Our Call. Lock into Cera Sanitaryware

Long-term investors can consider buying the Cera Sanitaryware stock. The company has seen its revenue grow at a compound annual rate of 35 per cent in the last three years, surpassing many of its peers. This was mainly due to capacity expansion and increased market penetration.

Cera’s sanitaryware capacity stands at three million pieces per annum now, up from two million pieces a year or two back. In faucet-ware, its capacity has grown from 2,500 pieces a day in 2010-11 to 7,200 pieces now.

At ₹1,990, the stock is down about 30 per cent from April following the correction in small-cap stocks, but a further decline from here could be limited.

The sanitary- and faucet-ware industry is likely to grow at double-digit rates in the next three years, thanks to the higher income levels of the middle-class and the shift to branded products. Given this, Cera, a company that is constantly working to expand its reach and capacity, should benefit. It will also benefit from the Centre’s Swachh Bharat mission.

 Cera derives about 55 per cent of its revenue from sanitaryware, about 16 per cent from faucet-ware and the balance from bath accessories and tiles. The company has a pan-India distribution network consisting of 1,400 dealers and 14,000 retailers.

This network is likely to expand further in the coming years as the company intends to widen its focus on the South and look for joint venture partners.

 In the quarter that ended in June, even as many companies reported lacklustre numbers, Cera recorded a 20 per cent growth in sales (₹194.26 crore) over last year’s quarter. Net profit grew 15 per cent. The operating margin was 14.5 per cent, marginally lower than the 14.8 per cent last year but higher than the 14.4 per cent in the March quarter.

Power and fuel costs as a percentage of sales dropped to 3.2 from 4.4 last year due to an increase in captive wind power capacity.

At the current price of ₹1,990, the stock trades at 28 times its expected earning for the 2015-16 fiscal year. While the stock is pricier than those of HSIL and Kajaria Ceramics, Cera’s growth prospects justify the premium.

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