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Buy Cera Sanitaryware, target Rs 2,801: Yes Securities

Cera Sanitaryware is a midcap company, operating in construction sector.|
Aug 05, 2019, 01.38 PM IST
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The brokerage has set a one-year horizon for the stock to hit the target price.
Yes Securities has maintained 'buy' recommendation on Cera Sanitaryware (CRS) with a target price of Rs 2,801.

Shares of Cera Sanitaryware traded at Rs 2,362.45 around 1:20 pm on 5 August, 2019. The brokerage has set a one-year horizon for the stock to hit the target price.

CRS reported a consolidated revenue de-growth of 3.8 per cent year-on-year (YoY) led by 9 per cent and 2 per cent growth in faucet-ware (FW) and tiles segments, respectively.

Sanitary-ware (SW) segment saw a decline of 12.7 per cent YoY. Consolidated Ebitda was down 5.5 per cent YoY with margins contracting by 24bps YoY to 13 per cent, primarily due to decline in high margin SW business.

Consolidated PAT was down 11.5 per cent YoY as depreciation expenses increased 46 per cent YoY due to Ind-AS 116 accounting standards.

"Even as residential segment in the real estate sector continues to be plagued with piling inventory, dealer re-stocking in SW segment remains far below than our expectations due to liquidity crisis & tough demand environment," said Yes Securities.

CRS’s unwavering focus on rejuvenating its product basket with aesthetically superior products, widening the distribution network, and its initiatives in cementing a lasting recall, will facilitate in growing its market share.

CRS has remained very selective in project business which has yielded positive results in form of working capital improvement during Q1FY20.

In quest of higher volume growth, management is not willing to sacrifice the Ebitda margins and also not extending credit terms to channel partners.

As per the brokerage, CRS would be focusing on profitable growth and cash conversion cycle through better control over working capital.

"We trim FY20E and FY21E earnings estimates by 9 per cent and 10 per cent to factor in slower growth from SW and tiles segments in the first half of FY20. With price hikes taken in both SW and FW in May’19, we expect near-term Ebitdam to remain stable," said the brokerage.

Yes Securities said it expects CRS to deliver 14 per cent earning CAGR over FY19-21E with an over 17 per cent Core ROICs. It has maintain ‘buy’ rating with a target price of Rs 2,801 at 25 times FY21 earnings per share (EPS).

CRS has two main sources of energy - GAIL and Sabarmati Gas, for operating its SW plant. The pricing of both sources are different. GAIL sources gas from isolated wells in and around Cera’s manufacturing facility, and is able to contract gas at a lower price over prevailing market pricing.

Medium-term contracts with these suppliers are renewed on a periodic basis. For energy conservation, CRS has installed fuel efficient burners to control gas consumption and in addition to this, every effort is done to adapt any technological developments in energy conservation by the company.

The second type of energy, electricity, which is required for running the machineries, is supplied by the local Discom. To compensate within the energy consumption by way of electricity, CRS has an installed capacity of Wind Turbines of 8.3MW and 2MW Solar Plant which generates about 90 per cent of the requirements and gets offset against monthly consumption of the energy bill.

CRS has been constantly upgrading its technology, increasing automation, upgrading consumer visible manufacturing processes via robotic glazing machines which help in evenness of glaze and also save glaze.

The Company is now going in for further mechanization of casting. It has developed 3D printing machines allow designs to be prototypes in a manner of weeks, facilitating quicker time to market of new designs.

FW unit has attained critical mass, the product offerings span most consumer tastes in price and design. In FW manufacturing, continuous technology upgradation programs have enabled higher productivity and minimum human intervention in the manufacturing process.

Commissioning of the Zamac plant, has substituted imported zamac handles. CRS has now embarked on further mechanization and automation of production process.

Launch of new prototypes, many of which are launched as products, with the help of 4 axis 3D printing and robotic grinding and polishing, the company has been able to differentiate products based on design, finish and consumer preferences.

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