Cera

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Enhancing investment decisions

Cera Sanitaryware Ltd
Initiating Coverage

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The CFV Matrix (CRISIL Fundamental and Valuation Matrix) addresses the two important analysis of an investment making process Analysis
of Fundamentals (addressed through Fundamental Grade) and Analysis of Returns (Valuation Grade) The fundamental grade is assigned on a
five-point scale from grade 5 (indicating Excellent fundamentals) to grade 1 (Poor fundamentals) The valuation grade is assigned on a five-
point scale from grade 5 (indicating strong upside from the current market price (CMP)) to grade 1 (strong downside from the CMP).

CRISIL
Fundamental Grade Assessment
CRISIL
Valuation Grade Assessment
5/5 Excellent fundamentals 5/5 Strong upside (>25% from CMP)
4/5 Superior fundamentals 4/5 Upside (10-25% from CMP)
3/5 Good fundamentals 3/5 Align (+-10% from CMP)
2/5 Moderate fundamentals 2/5 Downside (negative 10-25% from CMP)
1/5 Poor fundamentals 1/5 Strong downside (<-25% from CMP)

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Last updated: May, 2013

Analyst Disclosure
Each member of the team involved in the preparation of the grading report, hereby affirms that there exists no conflict of interest that can bias
the grading recommendation of the company.

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Branding to continue to power growth; faucet ware business a monitorable

Fundamental Grade 4/5 (Superior fundamentals)
Valuation Grade 4/5 (CMP has upside)
Industry Sanitary ware
1
August 07, 2013

Fair Value 615
CMP 511
For detailed initiating coverage report please visit: www.ier.co.in
CRISIL Independent Equity Research reports are also available on Bloomberg (CRI <go>) and Thomson Reuters.

CRISIL Research has assigned a fundamental grade of 4/5 to Cera Sanitaryware Ltd (Cera)
on the back of wide appeal of the CERA brand, established position in the organised sanitary
ware industry, an extensive distribution network and stable cash flows. We expect the
sanitary ware business to grow at 17% CAGR in the next three-four years. Simultaneously,
entry into faucet ware appears positive as it provides a scalable growth opportunity. However,
this business is challenging and currently loss-making. While we expect the business to
become profitable in the next two years, it is a key monitorable along with succession
planning.
Sanitary ware: Brand strength to sustain momentum
With improving lifestyle and increase in spending capacity, Indians have demonstrated
growing brand awareness leading to a shift from the unorganised to the organised building
products market. Cera has been a key beneficiary of this trend, given its strong brand
positioning in the mass market segment as indicated by its sanitary ware business recording
32% CAGR during FY09-13 vs. estimated industry growth of 14-15%. With Ceras sustained
focus on branding, we expect sanitary ware sales to remain healthy and likely grow at 17%
CAGR over the next few years.
Faucet ware a challenging business but with limited risk; profitability is a monitorable
We view Ceras entry into the faucet ware business as a positive as it provides a significant
scalable opportunity; however, the business is challenging and is currently loss-making. This
is primarily due to low brand awareness in faucet ware and significant competition from
unorganised players and Jaguar. We expect the business to grow at 29% CAGR and become
profitable during FY13-15 on its plans to introduce new faucet designs with higher profitability
and better branding. While profitability of the business is a key monitorable, we derive comfort
from Ceras investment of 225 mn, limited to 10% of overall gross block.
Outsourcing to support growth but increases vulnerability to supply side risks
Outsourcing has not only helped the company to support growth without incurring significant
investments but also have a presence in diversified product categories. Sales contribution
from outsourcing has increased from 46% in FY11 to 53% in FY13 and it is expected to
remain steady going ahead given the capacity constraint in sanitary ware coupled with growth
in the wellness segment. While we believe that the increase in outsourcing will help Cera to
support growth and better monetise its brand, it also increases the companys vulnerability to
supply-side risks in the long run.
Growth momentum to continue; arrive at a fair value of 615
We expect the growth momentum to continue and estimate revenues to grow at a two-year
CAGR of 25% to 7.6 bn in FY15. We estimate EBITDA margin to remain stable at 16.2%
during FY13-15. We expect EPS to grow at a two-year CAGR of 25% to 53.3 and expect
RoE to remain healthy at 26.3% in FY15. Based on our estimates, we arrive at a fair value of
615 per share using the discounted cash flow (DCF) method. Our fair value implies P/E
multiples of 14.1x FY14E and 11.5x FY15E EPS. At the current market price of 511, our
valuation grade is 4/5.

KEY FORECAST
( mn) FY11 FY12 FY13 FY14E FY15E
Operating income 2,440 3,209 4,893 6,225 7,588
EBITDA 489 561 793 975 1,226
Adj net income 252 308 434 547 674
Adj EPS () 19.9 24.3 34.3 43.2 53.3
EPS growth (%) (35.9) 22.0 41.2 25.8 23.3
RoCE (%) 32.0 28.8 32.7 31.2 32.3
RoE (%) 25.2 24.5 27.3 26.9 26.3
PE (x) 26.0 21.4 15.1 12.0 9.7
P/BV (x) 5.9 4.7 3.7 2.9 2.3
EV/EBITDA (x) 13.3 12.0 8.6 6.9 5.4
NM: Not meaningful; CMP: Current market price
Source: Company, CRISIL Research estimates

CFV MATRIX

KEY STOCK STATISTICS
NIFTY/SENSEX 5519/18665
NSE/BSE ticker CERA/CERASAN
Face value ( per share) 5
Shares outstanding (mn) 12.7
Market cap ( mn)/(US$ mn) 6,591/111
Enterprise value ( mn)/(US$ mn) 6,856/115
52-week range ()/(H/L) 570/277
Beta 0.6
Free float (%) 44.5%
Avg daily volumes (30-days) 6,178
Avg daily value (30-days) ( mn) 3.2

SHAREHOLDING PATTERN

PERFORMANCE VIS--VIS MARKET

Returns
1-m 3-m 6-m 12-m
Cera 3% 14% 33% 74%
NIFTY -6% -7% -7% 5%

ANALYTICAL CONTACT
Mohit Modi (Director) mohit.modi@crisil.com
Abhijeet Singh abhijeet.singh@crisil.com
Bhaskar Bukrediwala bhaskar.bukrediwala@crisil.com
Client servicing desk
+91 22 3342 3561 clientservicing@crisil.com
1 2 3 4 5
1
2
3
4
5
Valuation Grade
F
u
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d
a
m
e
n
t
a
l

G
r
a
d
e
Poor
Fundamentals
Excellent
Fundamentals
S
t
r
o
n
g
D
o
w
n
s
i
d
e
S
t
r
o
n
g
U
p
s
i
d
e
55.4% 55.4% 55.5% 55.6%
5.6% 5.7%
11.3% 11.5%
0.0%
0.3%
0.3%
0.1%
38.8% 38.7%
33.1% 32.8%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Sep-12 Dec-12 Mar-13 Jun-13
Promoter FII DII Others

