Cera Sanitaryware – stock analysis, fast growing mid cap stock

I recently did a study of Cera Sanitaryware, a listed sanitary ware company. I find it to be a company with good financial performance over the past. I think that it should do well if you have a long-term horizon for investment.

My analysis consists of the following sections:

  • Qualitative
  • Sector
  • Quantitative
  • Risk factors
  • Outlook
  • Valuation

 

Qualitative

 

1. What is the business?

Cera Sanitaryware Ltd. (CSL) is in the business of selling sanitary ware, faucets and other products like shower cubicles and bath-tubs. It has entered the high-end tiles segment recently.

The company was incorporated in 2002. CSL is the third largest sanitary ware maker in India.

They sell their goods via the institutional and the retail routes respectively. 90% of their sales are to the retail market. (Source: CARE report – Aug 2012).

FY06FY07FY08FY09FY10FY11
Vitreous China Sanitary ware
Capacity (MT)

15,000

16,500

24,00024,00024,000

24,000

Production

13,916

15,180

18,402

18,525

21,095

24,474

Capacity Utilization

93%

92%

77%

77%

88%

102%

Faucets
Capacity (in numbers)

-

-

-

-

-

750,000

Production

-

-

-

-

-

86,830

Capacity Utilization

NA

NA

NA

NA

NA

12%

 

This does not give the right picture because the sales figure includes outsourced goods (which does not need raw materials) and manufactured goods.

Creditor days are fairly constant at around 2 months of sales. This takes into account the payables for traded goods in addition to the payables for raw materials respectively.

FY07FY08FY09FY10FY11FY12FY13
Creditors days

87

78

63

76

70

67

62

 

3. How is the company placed against competitors?

In the organized market brands, Cera Sanitaryware is the third largest after Hindware (HSIL) and Parryware (owned by Roca). CSL is gradually trying to increase its brand strength.

Market share of Cera is around 20%. Hindware is around 40%, Parryware is around 26%.

There are foreign brands like Toto, American Standard, Kohler and Grohe which make up the rest of the organized market. Foreign brands have premium positioning.

Primary checks also suggest that foreign brands are quite strong in Mumbai. Kohler was stated to be doing quite well by multiple people during conversations.

The unorganized market is made up of domestic manufacturers, predominantly from the Morbi area in Gujarat. Morbi has historically been a tile and sanitary ware manufacturing hub. There is also a trend of importers who buy Chinese tiles, re-brand and sell them in the market. Chinese tiles are bought by price-conscious customers. They have relatively poor quality as maintained by the people who were asked about them in primary checks.

The Indian sanitary ware market, which is currently pegged at Rs 2,500 crore, equally shared by branded and unbranded players, is growing at a compound annual growth rate (CAGR) of 15% according to newspaper reports.

 

4. What is the company’s bargaining power with customers?

CSL sells their goods in the market through distributors. Typically, retailers are not exclusive to Cera Sanitaryware.

Debtor days are relatively steady at around 2 months of sales.

FY07FY08FY09FY10FY11FY12FY13
Debtor days75706862565162

 

5. Is the company innovative? Does it work on adding new product lines?

Management has been active in launching new product lines. They added a faucets production line a few years ago. They started importing wellness products like shower cubicles, luxury bath tubs and selling them under the CERA brand. They have started selling plastic cisterns and seat covers in the last year. They also sell kitchen sinks. Kitchen durables are experiencing high growth; 25% as per newspaper reports.

The core revenue is generated from sanitary ware products. But the fact that the company seems to be pushing new products into the market under the same CERA brand name is positive.

They have a wide range of products as can be seen from their website. Interestingly, one can order off their website. This is something that not even Hindware lets you do. One does not know how many people actually buy from the website but at least the management is pro-active.

Hitherto, they have not been strong in the institutional segment. They have invested in exclusive Cera Style Studios to target this segment. They have eight of these primarily in the tier I and II cities. They are adding three more by October 2013. Each costs Rs. 5 cr to Rs. 10 cr which is a sizable investment.

 

6. Is management compensation reasonable or too high?

As per the FY12 Annual Report,

Figures in Rs. cr

http://www.youtube.com/watch?v=Lv9qy3neIl0

Dia Mirza – since a couple of years

http://www.youtube.com/watch?v=LGq4tWV3LZ4

From personal experience, I have started noticing CERA brand since the last 4-5 years. I did not know about it earlier.

