Tuesday, 29 November 2011

Cera Sanitaryware: Prospective steady compounder

Cera Sanitary ware is the third largest player in organized sanitary ware market with market share of 20% in this segment. Cera has established its brand pan-India and positioned its products mainly as "value for money" offering. However lately it has entered into luxury/premium segment with very interesting product launches.

Cera currently trades at market cap of around 230 Crores with trailing PE of 7.67 and P/B of 2.06.

Now let me analyse, three important aspects for value investors 

- Quality of Business 
- Intrinsic Value of Business as compared to its price
- Margin of Safety. 

Quality Of Business:

Cera is one of the few sanitary ware manufacturers who has carefully nurtured a very strong pan-India presence with the help of strong dealers network (500+) and retail presence (5000 + retail network). This extensive reach combined with astute brand positioning and focus on quality has meant that company continues to achieve higher net profit margins and consequently higher ROCE/ROE compared to market leaders HSIL.

Value creation by an enterprise largely depends on what return it earns on the deployed capital and how much of free cash flow company is able to deploy for its further growth. For more on this please read  Why Stocks go up?

Cera has maintained average ROE of 20% in last 5 years and ROE has gone up from 18% to 24% in last 5 years. Cera has been able to maintain high ROE in spite of increased competitive environment in the industry. To put this into perspective, ROE for HSIL, largest player in the industry having 40% market share, has declined from 14% to 11%!

Another positive factor to be highlighted here is, that even though company has grown its top line  at CAGR 20% and bottom line at CAGR 45% in last 10 years (top line: 41 crores to 255 crores, bottom line: 0.45 crore to 25 crores) it has managed its balance sheet very very well. According to 2010-11 numbers, debt/equity stands at 0.33, much less than net working capital! This is another sign of a very prudent management...

Intrinsic Value of Business:

As warren buffet puts it, you have to value a company based on what value an enterprising private investor will be willing to pay to buy out an enterprise. If the question is put forth here for CERA, based on my layman understanding of the sanitary ware market combined with bit of gut feel, I would do following back of the envelope calculations.

If I calculate intrinsic value based on discounted cash flow model with 1st year FCF of 25 crores (PAT), CAGR of 10% for 10 years and terminal growth rate of 3% and discount rate of 12%, we arrive at enterprise value of around 500+ crores. 

Margin of Safety: 

Even after considering very conservative assumption for calculating enterprise value, we arrive at intrinsic value of 500 + crores. 

Currently Cera is available at RS. 230 Crore for buy, so even if I go wrong in my assumptions by more than 50%,  I am not likely to lose money on this enterprise. Thus my margin of safety is more than 50%.

However, if the conservative assumptions are replaced with realistic assumptions (company growing at industry average i.e. 15%), there is substantial upside at this price.

As many of the legendary investors put it, "Good business with bad management is a terrible investment". However, in case of Cera, quality of management is a comforting factor. It has been paying regular dividends and has issued bonus shares. Moreover during my reading of past annual reports, I have not found anything alarming in terms of lack of transparency or dubious
dealings by the management.

In all, Cera has all the characteristic of a typical steady compounder which will yield very decent returns from this level with minimal risk.

Disclosure: I have a position in Cera, and it is traded with thin volumes hence only long term investors shall venture into it. I would also strongly advise that readers should carry out their own due diligence before making investment decisions for any of the stock ideas discussed on this blog.


  1. Though I am still not Cera holder but I think it is good buy.SPD

  2. Nice writeup ! I read the reports and had a few questions. Are you concerned with(in 2011)

    1) inventory growing faster than sales ?
    2) PPE declining as % of total assets ?
    3) CFFO lagging Net income

  3. Thanks Gopal for your compliments.

    Regarding your first question, I do agree that inventory has grown faster than sales, however the differntial in growth is not alarming (sales growth 28% versus inventory growth of 40%). My guess for such increase is due to company's focus on increasing distribution network and lots of product launches. In addition to that their Faucetware products were launched in last 4 months of Fy 10-11 and hence may not be selling as fast as other prducts leading to higher inventory.

    Regarding cash flow from operations, if you look at the cash flow statement, cash flow from operations is lagging NP because of working capital changes.So increase in invetory has direct impact here. Moreover their receivables have increased substantially, while payables have gone down. I think one should keep focus on W/C side in coming quarters and years to make sure that company is managing w/c effectively.

    I am not too sure about your second question. can you please elaborate?


  4. Thank you for your response. I agree to your points that it is not alarming but definitely something to watch in the future.
    My second question is regarding gross Fixed Assets. Its been going down as a % of total assets from 60% in 2005 to 44% in 2011.