Sell Cera Sanitaryware, target price Rs 1,680: ICICI Securities

ICICI Securities has given a sell rating to Cera Sanitaryware with a target price of Rs 1,680. The share price moved down by -0.88 per cent from its previous close of Rs 2259.95. The last traded stock price is Rs 2239.95.

According to the brokerage, the Covid-19-led extended lockdown in Q1FY21 is expected to push Cera Sanitaryware’s overall growth deeper into the red than anticipated earlier. The brokerage now expects Cera to post an overall revenue decline of 24.9 per cent vs a decline of 9.3 per cent in FY21 anticipated earlier. The brokerage believes the company’s bathroom solutions-led model is likely to post a sharp decline in FY21E due to a) Covid-19-led countrywide lockdown in Q1FY21; b) non-need-based or discretionary nature of its product portfolio – likely to have least priority in these testing times and c) stricter control on its receivables – particularly in its allied products segment.

Investment Rationale

Despite expected gas savings and fixed cost rationalisation (focus on employee costs, brand spends and administrative costs), the brokerage expects Cera’s EBIDTA margin to remain at almost 15-year low in 12-13 per cent range in FY20/FY21 led by significant operating deleverage across its product portfolio. Muted growth in premiumisation segment vs earlier expectations, an inability to scale up its margins in tiles segment and inferior product mix with expected higher contribution from low-margin allied products – tiles and faucets, are also going to impact growth.

The brokerage expects margins to recover to 14.9 per cent in FY22E driven by expected recovery in volumes. It expects CRS’s EBIDTA to witness a decline in growth at 5.2 per cent CAGR over FY19-FY22E. RoCEs are likely to remain depressed over the next two years. Muted volume growth expectations and likely margin pressure in the near term would put considerable pressure on its RoCEs in the near term. The brokerage says the company’s RoCEs are likely to decline substantially to 14-year lows in the range of 10-15 per cent over the next 2-3 years. This may lead to multiple de-ratings in the near term

Financials

For the quarter ended December 31, 2019, the company reported consolidated sales of Rs 325.23 crore, down -1.27 per cent from last quarter sales of Rs 329.42 crore and up 1.53 per cent from last year's same quarter sales of Rs 320.35 crore. The company reported net profit after tax of Rs 28.23 crore in the latest quarter.

Promoter/FII Holdings

Promoters held 54.48 per cent stake in the company as of March 31, 2020, while FIIs held 14.26 per cent, DIIs 10.17 per cent and public & others 21.08 per cent.