 

9. What are the company’s plans for next few years?

The management is taking steps to increase capacity. They intend to spend Rs. 150 crore in the next three years. This includes increasing sanitary ware capacity from 2.7 million pieces per year to 3 million pieces per year. Capacity of faucets manufacturing will be increased from 2500 faucets per day to 10,000 units per day at its Kadi, Gujarat facility.

It will launch 3 Cera Style Studios in the coming year.

It plans to set up a plant in Andhra Pradesh. 40% of their sales come from South India.

The management has said that they want to grow and stabilize at 30-32 per cent market share in 3-5 years.

 

10. What is the promoter background?

Vikram Somany was part of HSIL, the owner of Hindware brand many years ago. There was a family split and he ventured into sanitary ware since it was a business he understood. His son Vidush Somany joined him. Recently, Vidush died at a young age in 2012.

 

Sector

 

11. What are the findings from primary checks?

I had written about the findings in an earlier article. You can read about it here. I got some good insights from my talks with dealers, architects and developers. There are some changes taking place in the ceramics and sanitary ware industry which will progressively work in favour of the branded players.

I recommend reading the primary checks article as there are some important points that point to continued good performance for Cera.

 

12. What are the business drivers that affect this sector?

Shift in demand from unorganized to organized manufacturers

As primary checks confirm, there is a shift in business to organized players. Small unorganized manufacturers gradually are becoming contract manufacturers for bigger branded players. This bodes well for branded players as they generate more sales per unit of brand building expenditure incurred.

If there is a business slowdown branded players will be comparatively asset-light and less affected in contrast to a case where they setup new capacities to cater to the demand.

Upgrading of sanitary ware purchases

As mentioned in the primary check section, changes in consumer behavior mean that product mix sold is changing and yielding more value per bathroom.
Consumers are not averse to opening their pockets for premium sanitary ware unlike earlier.

Replacement demand vs. new demand

The HSIL annual report mentions that replacement demand is around 10% and new demand is around 90% of sanitary ware sector sales. For HSIL sales, replacement demand is around 15% and balance 85% is new demand. Replacement demand is increasing because of increasing disposable incomes and changing consumer tastes.

Improving sanitation

Improvement in sanitation in India - UNICEF

Sanitation standards in India are improving. Govt. is increasing allocation of public spending towards sanitation.

The table below gives percentage breakup of access to sanitation for India as per the UNICEF report.

Year Urban Rural
Improved Unimproved Improved Unimproved
SharedOther unimprovedOpen defecationSharedOther unimprovedOpen defecation
1990 51 17 4 28 7 1 1 91
2000 55 18 5 22 14 3 4 79
2010 58 19 9 14 23 4 6 67

Source: UNICEF, 2012 update, Joint Monitoring Programme for Water Supply and Sanitation

I am not saying that one can read too much into this data with respect to Cera. But it is helpful to understand that there is a long way to go with respect to sanitation in India, especially outside urban areas.

 

13. What is the outlook for sanitary ware sector in the future?

Sanitary ware is a necessity. Volume growth will be dependent on real estate market growth primarily. Replacement demand is yet not high enough for the sector to be free from the direction of real estate growth.

Hindustan Sanitary ware (HSIL) management says that 25% of their sales come from metros. The balance sales are from tier II cities and beyond. The overall sanitary ware industry is growing by 15-16%, whereas the premium segment is growing by 20-25% (HSIL annual report).

 

Quantitative

 

14. What is the trend in return on equity?

RoE is healthy and has increased over the years.

FY07FY08FY09FY10FY11FY12FY13
RoE 19% 17% 18% 22% 24% 23% 26%

 

Dupont Analysis shows that RoE increase can be traced to the Asset Turnover which has increased from 1 to 1.3 over the last 7 years.

CSL stopped reporting the sales of outsourced goods from FY10. But the available data shows that they are benefiting from greater sales without corresponding increase in capacity.

Sales (in Rs. Cr)FY06FY07FY08FY09
Manufactured627383102
Outsourced26435665

 

There is data on the outsourced purchases which suggests that they have doubled from FY09-12.