2
Cera - Business environment
Product/ Segment Sanitary ware Faucet ware Wellness products
Revenue contribution (FY13) 63% 14% 23%
Revenue contribution (FY15E) 62% 15% 23%
Geographic presence Domestic: 95%
Exports: 5%
Domestic: 100% Domestic: 100%
Market position One of the third largest
players in the organised
space with 24% market share
Primarily focused in the
mass-market segment with
~50% of sales from this
segment
A relatively small player with
negligible market share in the
organised segment (45-55% of
overall market)
Brand awareness of CERA is
currently weaker than Jaguar,
which commands 70% market
share in the organised space
Markets its wellness products
in the mid and premium
segments
Lower priced than that of
products marketed by premium
brands such as Kohler,
America Standard and others
Growth drivers Growing brand awareness among customers. CERA is a strong brand in the organised space and awareness
is increasing
Shift from the unorganised to the organised segment. Cera is best placed to benefit from the shift because it
has primarily positioned its products for the mass market segment
Expected to take market share from the competitors as the company plans to enter newer territories and
expand its distribution network. Cera derives almost 30% of sales from Kerala and is strong in Gujarat
The faucet ware market is significantly under-penetrated; Cera is likely to benefit from growing brand
awareness among consumers that is expected to cause a shift from the unorganised to the organised
segment
Sales growth
(FY11-FY13 2-year CAGR) 35% 110%* 38%
Sales forecast
(FY13-FY15E 2-year CAGR) 24% 29% 23%
Key competitors Mass market: HSIL
Mid: HSIL, Parryware Roca
Premium: Kohler, Duravit,
HSIL, Roca, Toto
Jaguar and other sanitary ware
players such as HSIL, Roca,
Kohler and others
Competition from players in the
organised space is also
significant
Mid: HSIL, Parryware Roca
Premium: Kohler, Duravit,
HSIL, Roca, Toto
Key risks The overall ceramic and sanitary ware business is related to the demand outlook in the real estate market.
Potential slowdown in the real estate market can have negative implications for the company
Competition from organised players in the sanitary ware segment. In faucet ware, competition from both
organised and unorganised players is significantly high
Natural gas represents roughly 80-85% of the overall power and fuel costs. Potential increase in natural gas
price will put pressure on profitability
*High growth in faucets is because of a low base as Cera entered the faucets business recently
Source: Company, CRISIL Research

3
Grading Rationale

CERA brand rules in the mass market segment
Cera is the third largest player in the sanitary ware industry and is strongly positioned in the
mass market segment with its brand CERA. Though the company has a strong brand in the
sanitary ware business, it has relatively weaker brand awareness in faucet ware given its
recent foray.

The building products industry - sanitary ware, faucet ware and wellness products - can be
categorised into the following segments:

Mass market: In this segment, the customers are brand conscious but price sensitive.
This segment constitutes ~45% of Ceras overall sales from sanitary ware and faucet
ware. In this segment, the company largely competes with HSILs Hindware and
ParrywareRoca.
Mid-market: In this segment, the customers are relatively more focused on branding,
aesthetics and after sales service. This segment can be further divided into upper and
lower categories. Cera has a relatively larger presence in the mid-lower segment; here it
largely competes with HSIL and Roca, and has relatively weaker positioning than them.
Premium: The target customers are highly brand conscious and pricing does not play a
significant role in the purchasing decision. Cera is present in this segment through its
wellness products and competes with strong premium brands such as Kohler, American
Standard, Toto and others.

Figure 1: Mass market is the largest segment in sanitary
ware market
Figure 2: Cera is strongly positioned in the mass market
segment

Note: Roca acquired Parryware
%ages denote sales contribution of these segment in sanitary ware for
Cera

Competitors
Kohler, Duravit, Roca, HSIL
HSIL, ParrywareRoca,
American Standard, Kohler
HSIL, Parryware, Neycer,
Classica
Premium
(10%)
Lower and upper-mid segment
(30%)
Mass market
(60%)
Unorganised space
Premium
(0%)
Lower and upper-mid segment
(35%)
Mass market
(65%)
Unorganised space
Cera holds a strong position in
the mass market segment
through the CERA brand

4
Branding to continue to power the growth engine
With improving lifestyle and increase in spending capacity, Indians have demonstrated
growing brand awareness leading to a shift from the unorganised to the organised building
products market. Cera has been a key beneficiary of this trend, given its strong brand position
in the mass market segment, as indicated by its sanitary ware business recording 32% CAGR
during FY09-13 vs estimated industry growth of 14-15%. We expect branding to continue to
be the key growth driver going ahead because of the following reasons:

While we expect Cera to continue to benefit from the shift from the unorganised to the
organised market, we believe the company needs to move up in the customer
segmentation pyramid and tap growth in the mid-market segment to sustain its growth
momentum. While the companys push to premiumisation of its product mix becomes
apparent from 59% CAGR (FY09-13) in sales volume of its imported sanitary ware
products, it still represents ~7% of the overall sanitary ware sales volume. The company
markets its imported sanitary ware products in the mid-upper market segment where
purchase is significantly influenced by brand strength. Given that Cera has relatively
weaker brand positioning in the mid-market segment than key competitors HSIL and
Roca, we expect focus on branding to be the key growth driver.
Brand awareness of CERA in faucet ware is weak since it has recently entered this
space where Jaguar is the current ruler. We believe that success in faucet ware will
largely depend on Ceras ability to improve brand awareness in this market.
There is a growing shift from manufacturing to outsourcing as the company is trying to
better monetise its brand by increasing its presence across different market and product
segments. Though it is the right strategy, its long-term success will depend on
sustainability and growth of brand awareness.

Managements focus on branding is encouraging
Since the brand needs to be further strengthened to sustain long-term growth, we are
encouraged by the managements increasing focus on brand promotion. This is corroborated
by the following data points:

Ceras selling and advertisement (S&A) spend has grown at 35% CAGR over FY08-13.
The company used to spend around 12% of overall sales in FY08, which has increased
to around 15-16% currently. In contrast, S&A spend of its major competitor has grown at
15% CAGR and as a percentage of building products sales it has declined from around
20% in FY08 to 15% currently.
Cera has opened display centres called CERA Style Studios and CERA Galleries across
the country where it showcases the entire product portfolio. The company currently has
eight CERA Style Studios, 50 CERA Galleries along with a presence in shop-in-shops; in
contrast, there were less than 20 CERA Galleries in FY12.
Brand to play a stronger role as
Cera moves into the mid-market
segment and increases market
share in faucet ware
S&A spend has grown at 35%
CAGR, higher than major
competitor

5
Figure 3: Ceras S&A spend has increased from 12% to 15%
as a % of sales
Figure 4: In contrast, competitors spending has declined
from 20% to 15% during the same period
Source: Company, CRISIL Research Source: Company, CRISIL Research

Sanitary ware: Expect to sustain the growth momentum
Cera is one of largest players in the 20 bn sanitary ware industry. With 30% growth, Cera
has outpaced industry growth of 14-15% CAGR over the past four-five years. We expect the
growth momentum in the sanitary ware business to continue and expect around 17% CAGR
over the next few years. Here are some of the key drivers that have led to Ceras higher-than-
industry growth:

Shift from the unorganised to the organised market:
Over the past few years, there has been a consistent shift from the unorganised to the
organised market (~65% of overall market). We believe that the shift has been driven by
the following:
Growing brand awareness among consumers.
Increasing number of unorganised players are closing down because of declining
profitability. As per industry sources, coal shortage has led ceramic players in Morbi
region of Saurashtra, Gujarat to shut operations. There are around 250 coal-based
ceramic manufacturing units in Morbi.
As mentioned earlier, we believe that Cera has been one of the major beneficiaries of the shift
given its strong position in the mass market segment. We believe that the company will
continue to benefit from the shift.
155 220 326 366 523 703
12.2%
13.8%
17.0%
15.1%
16.4%
14.4%
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
-
100
200
300
400
500
600
700
800
FY08 FY09 FY10 FY11 FY12 FY13
(%) ( mn)
Selling and advertisement % of sales (RHS)
533 575 800 812 1,005 1,085
12.2%
13.8%
17.0%
15.1%
16.4%
14.4%
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
-
200
400
600
800
1,000
1,200
FY08 FY09 FY10 FY11 FY12 FY13
(%) ( mn)
Selling and advertisement % of building products sales (RHS)
Expect sanitary ware business to
grow at 20% CAGR over the next
three-four years

6
Figure 5: Decline in unorganised market share primarily Figure 6: led to increase in Ceras market share

Expanding into newer territories
The company has a strong presence in Kerala, Gujarat and Punjab they collectively
constitute 65-70% of overall sales. One of Ceras key growth strategies has been to
move into newer territories such as Tamil Nadu, Karnataka and Andhra Pradesh, which
has not only enabled it to expand its market presence but to also tap the growth
opportunity in the new locations. Cera derives around 45% of its sales from the South,
out of which ~15% comes from the new markets. Going ahead, the company plans to
further expand into newer geographies particularly in North and East India such as New
Delhi, UP, Kolkata and Assam.

Gaining market share from competitors
Cera has been successful in gaining market share from competitors in the mass market
segment and has simultaneously increased its presence in the mid-market segment
leading to an increase in its market share from 19% to 24% in the past two-three years.
We believe that the increase in market share is largely driven by the following factors:

Increasing consumer awareness of the CERA brand and expanding product
portfolio.
Shift of distributors from competitors to Cera because of relatively better trade
terms.
The company imports premium-end sanitary ware products from China that it primarily
markets to the mid-market segment. Sales contribution from imported sanitary ware products
has grown consistently to 7% of overall sanitary ware sales over the past five years. While we
expect the company to increase its presence in the mid-market segment given its continued
focus on branding and expanding distribution network, we believe that it will be challenging
due to the strong position of other brands such as that of HSIL and Roca.

Unorganised
40%
HSIL
39%
Cera
18%
Parryware
Roca
32%
Others
11%
Organised
Earlier sanitary ware market share
Unorganised
35%
HSIL
40%
Cera
24%
Parryware
Roca
28%
Others
9%
Organised
Currently estimated sanitary ware market share
Cera has been gaining market
share because of increase in
brand awareness and growing
relationship with distributors

7
Figure 7: Relative higher growth reflects increase in Ceras
market share
Figure 8: Growing footprint in the higher end market
segment

Good product design capabilities
Ceras gain in market share can also be attributed to strong product design capabilities.
The companys sanitary ware product Snow White was voted Product of the Year in
2011. The companys list of innovations includes products such as water-saving twin
flush coupled WC, one piece WC, wall hung WC and coupled WC. Further, Ceras
innovations have helped it to benefit from the shift in customer preference from the
unorganised to the organised market.

Faucet ware: A challenging business but investment is low
Cera is a small player in the 40-45 bn domestic faucet ware industry estimated to be growing
at 17-18% annually. While the company had been present in lower-end faucet ware through
outsourcing, the business picked momentum in FY11 after the company decided to establish
itself also as a faucet ware player by setting up a manufacturing unit by investing 225 mn,
10% of overall gross block. This is reflected in the 110% CAGR in sales during FY11-13 -
significantly higher than 19% CAGR during FY09-11. We view the companys entry into faucet
ware as a step in the right direction driven by the following factors:

Larger scalable growth opportunity than in sanitary ware
Faucet ware will provide the company a higher scalable growth opportunity than that is
currently available in sanitary ware. It is largely because 1) faucet ware constitutes a
larger share of consumers spending in a bathroom than sanitary ware as the
consumption of number of faucet ware units is almost 2-3x the latter, and 2) the faucet
ware market is relatively fragmented and unorganised.

Enhanced product portfolio attracts dealers and creates cross-selling opportunity
A focused presence in faucet ware with varied and better products will enhance Ceras
product portfolio which should increase the attractiveness of CERA products for dealers.
22%
11%
35%
0%
5%
10%
15%
20%
25%
30%
35%
40%
HSIL Roca Cera
(%)
2 year CAGR growth
0.03 0.05 0.10 0.15 0.21
2%
3%
4%
6%
7%
0%
1%
2%
3%
4%
5%
6%
7%
8%
0.00
0.05
0.10
0.15
0.20
0.25
FY09 FY10 FY11 FY12 FY13
(%) (mn units)
Sales volume of imported products % of overall sales (RHS)
Entered in faucet ware business that is
currently loss-making but investment
low at 225 mn, 10% of overall gross
block

8
Apart from that, in faucet ware the builders generally tend to favour players who have a strong
brand and own manufacturing. With its outsourced faucet ware products, the company was
finding it tough to sell its products to builders.

Figure 9: Faucet ware business picked momentum post
setting up of own manufacturing unit
Figure 10: But still a small player in the competitive
organised segment dominated by Jaguar

How much RoCE can a faucet ware business make on a sustainable basis?
Based on our analysis, a new faucet ware business with a capacity of 1 mn units can potentially make RoCE of 15-20%. Our key assumptions are
highlighted below:
Expected average sales: 1,250 mn (based on utilisation rate of 100%)
Required capital investment for 1 mn unit: 400 mn (Cera invested around 200-250 mn in a brownfield plant of 0.75 mn units)
Expected working capital: 240 mn (based on expected 70 working capital days)
Average capital employed: 640 mn
Implied sales/capital employed: 2.0x

Assumed EBIT margin: 9-10%
Implied RoCE: 18%

We believe that Cera will be able to make RoCE higher than 18% since it can scale up its capacity through the brownfield expansion route from
2,500 units per day to 10,000 units per day; however, it is contingent on the companys ability to improve EBIT margin to 9-10% from currently being
loss-making.

Loss-making as the business is significantly challenging
The faucet ware industry is significantly fragmented with 50-55% of it being unorganised. The
organised market is primarily dominated by Jaguar (70% market share) which has a strong
competitive position in the industry. The remaining 30% of the organised market constitutes
most of the other sanitary ware players such as HSIL, Roca and Kohler. Ceras faucet ware
business is currently loss-making and faces significant challenges as highlighted below:
Low brand awareness: Since the company is a new entrant, consumers are not very
aware of CERA brand in faucet ware. In comparison, 80% of the customers prefer
Jaguar products.
106
116
150
423
687
9%
29%
183%
62%
0%
20%
40%
60%
80%
100%
120%
140%
160%
180%
200%
0
100
200
300
400
500
600
700
800
( mn)
Revenues y-o-y growth % (RHS)
Jaguar
32%
HSIL
3%
CERA
1%
Roca
3%
Others
8%
Unorganised
53%

9
Highly competitive market: Cera faces significant competition from Jaguar and has to
price its products at a discount to Jaguar because of weak competitive positioning and
lower brand awareness. At the same time, it faces significant price competition from
unorganised players due to non-payment of taxes/duties and use of scrapped brass that
is cheaper but is of low quality.
Low production efficiency: Currently, production efficiency is low because of high
rejection rates.
We believe that the focus on improving brand awareness in this business is significantly
important for the company to improve its market position and turn the business profitable.

