Cera Sanitaryware - Initiating Coverage - A Quality Play in Building Materials Space - Reliance Securities

Key Triggers

- Imminent recovery in individual house building and thrust on low-cost housing projects
- Strong foothold in sanitaryware and faucets segments
- Strategic and balanced mix of in-house manufacturing and outsourcing
- Cost saving initiatives, strong brand positioning and better after sale services
- Strong balance sheet with consistent cash generation

Cera Sanitaryware (CERA) is one of the leading building material companies in India having pan-India presence. It enjoys over ~12% market share in sanitaryware business with strong positioning in faucetware and tiles business.

It continues to focus on offering innovative products to create a niche position particularly in premium segment. The company has expanded its annual sanitaryware capacity from 2mn to 2.7mn pieces in FY11 to over 3.6mn pieces as of FY20-end.

CERA is positioned amongst Top-3 organized players in sanitaryware market owing to its presence across product segments at various price points and unique designs. A proper balance of in-house manufacturing and outsourcing sets it apart from its peers, who depend on Chinese imports.

Most Indian consumers are actively willing of disown Chinese brands and ask for 'Made in India' certification. The shift in consumer preference is now likely to aid domestic players like CERA.

A prudent diversification into faucetware and tiles segment over last 9 years enables the company to become a major one-stop housing solutions provider, paving the way for long-term sustainable earnings growth.

ESG Analysis: While analyzing 20 key criteria under ESG Matrix, we have assigned an overall score of 61% to CERA. Under "Environmental Head", we have assigned 58% score, as it has stabilized power cost by generation of electricity through non-conventional (wind and solar) sources for captive use. Additionally, several measures under 'Waste Minimization and Waste Utilization' have aided CERA to maintain an effective control over wastages. Under "Social Head", we have assigned 60% score, as the company scores high on customer satisfaction, despite scoring low on gender diversity. Under "Governance Head", the company scores fairly well (65%) across criteria (please refer to page no 5. for detailed ESG analysis).

Outlook & Valuation

With dominant presence in sanitaryware segment and business interest in allied businesses like faucetware, tiles and wellness products, CERA is likely to see healthy traction in ensuing years. Additionally, balanced products portfolio at a varied price points, robust distribution network and rising brand awareness in Tier-II and Tier-III cities bode well for sustained earnings growth. Further, lean balance sheet (D/E at 0.1x) and consistent cash generation (cumulative FCF in last five years is Rs2.2bn) offer comfort. Whilst 8% earnings CAGR over FY20-23E does not look to be impressive on account of pandemic led slowdown, asset turnover at 1.8x in FY23E vs. average of 2.5x in last five years suggests that CERA can sustain growth momentum at current asset base or low capex. Valuing the stock at 30x P/E on FY23E EPS of Rs109, we initiate coverage on CERA with BUY and a 2-year Target Price of Rs3,271.

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Shares of CERA SANITARYWARE LTD. was last trading in BSE at Rs.2685 as compared to the previous close of Rs. 2693.55. The total number of shares traded during the day was 391 in over 177 trades.

The stock hit an intraday high of Rs. 2798.95 and intraday low of 2660. The net turnover during the day was Rs. 1067669.

Source : Equity Bulls

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