 

(in Rs. Cr)FY07FY08FY09FY10FY11FY12
Outsourced purchases213138435775

 

Gross margin on outsourced goods was around 28-34% from FY07-09. Data after FY09 is not available.

Outsourcing has positive impact on the bottom-line. The brand-building expenditure is spread over increased sales.

There is a risk in outsourcing in that as Cera Sanitaryware might not be able to control its supply chain well and distributors can face supply outages (as mentioned in primary check) on outsourced product range.

 

15. How does the company manage working capital?

All w.r.t salesFY07FY08FY09FY10FY11FY12 FY13
WC days55656355608671
Inventory days687359687410370
Debtor days75706862565162
Creditor days87786376706762

 

Apart from an inventory flare-up in FY12, the working capital picture looks good for CSL. It is managed reasonably. FY13 has seen inventory stabilizing at past levels.

 

16. What is the company’s dividend paying history?

FY07FY08FY09FY10FY11FY12 FY13
Dividend Payout7%9%9%8%12%12%11%

 

Dividend payout is relatively low. It is acceptable considering the capital expenditure needs. The company is re-investing profits at a healthy return on equity. Net worth has grown by over 25% CAGR over the last 5 years.

 

17. What is the dividend yield?

0.76% as of 14 Jun 2013. It is not much. One would be looking for capital appreciation in a stock like this.

 

18. What is the debt-equity profile?

Debt to equity has come down from 0.6 to 0.3 levels in the last 5 years.

 

19. What are the growth rates of sales, operating profit, net profit and EPS?

FY08FY09FY10FY11FY12 FY13
Net sales growth21%23%20%28%31%49%
EBITDA growth16%54%0%71%18%24%
PAT growth11%30%50%35%21%44%
EPS growth-3%32%49%34%20%44%

 

Overall, it has delivered very healthy growth in a dull economic environment.

 

20. What is the trend in free cash flow?

FY07FY08FY09FY10FY11FY12
FCF-12-1213195-20

A steady pattern does not exist because of capex which the company undertakes every 2-3 years (in the past 6 years).

 

21. Is net profit growth matched by EPS growth or is growth at the cost of dilution of equity?.

In FY07, the company allotted 0.15 mn shares to the promoters at Rs. 123 (Rs. 62.5 in today’s price adjusted for bonus in FY10), in pursuance of warrants issued to them.  In the same year, the company allotted 0.55 mn equity shares at Rs. 155 per share (Rs. 75 in today’s price adjusted for bonus in FY10) to a Mauritius based investor to fund expansion project. The amount was Rs. 8.25 cr.

In FY08, the company allotted 0.11 mn equity shares at Rs. 123 to the promoters in lieu of the warrants mentioned earlier

In FY09, the company allotted 0.26 mn equity shares at Rs. 123 to the promoters in lieu of the warrants mentioned earlier.

The six year EPS CAGR over FY06-13 is around 28% while corresponding net profit CAGR is 31%. There is a slight lag in EPS as compared to net profit.

I consider this level of dilution acceptable.

 

22. What is the trend in operating and net margins respectively over the last 5 years?

FY07FY08FY09FY10FY11FY12 FY13
EBITDA margin16%15%19%16%21%19%15%
PAT margin8%8%8%10%11%10%9%

 

In recent years, margin has come down because in recent years possibly because the contribution from outsourced goods has increased.

The management is planning an expansion in the coming three years which means more in-house production. I will not count on margin profile changing too much from these levels.

 

Risk factors

 

23. What risks does the company face?

Real estate slowdown

Considering that the bulk of CSL’s demand is new demand and not replacement demand, real estate slowdown will have an impact on the company.

A look at EID Parry’s past data is helpful. The period chosen is 1996-2002. This period covered the last protracted real estate slowdown in India. What happened in 2008-09 was not a typical slowdown because of the quick rebound due to central bank action.

