Rupee Eats Cera Sanitaryware's Profitability

Cera Sanitaryware's Q1FY14 numbers have fell short of market expectations. The company during the first quarter of the current fiscal has reported 39% growth in sales to Rs 133 crore. The net profit, however, came in at Rs 11 crore against an expectation of Rs 15 crore. The stock, following this disappointing result, has lost more than 7% in the last two trading sessions.

On the margin front, the company has reported a drop of 133 basis points. This was mainly due to the rise in purchases and the stock in trade which increased by 57% in the quarter. The main reason behind this was a sharp depreciation in the currency. The company imports some of its products from China and hence there was some rise in purchase in value terms. The quarter has also seen depreciation increasing by 30%. The raw material costs decreased by 3% and in terms of per cent of sales, it stood at 10.43% against 14.88% a year before.

During the quarter, the company saw a 12% drop in its other income to Rs 1.39%. The finance costs rose by 15% to Rs 1.42 crore. The interest cover ratio, however, remained healthy at 13%.

Effective tax rate remained at 34% against 33% in the June quarter of the last fiscal. Overall, the numbers would have been better but the rupee has played spoilsport.

The company spokes person told us that last year’s growth rate of around 50% is not sustainable and that the company will keep its topline growth in the range of 32-35% this year. The EBITDA margins (including other income) should be around 16.5% to 17% this year. He also said that there would not be any organic capacity addition this year due to political uncertainty in the country. If there is an additional demand, then it will rely on outsourced products. Besides, the increased costs would also be passed on to the customers and hence there should not be much decline in the EBITDA margins.

At the CMP of Rs 508 and TTM EPS of Rs 38.05, the stock is available13.3x. The correction in the stock is well-justified considering the lower profit growth. We now slash our previous target of Rs 616 to Rs 570. Investors holding shares of this company should continue doing so.