Launching new product designs and increasing brand awareness
Going ahead, Cera plans to improve its competitive positioning by launching a new faucet
range with better designs and high quality. These products will have higher profitability than
the current faucet products marketed by the company and will be priced competitively to
Jaguar. Cera also aims to strengthen its brand positioning in faucet ware by creating more
awareness of its faucet products through CERA Style Studios and promotional activities. In
addition, it plans to strengthen its after sales service, which we believe is more required in
faucet ware than in sanitary ware.

Though the business will be challenging and traction in consumer adoption of the companys
faucet ware will be a key monitorable, we expect the company to be able to increase its
market share gradually and grow at 30% CAGR over the next three-four years on the back of
planned steps. Simultaneously, we expect the business to turn profitable by FY15 and make
EBITDA margin of 4-5% driven by economies of scale and improvement in a profitable product
mix.

Insights from interaction with distributors/dealers and retailers
We interacted with 15-20 distributors and dealers across different states to get a sense on competitive positioning in the faucet ware industry. We have
highlighted the key takeaways from our discussion below:
Jaguar is the strongest brand in faucet ware and around 80% of the customers look for Jaguar brand.
Most of the dealers appear comfortable in pushing Jaguar products to customers. It is only after one asks for other brands such as CERA or others,
does a dealer gives detail on them. It is only the Cera dealer who suggests CERA branded faucets as a second choice or alternative to Jaguar.
Jaguar has a broader range of faucet designs compared to other brands.
Dealers suggested that it is good for a brand to have a diverse product portfolio including sanitary ware, faucet ware and others. For example, a
Jaguar dealer pushed for a Jaguar sanitary ware apart from showing Hindware and CERA; while a CERA dealer suggested a look at CERA faucet
designs.

Wellness: Product diversification, better monetisation of brand
Along with sanitary ware, Cera also markets lifestyle-based products in the wellness category
and allied sanitary ware products such as PVC cisterns, seat covers and others. The company
outsources these products completely from China and depends on branding and price
competitiveness to sell its products. Presence in wellness and other bathroom related
products has the following advantages for Cera:
Segment expected to turn profitable
on the back of launch of new designs
and brand enhancement
The wellness segment helps the
company to better monetise its
brand

10
Expands the portfolio of bathroom related products beyond sanitary ware and faucet
ware. This not only increases Ceras attractiveness for dealers but also potentially
increases its share in bathroom spending by a customer.
Better monetisation of its brand by tapping the growth opportunity in wellness products
such as bath tubs, jacuzzi, shower panels and others, the adoption of which has been
increasing because of changing lifestyle. Cera imports wellness products from China and
leverages its brand to sell.

Competitive pricing and upsell opportunity through brand monetisation
to drive sales growth
Wellness products such as jacuzzi and bath tubs are primarily luxury products that are priced
at a significant premium to sanitary ware and faucet ware. For example, the cost of a steam
bath with a compartment starts from 20,000, while that of shower panel ranges from around
15,000 to 50,000. In contrast, sanitary ware and faucet ware products on an average are
priced in the range of 500 to 5,000. These products are primarily targeted to end-users in
the mid-upper and premium market segments where premium brands such as Kohler, Toto
and Roca have stronger brand positioning. In contrast, Cera targets those end-users who
aspire for lifestyle-based products but cannot afford premium branded products because of
the high price. Cera prices its products at a discount to that of premium brands and leverages
its CERA brand, CERA Style Studios and CERA Galleries to create an upsell opportunity. The
segment sales have grown at 24% CAGR during FY09-13 to 1,130 mn and we expect the
growth momentum to continue with the companys sustained focus on branding and ramping
up of CERA Style Studios and CERA Galleries across the country.

Figure 11: Growth expected to remain healthy

595
627
1,128
1,410
1,705
10%
5%
80%
25%
21%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
0
200
400
600
800
1,000
1,200
1,400
1,600
1,800
FY11 FY12 FY13 FY14E FY15E
( mn)
Revenues y-o-y growth % (RHS)

11
Expect outsourcing to support growth and sustain RoCE
Cera has adopted outsourcing as a long-term strategy. It has enabled the company to not only
support growth without incurring significant investments but also have a presence in
diversified product categories. Sales from outsourced products have grown at a CAGR of 40%
during FY09-13 vs overall sales growth of 32%. We have discussed below outsourcing in
Ceras three business segments.

In sanitary ware, Cera outsources lower-end products for the mass market to domestic
unorganised players. This has enabled the company to strengthen its presence in the
mass market segment while simultaneously using its production capacity to manufacture
more profitable products. The company also imports products from China that it markets
to mid-lower and mid-upper market segments.
Earlier, Cera used to outsource faucet ware products entirely; however, sales from
outsourced products have declined to 47% currently after the company set up its own
manufacturing unit in FY11. Cera continues to outsource lower-end faucet products and
spares.
In wellness, Cera relies completely on outsourcing and procures its products both from
domestic vendors and imports from China.

Figure 12: Growing outsourcing in sanitary ware offsets decline in faucet ware

but increase vulnerability to supply-side risks
While outsourcing has helped Cera to continue to support growth and has improved returns
on investment, we believe that growing reliance on outsourcing in the long term will not only
expose the company to supply-side risks but also lower its control on product designs and
quality. Cera imports ~46% of its requirement China, which we expect to increase given the
increasing impetus on premium sanitary ware and wellness products. We expect this to
increase the companys vulnerability to supply risks from China and currency fluctuations. As
a result, we believe that Cera will need to expand its manufacturing capacity to support growth
in the long run.

46%
23%
89%
54%
41% 40%
0%
20%
40%
60%
80%
100%
Overall revenues Sanitary ware Faucet ware
(%)
Outsourcing in sanitary ware to grow
but decline in faucet ware over the
next few years

12
Outsourcing to support growth in sanitary ware over the next 3-4 years
Cera expanded its manufacturing capacity from 2.0 mn units to 2.7 mn units in FY13 through
brownfield expansion by incurring a capex of around 600 mn. The new capacity is currently
running at 50% utilisation rate which we expect to reach 100% by FY14-end. After that the
company can incrementally scale up its production capacity by only 0.3 mn to 3.0 mn units,
thereby necessitating the need to expand its manufacturing capacity (either through greenfield
expansion or potentially entering into a joint venture (JV) with an unorganised sanitary ware
player) or increase its dependence on outsourcing.

Figure 13: Utilisation rate to peak in FY14 in sanitary ware Figure 14: Utilisation rate to peak in FY15 in faucet ware

Note: Utilisation in sanitary ware can go higher than 100% as it depends
upon size of products and input can be double layer in furnace kiln


While Cera plans to largely support growth through outsourcing in the next few years, we
strongly believe that in the long run it will have to invest in capacity expansion that will lead to
decline in return on investments. To substantiate, we estimate the company makes RoCE of
around 25% from the existing sanitary ware capacity. In contrast, if a company puts up a new
capacity of 1 mn via greenfield expansion, we estimate the company to make RoCE of
15-20%.

