware
• Faucets
• Wellness
• Kitchen Sinks
• Mirrors
• Personal Care
• Green Products
Products
The achieving the growth in the rapidly changing retail market in the country, Cera, has
launched its one of a kind Cera Bath Studios in
Ahmadabad, Bangalore, Chandigarh, Kolkata, Cochin, Hyderabad and Mumbai.
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.
Cera Bath Studios will complement its existing network of 600 dealers and 5000 retailers.
Several Bathrooms are displayed live, so that the customers can get a feel of Cera’s vast range of
products.March 2011 8
www.drequity.in

March 2011 9
www.drequity.in

Sanitaryware Industry
The Indian sanitaryware Industry, estimated at around `1500-1800cr, contributes to ~8% of the
world’s sanitary production. In India, the organized market dominates the high-end products
segment but a majority share is still captured by the unorganized segment in the low-end
products segment. The industry has a sustained growth rate of 12-14% p.a. due to increasing
housing demand, purchasing power and consciousness towards hygiene. India is emerging as
the second largest sanitaryware market in the world and is expected to witness robust
growth owing to following:
Low penetration in Indian sanitation coverage
Considering India’s dense population, its sanitation coverage is only ~40%, which is considered
to be one of the lowest in the world, thus increasing risk of health hazards and epidemics.to be one of the lowest in the world, thus increasing risk of health hazards and epidemics.
According to a recent report by UNICEF, 638 million people in India lack proper sanitation
facilities. The government of India is keenly focusing on improving the level of sanitation in the
country by introducing housing policies, sanitation policies, public toilets schemes, 100% FDI in
real estate, etc which are being termed as some of the major factors contributing for the growth
of sanitary ware market in India.
Change in lifestyle and awareness in population
Witnessing a paradigm shift in the change in middle and upper class lifestyles in small but
significant ways, rising per capita income, increasing awareness about health and fitness and
changing consumer mindsets will drive the demand for premium sanitaryware products. The
concept of making a clean and hygienic toilet is growing rapidly in those rural areas where a
toilet did not even exist until a few years ago.
March 2011 10
www.drequity.in

Wide exports horizon
Indian sanitaryware products are very competitive because of their low production cost, and
hence exports from India are also increasing every day. Seven foreign brands like H&R
Johnson, Roca and Kohler to name a few; have established their operations in India.
March 2011 11
www.drequity.in

Filter # 1
Track record of high returns on capital.
"Here's what we're looking for...businesses earning good returns on
equity while employing little or no debt." - Warren Buffett's letter to
shareholders, 1987shareholders, 1987
12March 2011
www.drequity.in

13.63
21.08 20.28
18.54
23.72
28.26
0
5
10
15
20
25
30
Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10
Return on Capital Employed
10.44
20.87 19
17.23 18.58
22.17
15
20
25 Return on Net Worth
•As it can be seen from
the graph it has gained
both ROCE and RONW.
The company is growing
continuously year on
year without denting its
profitability.
•It has successfully sail10.44
0
5
10
Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10
•It has successfully sail
through the global
recession.
•It has an average ROCE
of 21%, which is
excellent looking at the
current scenario and
financial environment.
Source: Dr Equity Research
March 2011 13
www.drequity.in

Filter # 2
...else pays it back to shareholders
"Most high return businesses need relatively little capital. Shareholders of
such a company usually will benefit if it pays out most of its earnings in dividendssuch a company usually will benefit if it pays out most of its earnings in dividends
or makes significant stock repurchases."- Warren Buffett letter to
shareholders, 1992.
14March 2011
www.drequity.in

0.3 0.3 0.38 0.4 0.45 0.55 0.75
1
1.25
2.5
0
0.5
1
1.5
2
2.5
3
Dividend(Rs) per share adjusted for bonus
Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11
•Cera is continuously paying dividend since 2002. They have even increased the dividend
payout since 2003.
•As per buffet it clearly passes the filter of dividend payout. It also shows the credibility of
management towards minority shareholders.
•Cera has so strong cash flows that it maintains the expansion as well as the dividend
payout to shareholders.
March 2011 15
www.drequity.in

Filter # 3
A word on the management.
..."the certainty with which management can be counted on to channel..."the certainty with which management can be counted on to channel
the rewards from the business to the shareholders rather than to itself..."- Warren
Buffett letter to shareholders, 1993.
16March 2011
www.drequity.in