 

FY95FY96FY97FY98FY99FY00FY01FY02
Sanitary ware
Value (in Rs. Lakh)5,6786,6137,2138,7149,62310,13412,25812,890
Quantity15,03414,68313,95418,66618,85019,02521,90522,821
Avg. realization (in Rs.)37,76845,03851,69146,68451,05053,26755,96056,483
Value Growth16%9%21%10%5%21%5%
Quantity growth-2%-5%34%1%1%15%4%
Avg. Realization growth19%15%-10%9%4%5%1%

Source: EID Parry Annual Report FY96-FY02, segment details

 

This is what a bad real estate market did to EID Parry more than 11 years back. Through the down-cycle it still had a value CAGR of 12%.

Today, the real estate in India in metros is stretched but interest rates today are nowhere near the levels seen in 1996-99. Recently they have been at around 7.2-8% levels for the 10 year G-Sec.

As a comparison the following chart shows G-sec rates over the last 20 years including the last real estate slowdown period studied for EID Parry.

India Government securities rates - FY95-02

I really do not know if real estate will crash. I have been pondering over it for many years but the black money in our country is something that cannot be underestimated. That and the builder-politician nexus.

Since bulk of the sales are outside metros I would draw comfort from the fact that the company will be potentially less exposed to frothy markets which will see a greater slowdown if there is a real estate market crash.

 

Competition

Chinese imports
Chinese imports should matter more for domestic unorganized players and not the bigger branded players.

Foreign players
They are a small part of the market today.  They are present mainly in metros. Cera does not compete with them as much as Hindware and Parryware. Cera looks better placed since they are somewhere in the middle of the market in the organized segment.

HSIL (owner of Hindware) and Roca (owner of Parryware).

Competition will continue to be relentless for Cera Sanitaryware but they have held their ground and increased their share in the last 5-6 years.

New domestic players
Domestic players like Jaquar who are market leaders in faucets have started selling sanitary ware.  The balancing factor is that Cera is also entering into areas like faucets, fittings in which they were not present earlier. Overall market growth will be good for all branded players.

 

24. What is the outlook for CSL?

The biggest reason for my interest in CSL is the fact that the industry dynamics are changing. The fact that there is a shift from the unorganized market to the organized market is giving growth in excess of industry growth rates to the big branded players like Parryware, Hindware and Cera Sanitaryware.

The second reason is that the customer behavior is changing. People are spending more in comparison when they choose a Western toilet over an Indian toilet. Easily, a factor of 3-5 times more.

CSL has only 10% exposure to the institutional market. The company is trying to increase this share. In a counter-intuitive way, I feel CSL is better placed to handle a real estate slowdown than its competitors who have greater exposure to the institutional market.
On a conservative basis, I will not assume growth in market share from 20% to 30% as management expects to achieve.

If the market share increases, it will help the investment case. But this is not considered.

 

Valuation

25. What is the valuation in terms of price-earnings ratio?

At a price of Rs. 520.8/- as of 14 Jun 2013, CSL trades at a P/E of 14.3 times on trailing earnings.

Cera Sanitaryware historical trailing price to earning ratio

Average trailing price to earnings ratios (P/E) for Cera Sanitaryware from Jan 2008 to around May 2013 is approximately 7.

Cera is a good brand which is increasing market share in a sector which has favourable dynamics for branded players. The company has improved in terms of business profile over these last 7 years. Around 12 times trailing earnings is a fair price in my opinion for a company that has good growth potential in light of the sector dynamics discussed above, financial parameters, and management quality.

 

26. What are the results of the discounted cash flow analysis (DCF)?

This is a high growth company with lesser predictability of cash flows. There is greater chance of getting the DCF wrong than right.

I conservatively assume a 20% value growth over the next few years with similar margin profile. This compares to a 29% 6 year sales CAGR and a 36% 3 year sales CAGR (FY07-13). Recent years have seen acceleration in sales.

I have taken a growth in cash flows from operation at around 20% and 10% in multiple stages and a terminal growth rate of 3%. WACC works out to 13.5%.  Capex growth has been kept at a reasonable level, slightly lagging the cash flows from operation as has been seen in the past. DCF analysis yields a per share value of Rs. 371.

This value includes a margin of safety because I am considering lower growth in cash flows as compared to past data.

 

27. What is the investment decision?

DCF valuation suggests Rs. 371 as a fair value with a margin of safety.

I have bought into this stock at around Rs. 456 levels, when it was around 12 P/E.