How much RoCE can a company make in a new sanitary ware business?
Our analysis suggests that a company can make RoCE of 15-20% in a sanitary ware business with a capacity of 1 mn units set up through the
greenfield route. Our assumptions are highlighted below.
Expected average sales: 1,500 mn (utilisation rate -110%; avg. realisation per unit - 1,350 (50% premium to Cera)
Required capital investment for 1 mn unit: 1,250 mn (Cera invested around 600 mn in a brownfield plant of 0.7 mn units)
Expected working capital: 145 mn (based on average 35 working capital days)
Average capital employed: 1,395 mn
Implied sales/capital employed: 1.1x

Assumed EBIT margin: 17%
Implied RoCE: 19%

2.0 2.0 2.7 2.7 3.0
104%
113%
97%
110% 110%
85%
90%
95%
100%
105%
110%
115%
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
(%) (mn units)
Production capacity utilisation rate (%)
0.8
0.8 0.8 0.8 0.8
12%
44%
61%
67%
91%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
0.0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
(%) (mn units)
Production capacity utilisation rate (%)

13
Dependence on outsourcing in faucet ware to decline going ahead
In faucet ware, we expect Ceras dependence on in-house manufacturing to increase going
ahead as the company plans to turn around its business on the back of introducing products
with new designs and better product quality. Currently, the company has a production capacity
of around 0.75 mn units which is running at 60% utilisation rate. We expect the utilisation rate
to peak in the next two years (Figure 14), post which we believe that the company will expand
its capacity by another 0.75 mn units (2,500 units per day) through brownfield expansion.

Wide distribution network but lacks the scale of competitors
Over the last couple of years, Cera has significantly expanded its distribution network from
500 distributors/ 5,000 retailers to 1,000 /10,000. Of the total, around 40% are sole
distributors. Our interactions with distributors suggest that the company is relatively flexible in
payment terms (debtor days in the range of 50-60 days vs 30-40 days for key competitors).
The company has 12 major stock points, 10 zonal sales and service offices to supplement its
distribution network.

Though a wide distribution network ensures good reach for Cera, it is not really a competitive
advantage as peers have much wider distribution network on a pan India basis. For example,
HSIL has a distribution network of 2,000+ distributors/15,000+ retailers. As of 2011, Jaguar
has around 1,800 distributors, of which 90% are exclusive Jaguar distributors. As a result, we
believe that the company needs to further augment its distribution network to strengthen its
competitive positioning.

Figure 15: Cera benefits from a wide distribution network

Ability to pass on price rise to partly mitigate high operating
costs
We expect operating costs to increase during the year largely driven by the following factors.

Increase in power and fuel costs
South
45%
North
25%
West
25%
East
5%
Ability to pass on increase in costs
will help to mitigate the impact of
rising operating costs in FY14

14
Cera uses natural gas from GAIL in the sanitary ware plant. Natural gas prices for the
company have increased by around 47% y-o-y last year and we expect it to increase by
25% y-o-y in FY14. Gas constitutes around 85% of the overall power and fuel costs. The
company has wind farms with installed capacity of 4.97 MW in Gujarat that it plans to
increase by 2.8 MW in FY14. We believe that this will help the company to partially
control its power and fuel costs.

Cost of imported goods to increase due to weakening of the rupee
With the Indian rupee weakening by around 10% y-o-y to 60/ US$ currently from 55/US$
in FY13, Ceras cost of imported goods will increase. Imports constitute around 46% of
overall purchases.

However, we believe that Ceras brand strength gives it pricing power that enables it to take a
price hike to mitigate the impact of rising costs on margins. The company had taken two price
hikes of 4% and 5% in FY13 to protect its margins from rising natural gas prices; in August, it
is planning to take a price hike of around 4%.

15
Key Risks
Slowdown in the economy, real estate industry
Growth in the sanitary ware industry is primarily dependent on the overall economy in general
and the real estate industry in particular. During the economic slowdown in FY09-10, the
ceramic industry (particularly sanitary ware and tiles) registered lower growth in comparison to
the five-year average. Currently, the real estate industry is witnessing slowdown in a few
pockets, though tier II/III cities remain strong. Although Cera does not appear to be impacted
by the slowdown in the real estate industry given that it has benefitted from increasing brand
awareness among consumers, sustained slowdown could hamper future growth momentum.

Competition from organised players
Though Cera has a strong brand name in the sanitary ware market, it competes with other
large organised players such as HSIL and Roca who have a relatively strong brand position in
the mid and premium market segments. Cera is a small player in the fragmented and
significantly competitive faucet ware segment. To turn around the business, the company has
to compete with other large organised players, particularly Jaguar which is strongly placed in
the industry with a market share of 70%. Any potential move by its competitors can have
implications for Cera.

Inability to turn around the faucet ware business
The faucet ware business is currently loss-making and is a significant drag on overall
profitability. While the companys investment in the business is low at around 200 mn,
inability to turn around the business would not only limit Ceras future growth but also be a
drag on overall cash generation.

Inability to pass on the rise in operating costs
Power and fuel costs have increased significantly in the past few years but Cera has been
able to mitigate the impact of rising cost on margins by taking price hikes and captive power
generation through in-house wind farms. Brass is the main raw material for faucets; any
potential volatility in prices of brass can significantly impact profitability of the faucet ware
business. Although Cera hedges its foreign currency exposure, any further depreciation in the
Indian rupee can increase cost of imports and impact its margins.

Slowdown in the real estate
industry and competition are key
risks for the company

16
Financial Outlook
Expect revenues to grow at 25% CAGR driven by both volume
and realisations growth
We expect revenues to grow at a two-year CAGR of 25% to 7,588 mn in FY15 driven by
growth across product segments. We expect the sanitary ware business to grow at 24%
CAGR driven by 15% growth in sales volume. We expect faucet ware sales to grow at 29%
CAGR over the next two years, lower than 60% CAGR over FY09-13 because of two reasons:

Cera has launched a new range of faucets with new designs. We believe that consumer
adoption of the new designs will take place gradually given the companys limited
presence in the faucet ware segment. We expect sales of own manufactured faucets to
grow at 37% CAGR led by 25% CAGR in sales volume.
We expect growth in lower-end faucet ware market segment to flatten out as the
companys focus shifts to higher-end faucet products.

We expect the wellness and other products category to grow largely in line with growth in the
sanitary ware business as Cera primarily benefits from the upsell opportunity.

Figure 16: Overall revenues to grow at 25% CAGR Figure 17: Expect growth of 24% CAGR in sanitary ware

2,440 3,209 4,893 6,225 7,588
26.9%
31.5%
52.5%
27.2%
21.9%
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
-
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
( mn)
Revenues y-o-y growth (RHS)
1,685 2,144 3,064 3,892 4,678
34%
27%
43%
27%
20%
0%
10%
20%
30%
40%
50%
0
1,000
2,000
3,000
4,000
5,000
( mn)
Revenues to grow at a CAGR of
25% over FY13-15 driven by growth
across all product segments

17
Figure 18: Expect growth of 29% CAGR in faucet ware Figure 19: Wellness expected to grow at 23% CAGR

EBITDA margin expected to remain stable over FY13-15
We expect EBITDA margin to be under pressure in FY14 and decline by 50 bps to 15.7%
primarily due to increase in power and fuel costs and depreciation in the rupee. We also
expect S&A costs to increase as a percentage of sales given the companys focus on further
strengthening its brand and higher incentives to dealers to push faucet ware sales. We
estimate EBITDA margin to improve to 16.2% in FY15 as we expect profitability in the faucet
ware business to show improvement and expected strengthening in the Indian rupee to
56/US$ by the end of March-14 from current levels of 60/US$.

