Capex To Drive Future Growth - Cera Sanitaryware

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Many a time we have said that consistency is one factor that is highly rewarded in the stock market arena. Cera Sanitaryware (CSL) is one such company that has witnessed consistent topline and bottomline growth since the last eight years and has rewarded its investors by paying dividend on regular basis. But these two are not the only factors for recommending CSL.

Apart from its recently announced bonus of 1:1, the other compelling factors include its expansion plans and expected acquisitions while on the valuation front, the scrip is placed well. At its CMP of Rs 264 (cum bonus) the scrip discounts its trailing four quarter earnings by 7.25x. Even its EV/EBITDA of just 4.50x seems to be placed better than the other players in the same industry. CSL’s business can be divided into four segments.

The first is sanitaryware, the second includes taps and showers etc, the third segment has a tie-up with the Italian company Novellini for luxury products such as shower cubicles, elegant bathtubs etc and the fourth is the personal care segment which includes hand and hair driers etc. CSL also has windmills of 5 MW and is self-sufficient in terms of power - a requirement that makes for one of the major costs in the manufacturing process. Currently the sanitaryware business contributes 80 per cent of revenues while around 10 -15 per cent is contributed by luxury fittings. Going ahead the equation may change as its taps manufacturing facility (2,500 units a day) will be available from Sept. 2010. Further, the company is planning to expand the same to 5,000 units per day by Dec. 2011. The total cost is estimated at Rs 18 crore.

The management has also stated that eventually the capacity will be increased to 10,000 units and then to 20,000 units per day, but has not revealed any particular time frame. CSL is also expanding its existing sanitaryware capacity to 2.7 million units from the current 2 million. The capacity will be go on stream from December 2011. The total capex for the same is expected to be Rs 45 crore. CSL is also planning an acquisition in the European markets and is said to be closing in on a particular deal. There are, however, no further details available. But the total capex, including taps, sanitaryware and acquisitions, is estimated to be of Rs 90 crore. Regarding the funding of the capex, we believe the company may go for partial debt funding since its internal accruals may not be sufficient to fund the total requirement.[PAGE BREAK]

In terms of the current demand drivers, the up-tick in the housing sector will work in the company’s favour. With the company manufacturing larger size sanitaryware units, its realisation is also set to increase. As mentioned earlier, the company’s financial performance has been strong and it has managed to keep the momentum alive in Q1FY11 also. Here the company posted a topline of Rs 50.78 crore and bottomline of Rs 5.98 crore as compared to Rs  40.23 crore and Rs 3.35 crore in Q1FY10. For FY11 the management expects an EPS of Rs 40, resulting in P/E of 6.50x which will provide further scope for upward movement. Taking this into consideration, our recommendation to investors is to buy the scrip with a target price of Rs 380.