Since I have recently started documenting my stock picks (or stock analysis), I will state some of the rules I abide by (most of the time – after all, I am prone to stupidity):
I look for stocks with a low P/E, low P/B, high ROCE (ROE, I think doesn’t account for debt and hence a little skeptical), low D/E, good operating and NPM, consistent increase in Sales, EPS, OM and NPM over 3-5 yrs and finally low EV/EBITDA. If all this is good, then I look at the management’s track record. If all the above are satisfied, I then do a deep dive of the stock. As you realise by the above criteria, I hate losing money even if that means I overlook a few so-called multibaggers.
I use normal screeners to find such stocks. A list of screeners can be found here.
One of the stocks that came under this purview was CERA. CERA is one of the top two sanitaryware providers in India. Its closest (and a leading) competitor is Hindware (HSIL). With that brief background, let’s dive into numbers.
A brief financial snapshot of CERA (courtesy ValuePickr):
CMP (01/Dec/2010): Rs. 158/-
Market Capitalisation 102.38
Face Value (FV) (#) 5.00
Shares Outstanding 0.62
Equity Capital (Rs. Cr.) 3.11
Foreign (FII) Shareholding (%) 2.70
Promoters Shareholding (%) 54.02
So, one of Walter Schloss’s major criteria is satisfied: High Promoter holding. In this case > 50%.
Variable Current Industry Median
Net Profit Margin 8.21 6.57
Operating Profit Margin 17.47 16.86
Asset Turnover 1.49 0.82
Return on Assets 12.23 5.12
Financial Leverage 1.52 1.74
Return on Equity 18.56 12.13
Debt to Equity 0.52 0.70
Return on Capital 22.27 11.95
Interest Coverage 6.02 3.65
Quick Ratio 1.35 1.61
Current Ratio 1.93 2.37
Debtor Days 70.13 42.70
Inventory Days 131.65 113.60
D/E < 1, Interest coverage > 5, ROCE > 20% (almost double the industry median), ROE > 15%, healthy net and operating margins (close to industry median) – what’s not to like?
Variable Current Historical Average Industry Median
Price Close (Rs.) 164.60
Book Value per share 113.54 45.51
Cash flow per share 28.23 7.29
Earnings per share 21.08 4.99
Dividend per share 1.99 0.99
Sales per share 256.80 90.40
Free cash flow per share 21.77 0.53
Price to sales 0.64 0.56 0.69
Price to book value 1.45 1.32 1.19
Price to cash flow 5.83 6.23 4.02
Price to earnings 7.81 6.99 7.90
Price to free cash flow 7.56 -3.99 1.56
Dividend Yield 1.21 1.34 1.18
P/E < 10, P/B < 1.5 (I guess as of today, its close to 2), High P/FCF, Cash flow per share far higher than industry median – Awesome.
Let’s look at the history of management’s performance, rather than a single snapshot (just to ensure we are not under the influence of some accounting shenanigans or one time fad market)
Variable FY05 FY06 FY07 FY08 FY09
Operating Profit Margin 10.98 15.45 17.74 16.74 17.47
Return on Assets 6.56 12.21 11.83 10.31 12.23
Return on Equity 10.43 20.88 19.23 17.21 18.56
Return on Capital 13.77 21.43 21.21 19.19 22.27
Interest Coverage 4.83 7.45 7.14 5.90 6.02
Again, what’s not to like in this. Excellent Return on capital, very good interest coverage etc.
What about cashflows, you say?
Variable FY05 FY06 FY07 FY08 FY09
Cash from Operating Activities (Rs. Cr.) 4.06 6.92 10.09 10.20 17.56
A healthy growth in Cashflows from Operating activities.
Everything looks great. So, is this a screaming buy?
I would definitely buy it for the long term. Maybe a value buy at current levels too. Screaming buy? Not too sure. Here are my reasons –
1) Sanitaryware is a commodity market. Although we are slowly moving towards branding in Sanitaryware, we are still in the initial phases. Local players can chip away with low prices.
2) Sanitaryware has a high correlation to the real estate market. With the current rumblings in the real estate market, I might take a small position now and increase my position if it corrects.
3) HSIL (Hind Ware) has a better mindshare in terms of Sanitaryware. HSIL though quotes at 1.5 times Cera’s P/E. HSIL’s RoCE and RoE are almost half of Cera. And hence is not a buy in this industry. [Cera’s promoter by the way was in the same family as HSIL, but broke away to set up Cera]
4) Can a commodity company command a higher multiple than 8-10? I am not too sure. I request you guys to pitch in.
Having said all that, a little more into what Cera wants to do in the near future:
“The company, which enjoys 20 per cent share of Rs 1000 crore organised sanitaryware market in India, has already taken up substantial expansion in last four year involving an investment of Rs 53 crore.
Faucetsware plant of the company will be operational by September 2010. It is actively considering doubling the production capacity from 2,500 pieces to 5,000 pieces per day at Kadi. The cost of this capacity increase is likely at Rs 18 crore. Cera is also planning construction of a new fire clay plant entailing production of large wash basin. The approximate cost of this plant is Rs 3 crore.
Cera is also planning to set up a new research and development centre and a display centre, costing approximately Rs 1 crore. It is exploring the possibility of registration of CERA brand or any other new brand for business development in Europe. The Company may also consider acquisition of the existing brand or any existing company in Europe, depending on the European market conditions.”
I believe given the management’s track record, they can do a good job of it. Cera is a definite buy, in my opinion and can safely deliver atleast 15% growth annually, if not more.
Disclosure: I don’t hold any Cera stock as of today. And more importantly, this is not investing advice. Please do your due diligence before investing in Cera.