When I bought it, the blended value of DCF  (20% weightage) and P/E (80% weightage) worked out to Rs. 425.

In this investment, my margin of safety is relatively lesser at the price I have invested in. I recognize this fact. It is a conscious call I have taken.

Sometimes trying to scrape the bottom of the barrel can lead to missed opportunities. You would be right in saying that it can create investment mistakes too.

That is a call one needs to take. Take as much risk as you are comfortable with. As usual, please read the disclaimer.

Take an independent decision. I am not responsible for any losses that you might bear. You can say that I have a bias as I am invested in this stock.

 

I will leave you with some other thoughts.

 

Vidush Somany’s death

This is purely conjecture but with the death of Vidush Somany at the age of 31 there remains the question of what happens with the ownership of this family run business. Vikram Somany, age 62, had groomed Vidush and his son was taking greater responsibility over the years. Considering Indian promoters, 62 is not an advanced age that forces  Vikram Somany to call it a day. If the promoters decide to sell rather than continue running the show, there could be an M&A play in CSL.

There is a past transaction in this sector.

In 2008, Roca bought 47% of EID Parry’s stake in the 50:50 JV leaving EID Parry with 3%. They bought in at Rs. 705 crore for 47% when the FY08 sales of the JV were around Rs. 360 crore. The implied price to sales multiple was around four times sales.

The investment decision should not be based on this conjecture.

 

One might ask. Why not invest in HSIL, the market leader in sanitary ware?

HSIL is a listed entity and they are the market leader with Hindware brand. They also have a  container glass division which is a low RoE business and a drag. There has been news of sale of the subsidiary which had container glass operations. Disclosures are not helpful at all in understanding the transaction. Until there is clarity, I will not consider HSIL.

 

Feedback

I would love to hear your feedback. Views, counter-views are welcome. If you have thoughts to add please use the comments section below.

If you have any information that you have gathered through primary checks it will be helpful.

If you have purchased something for your home recently, that is excellent market information. You will have a view about consumer behaviour and market dynamics.

Do share your views.

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Comments

  1. says

    Hi Kunal, This is an awesome post. I learning stock investing and this post tell me how to analyze a stock and pretty much all the factors that influence it. I have an attention span bordering on the nanosecond and I kept awake for much of this writeup. Great stuff. Thanks.

    • says

      Thanks Pattu. I’m glad you found it useful. Hope to interact with you again on Capital Orbit. As always, do your own homework before you take any step. Independent thinking is absolutely necessary for all of us.

      • Nitin says

        Hi Kunal,

        i think you bought the stock at a reasonable price, even today 01/07/2013, with a PBT of 68cr. and a market cap of 624cr., this company is selling at a ROE of 11%, which is attractive, even if we assume zero growth for next year. The current 10 year gov bond yield is hovering anywhere around 7-7.5%

        • says

          Hi Nitin.

          Is not what you are saying as 11% actually a bit like earnings yield (Profit after tax / market capitalization)? Which is nothing but the Market cap / PAT (Price to earnings ratio) reversed.

          Normally we take PAT. You have taken profit before tax. Is there a reason why? I would like to understand.

          I agree with you broadly that earnings yield can be compared against bond yields. It serves as a good metric for attractiveness.

          • nitin says

            Exactly, as and investor if i am evaluating any investment…i refer to before tax return….therefore, i use pbt…for example in case i approach a bank asking for a fixed deposit rate….i dont look for after tax deposit rate…haha…secondly….unless a special case (a tax holiday, SEZ benifit, etc), most companies will fall in ~30% tax bracket….therefore…for most of the institutional investors…who themselves are facing 30% tax rate….they too will be more interested in pbt

  2. says

    Hi Kunal,

    Good analysis template. You have pretty much covered every important aspect of the story.
    Few points from my side,
    1. Did you come across any data on past market share and increase in the same for Cera? Obviously they have gained market share, which is often seen as a big positive by market and leads to re-rating. I think the re-rating is here to stay. So, from this point we should aiming for stock price growth in line with profit growth.
    2. What’s your estimate for the current year growth ? I think ~20% looks a safe assumption ? I have been invested into this one since over 15 months now last addition being at 450, and it’s been a good performer. Had doubts about company after the untimely and unfortunate demise of promoters son, but kept my faith and so far so good.