Figure 20: EBITDA margin to decline in FY14 but improve subsequently

150
423 687
879
1,150
29%
183%
62%
28%
31%
0%
50%
100%
150%
200%
0
200
400
600
800
1,000
1,200
1,400
( mn)
595
627
1,128
1,410
1,705
10%
5%
80%
25%
21%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
0
200
400
600
800
1,000
1,200
1,400
1,600
1,800
( mn)
489 561 793 975 1,226
20.1%
17.5%
16.2% 15.7% 16.2%
0%
5%
10%
15%
20%
25%
0
200
400
600
800
1,000
1,200
1,400
( mn)
EBITDA EBITDA margins (RHS)
Expected turnaround in the
faucet ware business to improve
EBITDA margin in FY15

18
PAT margin to largely remain steady, PAT to grow at 25%
CAGR
We expect PAT to grow at 25% CAGR to 674 mn and PAT margin to remain largely steady
over FY13-15. Cera has spent 170 mn in installing new wind mills with capacity of 2.8 MW
that are expected to get commissioned in 2HFY14. The company is eligible for 35%
depreciation in the first year of installation that we believe will likely lower its effective tax rate.
We believe lower taxes will largely offset the decline in EBITDA margin in FY14 and support it
at 8.8%.

Figure 21: PAT to grow at 25% CAGR; margin to remain steady

Internal accruals to sufficiently fund capex during FY13-15
Cera has spent around 925 mn over the past five years to expand the production capacity of
both sanitary ware and faucet ware. The company invested 225-250 mn in setting up the
faucet ware plant in September 2010 and 600 mn in expanding sanitary ware capacity. It
also spent 70 mn in setting up CERA Style Studios in Gurgaon and Ahmedabad. Going
ahead, we estimate the company will have to spend ~665 mn over the next two years which
includes the following:
Brownfield capacity expansion in both sanitary ware and faucet ware plants; expected
over the next three-four years.
Investment of ~170 mn in setting up additional wind farms with capacity of 2.8 MW.

252 308 434 547 674
10.3
9.6
8.9
8.8
8.9
8.0
8.5
9.0
9.5
10.0
10.5
-
100
200
300
400
500
600
700
800
(%) ( mn)
Adj PAT Adj PAT margin (RHS)

19
Figure 22: Expect internal accruals to sufficiently fund capex

Return ratios to remain healthy
We expect RoE to remain healthy at around 26% during FY13-15. RoCE is expected to
improve slightly to 31% in FY14 due to decline in EBIT margin. We expect asset turnover to
improve on the back of increase in utilisation of new capacities and increase in sales from
outsourcing. In FY13, increase in sales of outsourced products (53% of overall sales in FY13
vs. 48% in FY12) led to an improvement in asset turnover; which helped return ratios to
improve.

Figure 23: Return ratios expected to remain stable... Figure 24: on the back of steady asset turnover

215
267 248
110
432 435
652
(40) (23)
(202)
(267)
(392)
(177)
(488)
(600)
(400)
(200)
-
200
400
600
800
FY09 FY10 FY11 FY12 FY13 FY14E FY15E
( mn)
Operating cash flow Capital expenditure (RHS)
25.2
24.5
27.3
26.9
26.3
32.0
28.8
32.7
31.2
32.3
20.0
22.0
24.0
26.0
28.0
30.0
32.0
34.0
(%)
RoE RoCE
1.8
1.9
2.3
2.4
2.4
0.3 0.3 0.3
0.3
0.2
17.4%
15.1%
14.3%
13.3%
13.5%
0.0%
5.0%
10.0%
15.0%
20.0%
-
0.5
1.0
1.5
2.0
2.5
3.0
(x)
Sales/Capital employed Leverage ratio
EBIT margin (RHS)

20
Management Overview
CRISIL's fundamental grading methodology includes a broad assessment of management
quality, apart from other key factors such as industry and business prospects, and financial
performance.

Experienced promoter with good business acumen
Cera is headed by Mr Vikram Somany, chairman and managing director, with more than three
decades of experience in the sanitary ware business. Our interaction suggests that he has
good business acumen and industry understanding as reflected in steady financial
performance and strong position in the sanitary ware business. Although the company is run
by a professional team, we found the company to be significantly dependent on the promoter
for taking strategic decisions.

Top management brings experience and professionalism
The promoter is supported by a professional team that too has significant experience in the
sanitary ware business. The day-to-day operations and strategic decisions regarding
marketing, branding, financial and operational are taken by the management headed by Mr
Atul Sanghvi as the chief operating officer. We also found the second line of management to
be professionally equipped to run the company.

but its ability to take risks and entrepreneurial decisions is a
key monitorable
Cera has witnessed significant growth momentum over the past three-four years which has
been the result of its decisions to venture into a new business (faucets), increase focus on
brand strength and opt for outsourcing to support growth. Most of these decisions were driven
by late Mr Vidush Somany (Mr Vikram Somanys son). However, in his absence, the
companys ability to take business risks and execute them effectively is a monitorable.

Long-term succession plan is a monitorable
Mr Vikram Somanys eventual limited involvement in the business considering he is 63 years
old and the demise of his son Vidush Somany raise concerns about the companys
succession plan. We believe the current professional management has the requisite capability
and experience to successfully run the company over the next seven-eight years. The
company has also taken adequate steps to strengthen its second line of management and
provide leadership in the long run. Retention of the current management team in the absence
of any long-term incentive program such as the employee stock options program (ESOP) is a
monitorable.

Expect the top management to run
the company professionally
Succession plan is a
monitorable; management
taking the right steps

21
Corporate Governance
CRISILs fundamental grading methodology includes a broad assessment of corporate
governance and management quality, apart from other key factors such as industry and
business prospects, and financial performance. In this context, CRISIL Research analyses the
shareholding structure, board composition, typical board processes, disclosure standards and
related-party transactions. Any qualifications by regulators or auditors also serve as useful
inputs while assessing a companys corporate governance.

Overall, corporate governance at Cera meets the requisite standard and is supported by
reasonably good board practices and disclosure levels but independent directors ability to
exercise oversight is restricted as strategic decision making is largely promoter-driven.

Transparency and disclosure levels are good
The companys quality of disclosure is reasonably good judged by the level of information and
details furnished in the annual report, websites and other publicly available data. In addition,
we found the management quite forthcoming in sharing information related to the companys
challenges.

Board processes in place but independent directors appear to
exercise limited oversight
Ceras board comprises seven directors of whom five are independent non-executive
directors; this meets the minimum criteria under Clause 49 of SEBIs listing guidelines. The
company has all the necessary committees audit, remuneration and investor grievance in
place to support corporate governance practices. The fact that both audit and remuneration
committees consist primarily of non-executive independent directors indicates that the
corporate governance of the company is good. In FY13, six board meetings were held and
were attended by majority of the board members. The board is not only highly experienced but
also encapsulates diversified knowledge of various fields. However, we found the independent
directors to exercise limited oversight and have low awareness of business challenges and
future strategies.