KEY Management Team:
Mr. Vikram Somany Chairman-MD
Mr. Vidush Somany Executive Director
Mr. M.K. Bhandari President (Works)
Mr. Atul Sanghvi Sr. VP (Marketing & Sales)
Mr. Vidush Somany, Executive Director of CERA Sanitaryware Limited, has been awarded many
acollades in his career from various government and private institutions. One of them is
Nirman Ratna 2010 by Gujarat Institute of Civil Engineers & Architects in the building material
and manufacturing category.
Mr. Vidush Somany took the reins of CERA Sanitaryware Limited in the year 2004 immediately
after his graduation in Business Administration from Franklin & Marshall College, USA. He carriesafter his graduation in Business Administration from Franklin & Marshall College, USA. He carries
the vision saw by his father to take the organisation to the next level and make it one of the
most successful bathroom solutions company in the coming years.
Mr. Vidush Somany, has drawn aggressive growth plan for CERA for the coming years, to take
the turnover to Rs.500cr from the current Rs.200cr.
On capital allocation, given Cera’s rising return ratios and that the management has not done
anything foolish so far. As far as integrity is concerned, again there are no indications from the
past that suggest any scrupulous activity from the management’s part.
March 2011 17
www.drequity.in

Filter # 4
Strong MoatStrong Moat
18March 2011
www.drequity.in

Does the business has got the Moat?
•Yes, proven by the average gross profit margins of around 39% over the past 5 years
(>40% suggests a sustainable competitive moat). What is more, the company has
consistently grown its sales and net profit over the past 10 years. An overall clean
balance sheet adds to the comfort.
•The company is expanding its capacity and spending huge amount on advertising and
marketing which we believe will reap in huge benefits in the coming years.
•The management is aggressively advertising and•The management is aggressively advertising and
have appointed DIA Mirza as brand ambassador.
•Brand CERA with its legacy of over 3 decades has
built a great reputation of the companyin the
minds of the consumers. During these years Cera
has diversified itself in to showers, PVC
cisterns, faucets, seat covers and now planning to
enter Tiles.
March 2011 19
www.drequity.in

•Company is also rewarding its distributors with regular incentive plans. It has a nation
wide large distribution network which serves as a strong moat for the company. Cera
has launched its one of a kind bath studios in major towns of India. It has a network
base of 5000 Retailers and 500 Dealers across nation.
•Gross profit margin suggests the true profitability of a company’s operations. Buffett
would generally like a company earning >40% margin, but this is true largely of
consumer goods companies . As for Cera, the average GPM for the last 10 years has
been around 37%, which is good.
March 2011 20
www.drequity.in

March 2011 21
www.drequity.in

Filter # 5Filter # 5
Huge Opportunity
22March 2011
www.drequity.in

Indians income has been rising since last
10 years which is kicking off the demand
for the products.
Further increase in income level has given
a push to the higher value products. Now
the consumer is much concentrating on
the wellness and status.
They want there bathroom to be more
luxurious than earlier years.
There are a lot of families which are
moving towards nuclear families which in
turn needs better housing so as the
sanitary ware demand is surging.
India’s housing shortage of 26.53 mn
homes is expected to increase further. To
fulfil the demand there is an ongoing
need for the sanitary ware.
Source: Mc Kinsey
March 2011 23
www.drequity.in

Huge population of India with under penetrated sanitation coverage (around 40%) is a big
opportunity itself. Icing on cake is the replacement demand (very low at 7% compared with 80%
in developed countries, is expected to pickup with urban growth) which will further create
demand in the industry.
Moreover, a burgeoning middle class, rising per capita income, increasing awareness about
health and fitness, changing consumer mindsets, easy availability of home loans will drive the
demand for premium sanitary ware products.
Lot of government policies have been initiated for better and hygiene public sanitation in rural
and urban areas.
Poor sanitation coverage in India reflects vast potential for growth opportunities for thePoor sanitation coverage in India reflects vast potential for growth opportunities for the
sanitary ware industry.
March 2011 24
www.drequity.in

Investment Rationale
Company’s emphasized focus on marketing:
CSL intends to widen its reach by opening more retail formats of ‘Cera Style Galleries’ which
display the complete range of Cera products. These studios have been set up in metros and tier
2 cities which will help interior designers and customers to have a real look of the products.
CSL had a massive media campaign employing the celebrity endorsements approach to unveil its
new re-designed logo. The former Miss Asia Pacific turned actress, ‘Dia Mirza’ is the brand
ambassador of Cera for the next two years.
Expansion of product portfolio to complete the package:Expansion of product portfolio to complete the package:
CSL in its latest analyst meet announced its entry into the tiles segment which is a logical
extension of its product portfolio, thereby enabling customers to fulfil their entire bathroom
products needs.
As per the management, the company is to launch high-definition digital wall tiles with matching
floor tiles, besides digital polished glazed vitrified tiles which would be completely outsourced.
Being a complimentary product of CSL’s product portfolio, it would be easy to penetrate the
market through the existing distribution channels. Entering in to the tiles business through
(Asset Light Business Model) outsourced model de-risk the balance sheet.
March 2011 25
www.drequity.in

