My First Tryst With Scuttlebutt: Cera Sanitaryware

After reading the title of my blog, many of you would have been perplexed by this relatively unknown word called "scuttlebutt". What does this word mean and how is it relevant to a value investor? I will first summarize the concept of scuttlebutt and then talk about my findings for Cera while I applied this method. 

Scuttlebutt term was first phrased in investing by legendary investor Mr.Philip Fisher in his seminal book "Common Stocks, Uncommon Profits". Scuttlebutt simply means finding out from the real, "Main Street" sources if the business/firm is good or bad. The central idea here is that, customers,dealers, suppliers, competitors and employees of the firm do possess some very useful and authentic information about the operations of the company and management. This information can help investor gauge certain business traits, company's position in competitive landscape and overall impression of the company with its various stakeholders. He suggested that such information is far more authentic  than the assumptions and inferences drawn by Wall Street analysts who,many a times, have no connections with various stakeholders in business operations.He suggests that "business grapevine" is a very powerful tool for investors if applied intelligently. 

So, After reading about this fairly common-sensical approach, I decided to venture into it and try it for one of my portfolio companies and see how accurately I have been able to judge the position of the company. I picked Cera Sanitary ware for several reasons. First, Cera has a well established dealer networks and retail presence hence I can get the information relatively easily by visiting nearby dealers/retailers. Secondly, it offers products which is used by all my relatives,friends and acquaintances hence seeking and opinion on Cera's products and gauging their preference may be easier. Lastly, Cera has manufacturing set up located near Ahmedabad and hence, if required, I can go and visit the company to get a sense of the operations. Once I zeroed in on the company, I located dealers, retailers of the company. I also found that some of my relatives/friends have bought new sanitary wares and I tried to understand from them the decision making process while they bought sanitary ware. Following are my observations from this   small little investigative journey.

• I went to 7-8 different retailers posing as customer wanting to renovate his bathrooms and hence is in need for sanitary ware products.   I checked with them that I want decent quality yet elegant products at reasonable price. Almost all of them suggested me Cera and Hindware, in that perticular order. On further probing many of them suggested Cera would be a good fit considering "value-for-money". They also indicated that Cera & Hindware are the fastest moving sanitary ware brands for them.
• Almost all retailers suggested that, there was no difference in quality at all between Cera and Hindware and hence both were equally good. Both  Cera and Hindware offer life time warranty and have very good support services in case of need for repair/replacement.
• I found that Hindware products are generally priced at premium to Cera and most dealers justified the difference in prices by saying that Hindware is an older brand and has pan-India presence and hence they are charging premium.
• Most of the retailers suggested that in terms of bath fittings (faucets), Jaguar is the best in terms of quality and style. No other brand comes near to that. 
• In my interaction with 2 Cera dealers, they indicated that both of them are very satisfied with their relationship with Cera. The business is brisk and dealership margins are decent. They also indicated that Company supports them very well in terms of delivery time, product range and bulk orders. Icing on the cake is annual foreign trip for dealers, which they and their family look forward to every year. They are very optimistic about future business of Cera.
• Another thing I found from retailers/dealers was that both Cera and Hindware are going to raise prices for their product by 10% from first week of February. This will be a positive for maintaining margins for them as their margins have come down in Q3 for both Cera and HSIL. I probed them further on impact of price hike on demand and almost all of them suggested that it will not have any impact on demand. They attributed this price inelasticity to changing preference for more elegant sanitaryware  products and increasing willingness  to spend on branded sanitary ware. 
• Finally, I interacted with end customers who recently made purchase decision for sanitary ware. Out of 3 acquaintances, ( i know it is too small a sample size, but can't do anything about it!) 2 of them bought all the products from Cera while one of them bought some Cera products while some unbranded products. All the three customers provided  rationale for buying Cera as "value-for-money" products and "good quality" 

So what did I derive from my small little "scuttlebutt".

• Cera offers good quality, "value-for-money" products that targets middle/upper-middle class. 
• It competes directly with Hindware (HSIL), however Hindware commands slight premium (15-20%) due to larger brand equity. In the longer run, Cera has room to increase its prices as it offers equally good quality, design and support services.
• Cera operates in a relatively price inelastic market and hence shall be able to protect its margin by passing on increase in cost to customers (unless one of the competitors and mainly Hindware decides to cut its own profit margin).
• Jaguar's has dominant position in faucet ware market and hence I am not sure about how well Cera will be able to penetrate this market. I will be closely watching management's take on faucet ware performance.