Cera Sanitaryware: Near-term weakness; long term outlook healthy

21 Mar 2024 , 10:42 AM

Recommendation: Buy; Target price: ₹8230

In analysts of IIFL Capital Services’ recent interaction with the Cera Sanitaryware (CRS), mgmt outlined the demand weakness since Nov’23, which is likely to persist over the near term. Over the last few years, CRS has focussed on improving operational efficiencies, scaling up distribution, launch of new products, and premiumisation especially in the Sanitaryware segment. Going forward, input costs are expected to be stable, and mgmt sees higher growth to come in from the Faucet segment. Despite FY24/25 seeing earnings cut of 9-13%, medium-term outlook remains healthy driven by real estate completions; analysts of IIFL Capital Services revised TP implies 18% upside. Upgrade to BUY.

Near-term demand weakness to persist:

After growing revenues at 21% Cagr over FY21-23, 3QFY24 saw a sharp slowdown in demand momentum for CRS, led by a weak macro and some region specific factors. CRS is tracking 5% YoY growth for M9FY24 — much lower than its growth guidance. Mgmt expects some pick-up Q4 onwards, but maintains that there is an overall slowdown. Margins have been steady as input costs stabilised and gas costs were lower. CRS has taken a 2% hike in Sanitaryware in February’24 (first since May’22). While mgmt has kept its revenue growth guidance unchanged (~18% Cagr over FY23-25ii), it is under review; although the margin guidance remains firm at 16-17%.

Premiumisation to be the focus, especially in Faucets:

Mgmt reiterated its focus on premiumisation, especially in Faucets (26% share of premium vs 57% in Sanitaryware), and also increasing concentration in the Tier 1/ 2 cities. Mgmt highlighted significant operational efficiencies that were achieved, including the reduction in rejection rates; ~40-50% cost savings on imported products by moving in-house. Mgmt estimates Sanitaryware market to have grown to Rs100-120bn (~50% organised) and 140bn for Faucets (~60% organised).

Medium-term outlook strong; Upgrade to BUY:

Mgmt highlighted that despite the recent senior mgmt attrition in CRS, currently they don’t have any plans to roll out ESOPs. On the business outlook, over the medium to long term mgmt remains optimistic due to robust luxury real estate demand environment. But given the weak near term outlook, analysts of IIFL Capital Services build lower revenue growth for Q4FY24/FY25, upgrade to BUY post the recent weakness.

Prominent Bathware player in India with presence across Sanitaryware, Faucets and Tiles

CRS is the largest sanitaryware player in India and a leading faucet brand founded by Mr. Vikram Somany – the current CMD. Promoter holding in the company is 54.5%. It has an annual capacity of 2.5mn pieces for sanitaryware and 4.8mn pieces for faucets. The company follows an asset-light model and outsources all its mass-mid range simpler product. CRS has four brands (Cera, Senator, JEET and ISVEA), which cater to different price points. The premium sanitaryware products are sold under the ‘Senator’ brand, while affordable range of bathware products are sold under the ‘JEET’ brand. CRS also sells tiles and is currently outsourcing its tiles requirements with a focus to only sell high-margin GVT tiles. It also has a small business vertical of wellness products, comprising bathroom cubicles/ partitions/ shower panels. CRS has a strong distribution network with 24,000+ touchpoints across India, which included ~6,000 dealers and 18,000+ retailers.

Mgmt estimates Sanitaryware to be a Rs100-120bn market (~50% organised) and 140bn for Faucets (~60% organised). The key players in the Bathware space — Jaquar, CERA, Parryware, Hindware, Kohler, Grohe, Asian Paints, Kajaria Ceramics, Somany Ceramics. Recently, this space has seen the entry of players like Astral and Prince Pipes.