Stock Analysis: Cera SanitaryWare Ltd. (Cera)

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%.

Moving along,

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.

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  1. #1 by Swaroop on January 1, 2011 - 4:47 PM

    Hi Kiran,
    This is Swaroop, a greenhorn value investor from Bengaluru.Came across your blog while researching Cera Sanitaryware

    Great analaysis with minor mistakes

    Would like to start my pointing out an error on your analysis Market cap of Cera is 200 Crore NOT 100 Crore as company recently issued a bonus & total outstanding shares is around 1.25 Crore NOT 0.62 Crore
    Even at that market-cap it looks attractive….but…

    Here are my 2 cents (err or more!)

    Positives:
    1) Cera has good brand recall(admittedly not as great as HSIL) but recent ads on TV have been good & make it a more aspirational brand esp. for Urban consumers.
    Commodity companies can have very high PE’s by building a great brand & distribution network (eg TTK Prestige which is a ‘commodity’+brand commands a PE of 25! so does Hawkins).Even a plain vanilla SUgar producer like EID Parry has tremendous valuation because of the brand,this in a highy ‘politicised’ +regulated & disliked(by investors!) comodity like Sugar.
    2) Company is gradually moving to higher margin businesses & becoming a ‘Total Bathroom solutions provider’ Reminds me of TTK Prestige again! Total Kitchen solutions! Uncanny!
    3)Companys Faucet plant started production in Sep. so this should result in higher Q3 & Q4 sales/profit & company can double capacity if demand is good without much higher capex.

    Negatives:

    1)Promoters have issued warrants in the past. Some ppl. say issuing warrants is against minority shareholder interest. Also Promoter’s shareholding has reduced from 54 to around 53% in Sep-10 Quarter.FII holding has also reduced in the Sep quarter
    2) Company doesn’t host Annual Report on the website despite putting up quarterly results.
    3)Not a single MF(Mutual fund) owns this stock though several own ‘pricier’ HSIL. Does it mean there are Corporate Gov. issues?
    4) How come CERA beats HSIL in most parameters despite HSIL having larger scale of operating & more experience in the same field?
    5) Dividend payout as % of profits is just about 10% from many years which is low

    I’m in a dilemma just like you! Could you lay your hands on the annual report of the company? If so could you be kind enough to mail it to my e-mail address.

  2. #2 by Kiran on January 3, 2011 - 12:11 PM

    @Swaroop – Yep, a glaring mistake in Market Cap. I missed the stock ex-bonus capitalization part. Thanks for pointing it out.

    Agreed with your positives. In fact, I did hear some investor say that Cera is a poor man’s Hawkins 🙂 I visited their store the other day and by the looks of it, they are selling very well.

    Coming to the negatives –
    1) I would not read too much into a 1% reduction in promoter’s interest. In fact, there are some studies which indicate that promoter selling (<10%) doesn't indicate anything (the reason given was the promoters usually do portfolio rebalancing). Warrants are common. The issue is if the promoters don't exercise their warrants – then it indicates little confidence in the company.

    2) The Annual report is a pain. I was not able to procure it. I guess after the recent SEBI regulation that all companies should host their annual reports on NSE/BSE websites, I guess we'll be better off.

    3) As Peter Lynch says, MFs are a herd. In fact, I would see it as a positive since the upside would be higher if any one MF gets into this stock (and the herd would follow).

    4) Precisely my indication that there is value in the stock. Their retail store strategy just plays into the growth story.

    5) Dividend payout is definitely a negative. However, they are not frittering away their cash in any meaningless acquisitions. They are using the cash to build capex and retail stores. So far so good, in my opinion.

    And did you say Bengaluru? We can catch up sometime to discuss stocks then 🙂

  3. #3 by Swaroop on January 4, 2011 - 12:17 PM

    Hi,

    Got this piece of info from the Notes to account section from Moneycontrol website:

    4. Preferential Warrants for Equity Shares

    During the year ended on 31 st March, 2009 the company has forfeited
    3,40,000 Preferential Warrants issued to promoters on preferential
    basis ; since the option of conversion of warrants was not exercised by
    the due date 26.07.2008. Rs. 41.82 Lacs received as 10% of subscription
    value of preferential warrants is transferred to Share Premium Account.

    Shri S.K. Nema has resigned as Director and whole-time Director w.e.f.
    26-06-2009. Shri S.A.Trivedi was appointed as Additional Director
    w.e.f. 26-06-2009 and resigned w.e.f. 19-04-2010. Dr. Abraham Koshy
    has resigned as Director w.e.f. 19-04-2010.

    Lots of churning of Management (in some cases less than a year after appointment) & non-conversion of preferential warrants allotted.

    Clear red flags i’ve decided to give up on this one. I guess discount is well deserved!

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    If your company is in the business of sanitary wares, please join to Sanitary ware market and become a PREMIUM MEMBERSHIP FOR FREE

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