Increased contribution of sanitaryware in total domestic Expenditure:
Owing to the change in lifestyle of people, the role of sanitary products is no more
restricted to basic necessity but has become a status statement; thus influencing individuals’
spending budgets and improving the proportion expended on these amenities. Increase in
disposable incomes of people has been a vital factor supporting the changing lifestyle of
people. Also, requirement of personal space and privacy are gaining inevitable
place, subsequently leading to nuclear families.
Capacity expansion of sanitaryware:
CSL has already expanded its capacity of sanitaryware unit from 24,000MT (2.0mn pieces p.a.)
to 32,400MT (2.7mn pieces p.a.). Moreover, the company is planning to further expand this
capacity to 3mn pieces p.a at a cost of `100cr by January 2013. This development will enable the
company to en-cash the opportunity arising out of increasing demand.company to en-cash the opportunity arising out of increasing demand.
CSL started production at its faucet ware unit at Kadi in September’10. It has setup this plant
with an initial investment of `10cr, met by internal accruals, with a current capacity of 2,500
pieces per day. This capacity is planned to be doubled in the current year to 5,000 pieces per
day at a cost of `40cr as said by the management.
Huge fresh demand on the back of construction sector growth:
In India, the construction sector is growing at a robust pace because of rapid urbanization. For
the domestic sanitaryware industry, ~93% of the demand is fresh demand, while the remaining
is from replacement segment. With regards to the above facts, development in construction
sector is bound to register humungous growth in demand for sanitary ware and eventually for
CSL.
March 2011 26
www.drequity.in

Benefit from unmatched distribution network and high brand visibility:
Owing to continuous marketing activities creating high visibility of the brand, the advertisement
cost of CSL is consistently moving northwards. CSL has a strong foothold in the north east and
central India while it is eyeing southern states like Andhra Pradesh, Tamil Nadu and Karnataka to
establish its footings.
Relatively slowly changing industry :
It’s a relatively slow changing business (makes it easier for us to hold it for long term in
comparison to education or technology stocks where the trends change very fast and thus a
company doing well today may end up on a losing side in a very short period of time).
No Institutional holding:
There’s no institutional holding in Cera, probably because of low liquidity. There is a very highThere’s no institutional holding in Cera, probably because of low liquidity. There is a very high
probability the stock can get re-rated to higher PE multiples once it comes in sight of smart
investors.
March 2011 27
www.drequity.in

Filter # 6
and now Valuations...and now Valuations...
28March 2011
www.drequity.in

Earnings Power Value (EPV)
The formula for EPV of a company is:
EPV = Adjusted Earnings x 1/R
Here, ‘R’ is the cost of capital.
CSL posted an adjusted EPS (earnings per share) of Rs 31.18 in March FY10. If the company’s
profits were to stagnate and remain at Rs 31.18 per share going forward, and applying the EPV
formula here, we multiply Rs 31.18 with 1/15% (15% being my assumption for the opportunity
cost of capital)
This gives us a value of Rs 208 per share, which is CSL’s intrinsic value as per the EPV calculation.This gives us a value of Rs 208 per share, which is CSL’s intrinsic value as per the EPV calculation.
And the current market price of the share is INR 170.
March 2011 29
www.drequity.in

Filter # 7
Margin of safety
Having ascertained that Cera Sanitaryware Ltd is one of the contenders forHaving ascertained that Cera Sanitaryware Ltd is one of the contenders for
becoming a part of a portfolio that Warren Buffett would love to own, let us have a
look whether there is sufficient margin of safety in the company's current stock
price and whether one should invest in the stock at the current levels.
30March 2011
www.drequity.in

Buffett always insist on the Margin of Safety of 25% from the current share price. Because an
analyst can go wrong in estimating the fair value of a company. That is why Buffett always look
for a fair amount of Margin of Safety.
Cera’s current share price stands at Rs. 170, while Fair Value comes at Rs. 208. So there is a
margin of safety exist in the current share price.
There is a 22% undervaluation calculated at the current price compared to its fair valuation
which offers a reasonable level of Margin of Safety.
Margin of Safety
which offers a reasonable level of Margin of Safety.
March 2011 31
www.drequity.in