    • says

      Thanks Raj.

      1. I did not get the data for past market share. In the assumptions I did not take any increase in market share.

      2. I would estimate around 20%, yes. I also eagerly await to see how this actually plays out.

      You must have got in at much better valuations. I was pondering over this for a long time and missed entering it earlier.

  3. Anil Kumar Tulsiram says

    Quite detailed one

    Few observations:

    1) EID parry date for 1996-2002: Entire CAGR in quantity seems to be driven by 34% growth reported in 1998 and coming to value growth possibly that’s driven by raw material increase. So assuming 34% growth was because of some merger or acquisition, it seems EID parry did have pathetic performance during last real estate downfall.

    2) Second in more technical: I have always believed that DCF value is the maximum value and in Cera case your DCF value is lower than value through multiple even after applying 20% growth for first phase.

    • says

      Anil, you are right about the 34% data point which has given a boost to quantity.

      I computed avg. realizations from the quantity and value data taking value = quantity * average realization. They were able to increase prices in all years except FY98 and FY02. I don’t know the exact raw material price trend in those years. I am not sure what more I read from this.

      I have no doubt that if there is a real estate crash, Cera Sanitaryware will be affected. Again, this does not take into account that there might be P/E ratio drop. What we have here are only revenues.

      DCF is indeed what it is. I have chosen to be pay more attention to the multiple. That is why you might say that DCF is lower. It is subjective.

      I accept that this is not a smoking hot bargain. But it helps to know what the DCF suggests. And yes, it is lower than the multiple based valuation. But like I said, I am comfortable in terms of the size of this position with respect to my portfolio size.

  4. sagar says

    Real fantastic analysis sir.I came to the blog from the link you had given on the Valuepickr site.You all are doing great work.I just needed some advise regarding ‘Signing up’ for Valuepickr.As I feel its a better place to have discussions.

  5. Dhaval Shah says

    Hi,
    Very nice post.
    Mngmt of HSIL, shared very good information on the indian sanitaryware market in its last concall, i.e q4fy13.
    It will be very usefull in gaining the conviction on the sector.

  6. says

    Hi kunal,
    Fantastic writeup about cera, i got into this beauty at around the same levels and am now faithfully adding at every opputunity little by little. What do you think will be the share price in the next 2-3 years. Are we staring at another hawkins/ ttk.

    • says

      Thanks Sash,

      I will answer this question and the other question on P/E.

      I am not “hoping” for a P/E rating. If it happens I will be happy. My interest is more from the business side, that they are growing profitably at a fast clip.

      P/E rating, if it happens, will be icing on the cake. I am ok with the cake too if it is good :)

      As of today, are there any other stocks you find to be at compelling valuations? Would love to hear your views.

    • says

      Yes Sash, I have tried to find out who Dolly Khanna is. Did not understand. People in investment management seem to know her name but not her background.

      Though I must say, her being a shareholder did not influence my decision. Nor should the presence of a well known name influence our decision for any stock actually. Big investors also get it wrong many a times.

  7. says

    Kunal, another question, can we expect a p/e re-rating? When does it generally happen. It deserves atleast 18 in my opinion.

    • says

      Hi Raj,

      I was invested in Noida Toll, got out at a small loss later.

      My reasons for investing were that it was given rights to earn a return of 20% on their asset base. If they did not earn them economically in any year, the return hurdle would increase for future years. Essentially, it was cumulative.

      If they did not get returns from the bridge tolling business, they were to receive development rights to land close to the bridge, on request to the authorities.

      If you a discounted cash flow analysis, it looks good. No doubt about that.

      All this is fine on paper, as I realized later.

      There are multiple occasions when they have increased toll rates and then done a rollback. Why? Political pressure, demonstrations, dharna etc. If the business cannot increase it’s toll, then where is the pricing power?

      Second, look at the contract that Noida Toll has entered into with NOIDA authority.

      It is a one-sided contract. With courts getting activist in regulated areas like telecom, power and coal, who knows whether there is a legal risk to the business. This report by a consultant should be good reading to understand the lacunae in the contract, if you have not already read it.

      http://infrastructure.gov.in/pdf/NOIDA.pdf

      Over time, I have taken a call to not invest in businesses in which unilateral govt. action can hurt shareholders.

