Cera Sanitaryware volume growth supports margin recovery despite weak first-quarter earnings

Investment View and 1QFY27 Summary

Motilal Oswal Financial Services Ltd. reiterated its Buy rating on Cera Sanitaryware in its August 8, 2026 1QFY27 result update. The broker characterised the quarter as one of healthy revenue growth but weak margins. The target price remains unchanged at Rs7,384, based on 30 times FY28E EPS, versus the CMP of Rs6,062.

Healthy Revenue Growth and Operating Performance

Cera Sanitaryware reported consolidated revenue growth of 16 per cent year-on-year to Rs4,860 million in 1QFY27, broadly in line with Motilal Oswal's estimate of Rs4,823 million. Reported growth was affected by around 3 per cent because dealer discounts were reclassified from other expenses into revenue.

The reported 1QFY27 revenue mix comprised 47 per cent sanitaryware, 40 per cent faucetware, 11 per cent tiles and 2 per cent wellness. Plants were operating at around 90 per cent utilisation.

Cera Sanitaryware improved its working-capital cycle by 25 days to 50 days, led by a 12-day reduction in inventory days and an eight-day reduction in receivable days. The cash balance stood at Rs9.43 billion.

Profitability Under Pressure

Profitability was the key weakness in the quarter. EBITDA declined 7 per cent year-on-year to Rs492 million, 31 per cent below Motilal Oswal's estimate of Rs712 million. The EBITDA margin fell to 10.1 per cent, while reported PAT declined 3 per cent year-on-year to Rs453 million, 14 per cent below the broker's estimate of Rs527 million.

The margin weakness principally reflected a one-time employee wage settlement cost of Rs63 million in 1QFY27. The total settlement cost is expected to be around Rs180 million. Elevated raw-material costs and gradual price hikes also affected gross margins.

FY27 Growth and Margin Outlook

Management maintained its FY27 revenue-growth guidance of 18-20 per cent and expects profitability to improve progressively during the year.

Cumulative retail price increases of 12 per cent in sanitaryware and 16 per cent in faucetware have been implemented, while price increases in the project segment are pending. Other management actions include:

• Providing dealer incentives to support volumes.
• Reducing sourcing dependence on Morbi by adding vendors outside the region.
• Increasing in-house manufacture of high-value products.

Growth Initiatives and Capital Allocation

Management expects Senator revenue to increase from Rs105 million in FY26 to Rs450 million in FY27, with its store network expanding from more than 40 stores to 60 by FY27-end. Polipluz revenue is targeted to rise from Rs85 million to Rs350 million, alongside dealer expansion from 1,120 to 2,000 and distributor expansion from more than 100 to 200.

FY27 capex of Rs430 million is mainly intended for faucetware brownfield expansion. Advertising and promotion expenditure is planned at Rs850 million, compared with Rs490 million in FY26. Ramesh Baliga, CEO of Senator, has resigned and is expected to exit Cera Sanitaryware by October 2026.

Earnings Estimates, Valuation and Risks

Following the weak first-quarter margin performance, Motilal Oswal reduced its FY27 earnings estimate by around 4 per cent but retained its FY28 estimate, expecting healthy volume growth and margin recovery. The broker forecasts FY26-28 revenue, EBITDA and adjusted PAT CAGR of 14 per cent, 20 per cent and 22 per cent respectively. FY28 EBITDA margin is expected to reach 14.6 per cent, the upper end of management's guidance.

The broker notes that a cash surplus of around Rs10 billion and annual free cash flow above Rs1.5 billion could constrain return on equity and pre-tax return on capital employed, estimated at around 17 per cent and 24 per cent respectively. The key risk to the positive view is a slower-than-expected recovery in sales and margins.