Name Of Shareholder
No. Of Shares
held
Shares as a % of Total No. Of
Shares
HSBC Bank (Mauritius) Ltd A/c Jwalamukhi
Investment Holdings 1122769 8.87
Vijay Kishanlal Kedia 315000 2.49
Shareholders with more than 1% stake
March 2011
www.drequity.in
32
Sajan Kumar Pasari 245140 1.94
Dolly Khanna 144183 1.14
Nalanda India Equity Fund Ltd 277882 2.2
Total 2104974 16.63
Source: BSE India

March 2011 33
www.drequity.in

Concerns
1. The main risk associated in the sanitaryware segment is from the unorganized and local
players. The unorganized sanitaryware manufacturers enjoy the benefit of nil excise duty
and sales tax and hence their products are ~70% cheaper than the organized sector
products. Increase in excise duties from 8% to current 12% will make products from
organized players more expensive.
2. Advent of foreign brands in India is also becoming a threat since increased purchasing power
may lead to shift in consumer preferences to bigger brands.
3. Changes in government policy related to housing construction, imports etc are bound to3. Changes in government policy related to housing construction, imports etc are bound to
impact the industry.
4. Further slowdown in the housing segment will impact fresh demand for sanitary ware.
March 2011 34
www.drequity.in

Conclusion from Head Equity Research
Looking at the industry structure and the business model, we have arrived at the conclusion to
buy this gem.
This company possess enormous competitive advantage which can be evident from the analysis.
Management is clean and clear in there vision and integrity.
At this level share price gives us enough margin of safety and the way company has grown in the
past if it continues to do same it will create huge wealth for all the stakeholders.past if it continues to do same it will create huge wealth for all the stakeholders.
Cerebral Advisory Services Pvt Ltd
March 2011 35
www.drequity.in

1. Any action you choose to take in the markets is totally your own responsibility.
2. Cerebral Advisory Services Pvt Ltd (Dr. Equity) will not be liable for any, direct or indirect, consequential or
incidental damages or loss arising out of the use of this information. Information in this report is believed to be
correct & reliable. Information & data in this report is been taken from publicly available data. We do not
guarantee correctness of Information.
3. Stock market Investing may result in losses as well as profits. Stock Investing is not suitable for many members
of the public and only risk capital should be applied.
4. Cerebral Advisory Services Pvt Ltd (Dr. Equity) does not take into account special investment goals, the financial
situation or specific requirements of individual users.
Disclaimer
Result Update March 2014 CSL
www.drequity.in
36
5. You should carefully consider your financial situation and consult your financial advisors as to the suitability to
your situation prior to making any investment or entering into any transactions.
6. If you want personal advice, then you should seek a registered investment advisor.
7. Price and value of the investments referred to in this material may go up or down.
8. This service does not assure specific amount or percentage of return and it does not guarantee number or
periodicity of recommendations either.
9. Investment / disinvestment decisions are entirely at the discretion of the subscribers and the entire
gains/losses are theirs. Hence, Cerebral Advisory Services Pvt. Ltd. or any of its employees will not be liable for
any loss suffered. (CASPL – Cerebral Advisory Services Private Limited)

Our Solutions YOUR growth..
Our Value Portfolio service which helps clients build robust portfolio of High quality companies.
By investing in SMALL companies you can make huge money, trick is QUALITY Companies.
Eg:
•ITC given 2500 times returns in last 25 years, Your Rs 1 lac turned to whopping Rs 25
Crores TODAY. Similarly,
•Hero Honda given 1200 times return in last 25 years.
•Infosys given 44% CAGR in last 21 years which is more than 1000 times returns. These are
few examples likewise there are lot of companies like this which has given stellar
Manage your Equity Portfolio effectively…
Subscribe to the Best Offline PMS Service, “The Value Portfolio” today !!
37
few examples likewise there are lot of companies like this which has given stellar
performance.
This is only possible in small cap companies which are in there high growth phase with QUALITY
management in hand.
Spend only 30 minutes/month on your portfolio to generate stellar returns...
For details visit: http://www.drequity.in
Call: +91-7665514555
March 2011
www.drequity.in

For any query contact,
Dr. Equity
Cerebral Advisory Services Private Limited
38
Cerebral Advisory Services Private Limited
H.O. – Mumbai
Branch Office: Udaipur
Contact: +91 7665514555
March 2011
www.drequity.in

Dr equity cera sanitaryware ltd

More Related Content

What's hot

Viewers also liked

Recently uploaded

Dr equity cera sanitaryware ltd