      Look at the recent TCI vs. Coal India tussle. TCI fund managers have cried hoarse about govt. mismanagement of Coal India, conflict of interest and loss to minority shareholders. What happened?

      TCI has pared their stake in the company.

      On similar lines, I was interested in Indraprastha Gas. But I have not touched it. Tomorrow, there might be a gas price spike. Political parties may rally and force the company to abstain from passing on the increase to customers.

      • Raja says

        Hi Kunal,
        Thanks for the link, it’s an excellent read.
        I guess, it rightly points out the flaw in the existing contract design.
        Another thought is, forget about the promise of 20% assured returns, assume it’s never going to happen and then look at the merits of the business as it stands today.
        Figure into calculation, that the hike in toll prices over years will probably slightly lag even inflation numbers.
        In next 2 years they are going to be debt free, actually they are already debt free, net of cash. What impact is it going to have on the EPS and dividend ?
        I am thinking market price will probably keep it in a 5% yield range, because of the predictablity in the business. My guess is , we are not going to see a situation, where the dividend rises to say 2/- and stock price is still in 20/- range.
        So, the thing to figure out , is there a case of dividend increase in the next 1-2 year and hence a commensurate price rise ? Would love to hear from you on this theory. It’s a medium term bet for me, not the buy and hold kind of business.

        Of course, if govt authorities are hell bent on destroying the business and the PPP model, they can even take the existing sources of income away, like the making the toll road free etc etc… but i don’t see that happening. Worst case i figure is, this 20% assured return stuff and resulting increase in toll tenure to 30+ years is going to go away.

        On the TCI, thing, i think the situation was a little different, govt is a 90% owner. In this case it’s not. Also, i would request you to read the post of Prof. Sanjay Bakshi on it. There is a good case for why TCI is wrong.

        Regards
        Raja

        • says

          I had also thought of the same thing that debt will come down, dividend will increase. I agree that if dividends increase price should go up. What price it goes up to and what the dividend yield would be is a question. It could be a medium term bet as you say. Is your understanding that the price increase would be as much as the percentage dividend payout increase?

          In Noida Toll and Coal India, what I meant to say was that we need to see government action and its impact on minority shareholders. This is irrespective of the the presence or absence of government as a shareholder/promoter in a company.

          I had read Prof. Bakshi’s post too. Though there are some problems with Coal India too. It is not run as a independent business entity.

          • Raja says

            Theoretically if the current interest cost gets added to bottom line after repayment of debt, eps can easily grow by ~25% to close to 3. And i won’t be surprised if dividend increase to say 2-2.5.
            Market will have to take notice of a steady payout prospect.
            I think in next 2 years we can see if this theory will play out or not :)
            Would love here a detailed analysis from you.

            Regards

          • says

            Hi Raja, I’m not sure whether I will do a detailed post. If you are interested, I would be glad to accept your analysis as a guest contribution. Let me know if you are interested.

            Thanks.

    • says

      Ok. I would not have the courage to do that :)

      I will just leave you with a point. It’s your decision eventually.

      I share this in the Smart Investor Workshop too when I talk about diversification.

      Look at a listed company called Genus Power which is in the power meters business. There was a huge fire in the Indian Oil depot in Jaipur in 2009. Genus Power’s factory compound was adjacent to the Indian oil depot. Their factory was heavily damaged by the fire.

      They got insurance, but they could not operate for a few months. They had one factory at that time as I had read earlier.

      This is truly a black swan event. One that you could not have predicted.

      Diversification does have its merits.

  8. says

    I agree kunal i have been in markets since 2007, i am a bloody risk taker. Lets see how things pan out, will keep you updated.

    • says

      I don’t mean to impose my views. I wish you the best in your efforts.

      Serious things aside, I am sure I can count on getting all the facts / updates on Cera from you. You surely will be observing it with the greatest interest because of your position in this stock.

      Do share anything interesting that you come across. Thanks.