Independent directors appear to
exercise limited oversight

22
Valuation Grade: 4/5
We have valued Cera by the DCF method and arrived at a fair value of 615 per share. Our
fair value implies P/E multiples of 14.1x FY14E and 11.5x FY15E EPS and EV/EBITDA of 8.1x
FY14E and 6.4x FY15E EBITDA. The stock is currently trading at 511 that suggests P/E
multiples of 12.0x FY14E and 9.7x FY15E EPS. At this stock price, the valuation grade is 4/5.

Key assumptions
We have considered the discounted value of the firms estimated free cash flow over FY15-24
to sufficiently capture the potential high growth of the company. In the terminal year, we have
assumed a terminal growth rate of 5% and EBITDA margin of 15.0%. We have assumed cost
of equity of 15.2%.

WACC assumptions
Explicit period Terminal value
Cost of equity 15.2% 15.2%
Cost of debt (post tax) 8.04% 8.04%
WACC 13.9% 13.9%
Terminal growth rate 5.0%

Sensitivity of fair value to terminal growth and WACC Sensitivity of fair value to terminal growth and EBITDA
Terminal growth
W
A
C
C

3.0% 4.0% 5.0% 6.0% 7.0%
11.9% 669 718 781 865 984
12.9% 605 641 687 745 823
13.9% 556 583 615 658 712
14.9% 517 538 563 594 632
15.9% 485 502 521 544 573

EBITDA margin %
W
A
C
C

13.0% 14.0% 15.0% 16.0% 17.0%
11.9% 665 723 781 838 896
12.9% 593 640 687 733 780
13.9% 540 578 615 655 694
14.9% 498 531 563 595 628
15.9% 466 494 521 549 576


Valuation multiples of peer companies

Mkt
cap
Sales
growth (%)
EBITDA
margin (%) P/E (x) EV/EBITDA (x) RoE (%)
( mn) FY12 FY13 FY13 FY14E FY13 FY14E FY15E FY13 FY14E FY15E FY13 FY14E FY15E
Cera Sanitaryware 6,512 31.5% 52.5% 16.2% 15.7% 15.1 12.0 9.7 8.6 6.9 5.4 27.3% 26.9% 26.3%
HSIL 4,924 34.1% 21.0% 11.3% 11.8% 17.3 13.3 8.4 7.6 6.1 5.9 5.9% 8.0% 10.3%
Ceramic Players
Somany Ceramics 2,391 22.4% 20.0% 8.1% 8.6% 11.7 9.2 4.7 4.9 4.1 3.5 23.0% 23.9% 24.1%
Kajaria Ceramics 16,762 37.7% 22.8% 15.3% 15.3% 16.0 12.8 10.0 7.0 5.9 5.0 32.5% 30.7% 31.0%
Average 11.7% 11.9% 13.9 11.0 7.3 6.0 5.0 4.2 27.7% 27.3% 27.5%
Strong branded players
Butterfly Gandhimathi 5,834 187% 23% 9.9% 9.9% 19.8 14.4 9.9 9.1 7.2 6.0 24.8% 21.2% 22.2%
TTK Prestige 41,389 45% 23% 15.0% 15.4% 26.0 21.7 16.8 20.7 16.4 13.2 39.1% 34.9% 40.4%
Asian Paints

424,926 24% 14% 16.0% 16.6% 38.1 31.8 26.7 26.8 22.5 19.1 36.3% 35.4% 34.9%
Average 13.7% 14.0% 26.0 21.7 16.8 18.9 15.4 12.7 33.4% 30.5% 32.5%
We arrive at a fair value of 615
per share that implies P/E of
14.1x FY14E and 11.5x FY15E

23
Our fair value implies P/E multiples of 14.1x FY14E and 11.5x FY15E EPS, which suggests a
premium to the current trading P/E multiple of Cera and leading ceramic tiles manufacturing
companies where branding and distribution is important. The consumer companies in our
consideration are trading at P/E of 16.8x FY15E EPS; our fair value implies a discount of 31%
which we believe is justified given the relatively higher brand strength and strong distribution
network of the group.

One-year forward P/E band One-year forward EV/EBITDA band
Source: NSE, CRISIL Research Source: NSE, CRISIL Research

P/E premium / discount to Nifty P/E movement
Source: NSE, CRISIL Research Source: NSE, CRISIL Research

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()
Cera 1x 4x 7x 10x 13x
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
9,000
A
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( mn)
EV 3x 4x 5x 8x
-100%
-80%
-60%
-40%
-20%
0%
20%
A
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Premium/Discount to NIFTY
Median premium/discount to NIFTY
0
2
4
6
8
10
12
14
A
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(Times)
1yr Fwd PE (x) Median PE
+1 std dev
-1 std dev

24
Company Overview
Incorporated in 1980, Cera has emerged as the third largest player in the sanitary ware
industry in India. The company enjoys ~24% market share in the organised segment. The
manufacturing plants for sanitary ware and faucet ware are located in Kadi (Gujarat). The
company has installed capacity to produce 2.7 mn pieces p.a. of sanitary ware and 2,500
pieces per day of faucet ware. The company imports premium sanitary ware products from
China and markets under the CERA brand. The product range includes vitreous China
sanitary ware; faucet ware (chrome plated (CP) fittings and taps); wellness products such as
shower panels, bathroom cubicles, bath tubs, jacuzzi, bath fittings, allied products (PVC
cisterns and seat covers), kitchen sinks and bathroom mirrors. As of May 2013, Cera has
1,000 distributors / dealers, 10,000 retailers and 12 major stock points all over India.

Figure 25: Segmental revenue break-down in FY13

Milestones
1979-80 Incorporated as Madhusudan Ceramics, a unit of Madhusudan Industries Ltd, with presence in the oil and
ceramics segments. Installed capacity at ceramics division was 0.3 mn pieces p.a.
1995-96 Established its outsourcing division with initial turnover of 13.72 mn and manufacturing capacity increased to
1.25 mn pieces p.a.
2001-02 Demerger of Madhusudan Industries and transfer of ceramics division to form Cera Sanitaryware Ltd
2005-06 First to introduce concept of bath studios in Ahmedabad
2006-07 Undertook expansion and increased the capacity to 1.38 mn pieces p.a. in sanitary ware
2007-08 Installed captive power plant (gas based) in Kadi, wind turbine generator and increased capacity to 2 mn
pieces p.a. in sanitary ware
2010-11 Commissioned manufacturing plant for faucet ware with initial capacity of 2,500 pieces per day and scalable
to 10,000 pieces per day
2011-12 In the sanitary ware segment, CERA was voted product of the year for the second consecutive time
2012-13 Expanded the capacity of sanitary ware plant from 2.0 mn unit to 2.7 mn units
Sanitary ware
63%
Faucet ware
14%
Wellness
23%