  9. Dhaval Shah says

    Hi Kunal,
    want to add some points which I have understood while I was doing my research on CERA
    1) 50% of its top line comes from trading activity, out of which majority is import from china. In such an environment where rupee as depreciated by 11% YTD, CERA should face higher currency risk.
    2) But, so far what I have understood is, CERA’s policy is to keep buffer of Rs. 5 on $/Rs. rate while doing their cost calculation. which means, currently they calculate their import cost as $/Rs 65. and decide their pricing.
    3) Their margins have fallen by 2-3 % for fy12 and Fy13 is because of drag in the faucet business and not because of currency depreciation

    So, what I would want to ask you is, Does HSIL also maintain this policy? Or what is their policy on the forex management front.
    And to what extent can the consumers take price increases( I knw this is a very hypothetical question) bt just want to know ur thought process.. This is one point where I am not very clear about.
    Infact, HUL has reported drop in sales of its, premium skin care products. Fall in discretionary spends is clearly visible. But wonder, when Page industries will report a fall.

    • says

      Thanks Dhaval, for adding those points.

      I don’t know about HSIL’s policy. Nor do I know the answers to what can happen? I agree and I have been also reading of the fact that not all price increases are passing through to consumers in different products.

      Page has become a theme in itself. True. It’s floating on a flying carpet. :)

  10. says

    Hi Kunal,
    I think a lot has been written about this story in the past few years, including the best from Prof. Sanjay.
    So, i think there isn’t much new to write, except , that now the triggers are closer and more visible.
    Like, they took a hike of 15% in April 2013 without rollback this time, debt will close in 2 years, already hiked dividend this year and further hikes prospects look better etc etc….

      • Dhaval shah says

        Hi,
        Just heard mr. Somany on ET now. Nothin important ..but he mentioned about increased share of tiles under his trading activity. Need to get the amount of tile component… Where is the company heading towards. Sanitary/wellness/tiles/faucets…what all they want to do. Tiles is a very very commoditised business. And, I feel margins should be around 15% (ebitda) at company level…those 18-19% days are gone. Company might hold a con call next week.

        • says

          I missed the ET Now video. Will try seeing it on their website.

          I completely agree with you on the tiles question and the direction the company takes. On tiles, there are two things. One, slightly lower margin. Two, brand probably works lesser in tiles as compared to sanitaryware. If you get the details of the concall, please share it with me. Thanks.

  11. Dhaval shah says

    I did some channel checks for CERA. Met 30 year old distributor of cera. One thing which I came out very positive is, they all have very high regards for Vikram somany. Very honest man.

  12. says

    I think thats a very plus point, promoters integrity plays a vital role.coming to q1, its always been weak, any reason for raw material costs jumping during all q1 so far. So what will be your targets for fy14? I still think a lot of steam is left in this share, due to its brand.

  13. says

    Dhaval, i think its too soon for us to decide on the numbers because Q1 has always been low in numbers, it could spring back in the next quarters. 9% seems too low IMHO, cera will bounce back.

  14. Gautam Mehra says

    HI,

    Aren’t you dissapointed with the September 13 results. Absolutely no growth in profit? How much has the company paid Sonam Kapoor for promotion? Is the full amount expensed in this quarter?

    Thanks,

    G Mehra

    • says

      Hi Gautam,

      The management has indicated that there would be pressure on margins. Other players are also feeling the same. I don’t know the Sonam Kapoor expense specifically. If I find it out, I will definitely let you know.

      I continue to hold my position. I think this one needs patience. The bigger picture to be checked is whether they can outsource effectively and maintain margins at roughly 15% level. As long as they grow well with a good return on equity I don’t think there is a problem.

    • says

      HSIL’s sanitary ware segment grew by 25% in the Sep 13 quarter. I have checked with someone who mentioned that Hindware is facing pressure on market share. Jaquar is anyway strong in faucets. I have read reports that they have upwards of 50% market share in the faucets and fittings segment. Cera grew by 35% in the Sep 14 quarter.

    • says

      I have no information on this Gautam. It is a possible acquisition candidate. I had written about that earlier. With the son’s passing away, a sell-out remains a possibility.

      Thanks for the report too.

      Regards,
      Kunal

  15. Prashant says

    Hi Kunal,

    I like the way these stock has been discussed here, its a very healthy discussion. thanks for posting such a nice analysis of this stock.

    Can you look into Kewal Kiran clothing ltd?

    Thanks,

    Prashant

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