25
Annexure: Financials

Source: CRISIL Research
Income statement Balance Sheet
( mn) FY11 FY12 FY13 FY14E FY15E ( mn) FY11 FY12 FY13 FY14E FY15E
Operating income 2,440 3,209 4,893 6,225 7,588 Liabilities
EBITDA 489 561 793 975 1,226 Equity share capital 63 63 63 63 63
EBITDA margin 20.1% 17.5% 16.2% 15.7% 16.2% Reserves 1,052 1,328 1,732 2,209 2,797
Depreciation 65 77 94 150 201 Minorities - - - - -
EBIT 424 484 699 825 1,025 Net worth 1,115 1,391 1,795 2,272 2,860
Interest 27 40 71 68 68 Convertible debt - - - - -
Operating PBT 397 444 628 757 957 Other debt 379 476 610 610 610
Other income 5 28 23 24 34 Total debt 379 476 610 610 610
Exceptional inc/(exp) 13 13 28 - - Def erred tax liability (net) 139 136 162 162 162
PBT 415 485 678 781 991 Total liabilities 1,633 2,004 2,567 3,044 3,633
Tax provision 150 165 216 234 317 Assets
Minority interest - - - - - Net f ixed assets 783 903 1,251 1,339 1,636
PAT (Reported) 265 320 462 547 674 Capital WIP 61 132 82 - -
Less: Exceptionals 13 13 28 - - Total fixed assets 844 1,035 1,333 1,339 1,636
Adjusted PAT 252 308 434 547 674 Investments 0 13 67 67 67
Current assets
Ratios Inventory 500 918 940 1,196 1,458
FY11 FY12 FY13 FY14E FY15E Sundry debtors 389 459 836 1,156 1,410
Growth Loans and advances 211 210 270 344 419
Operating income (%) 26.9 31.5 52.5 27.2 21.9 Cash & bank balance 365 300 336 481 525
EBITDA (%) 30.9 14.7 41.3 23.0 25.7 Marketable securities 78 11 14 14 14
Adj PAT (%) 29.0 22.0 41.2 25.8 23.3 Total current assets 1,542 1,898 2,396 3,191 3,826
Adj EPS (%) (35.9) 22.0 41.2 25.8 23.3 Total current liabilities 754 942 1,229 1,573 1,907
Net current assets 788 956 1,167 1,618 1,919
Profitability Intangibles/Misc. expenditure - - - 20 10
EBITDA margin (%) 20.1 17.5 16.2 15.7 16.2 Total assets 1,633 2,004 2,567 3,044 3,633
Adj PAT Margin (%) 10.3 9.6 8.9 8.8 8.9
RoE (%) 25.2 24.5 27.3 26.9 26.3 Cash flow
RoCE (%) 32.0 28.8 32.7 31.2 32.3 ( mn) FY11 FY12 FY13 FY14E FY15E
RoIC (%) 29.2 28.0 29.7 29.4 29.8 Pre-tax prof it 402 472 651 781 991
Total tax paid (143) (167) (190) (234) (317)
Valuations Depreciation 65 77 94 150 201
Price-earnings (x) 26.0 21.4 15.1 12.0 9.7 Working capital changes (105) (299) (173) (306) (257)
Price-book (x) 5.9 4.7 3.7 2.9 2.3 Net cash from operations 219 83 382 391 618
EV/EBITDA (x) 13.3 12.0 8.6 6.9 5.4 Cash from investments
EV/Sales (x) 2.7 2.1 1.4 1.1 0.9 Capital expenditure (202) (267) (392) (177) (488)
Dividend payout ratio (%) 11.9 11.9 11.0 11.0 11.0 Investments and others (78) 54 (57) - -
Net cash from investments (280) (214) (449) (177) (488)
17.4% 15.1% 14.3% 13.3% 13.5% Cash from financing
B/S ratios 1.8 1.9 2.3 2.4 2.4 Equity raised/(repaid) 5 - - - -
Inventory days 75 105 71 71 71 Debt raised/(repaid) 107 97 134 - -
Creditors days 99 93 80 80 80 Dividend (incl. tax) (37) (44) (59) (70) (86)
Debtor days 58 50 60 65 65 Others (incl extraordinaries) 10 13 28 - -
Working capital days 44 56 55 57 60 Net cash from financing 85 66 103 (70) (86)
Gross asset turnover (x) 2.3 2.6 3.2 3.3 3.4 Change in cash position 24 (65) 36 144 45
Net asset turnover (x) 3.3 3.8 4.5 4.8 5.1 Closing cash 365 300 336 481 525
Sales/operating assets (x) 3.1 3.4 4.1 4.7 5.1
Current ratio (x) 2.0 2.0 1.9 2.0 2.0 Quarterly financials-standalone
Debt-equity (x) 0.3 0.3 0.3 0.3 0.2 ( mn) Q1FY13 Q2FY13 Q3FY13 Q4FY13 Q1FY14
Net debt/equity (x) (0.1) 0.1 0.1 0.1 0.0 Net Sales 905 1,114 1,280 1,580 1,274
Interest coverage 15.6 12.1 9.8 12.2 15.1 Change (q-o-q) 40% 23% 15% 23% -19%
EBITDA 156 184 205 243 207
Per share Change (q-o-q) 29% 18% 12% 18% -15%
FY11 FY12 FY13 FY14E FY15E EBITDA margin 17.3% 16.5% 16.0% 15.4% 16.3%
Adj EPS ( ) 19.9 24.3 34.3 43.2 53.3 PAT 92 110 120 174 112
CEPS 25.1 30.4 41.8 55.0 69.1 Adj PAT 92 110 120 174 112
Book value 88.1 110.0 141.8 179.5 226.0 Change (q-o-q) 34% 19% 9% 45% -36%
Dividend ( ) 2.5 3.0 4.0 4.7 5.8 Adj PAT margin 10.2% 9.9% 9.4% 11.0% 8.8%
Actual o/s shares (mn) 12.7 12.7 12.7 12.7 12.7 Adj EPS 7.3 8.7 9.5 13.8 8.9

26
Focus Charts
Overall revenues to grow at 25% CAGR over FY13-15 Expect growth of 24% CAGR in sanitary ware

EBITDA margins to remain stable over FY13-15 Asset turnover expected to improve gradually over FY13-15

Return rations to remain healthy Stock price movement

-Indexed to 100
Source: Company, CRISIL Research Source: NSE, CRISIL Research
2,440 3,209 4,893 6,225 7,588
26.9%
31.5%
52.5%
27.2%
21.9%
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
-
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
( mn)
1,685 2,144 3,064 3,892 4,678
34%
27%
43%
27%
20%
0%
10%
20%
30%
40%
50%
0
1,000
2,000
3,000
4,000
5,000
( mn)
489 561 793 975 1,226
20.1%
17.5%
16.2% 15.7% 16.2%
0%
5%
10%
15%
20%
25%
0
200
400
600
800
1,000
1,200
1,400
( mn)
EBITDA EBITDA margins (RHS)
1.8
1.9
2.3
2.4
2.4
0.3 0.3 0.3
0.3
0.2
17.4%
15.1%
14.3%
13.3%
13.5%
0.0%
5.0%
10.0%
15.0%
20.0%
-
0.5
1.0
1.5
2.0
2.5
3.0
(x)
Sales/Capital employed Leverage ratio
EBIT margin (RHS)
25.2
24.5
27.3
26.9
26.3
32.0
28.8
32.7
31.2
32.3
20.0
22.0
24.0
26.0
28.0
30.0
32.0
34.0
(%)
RoE RoCE
0
100
200
300
400
500
600
700
800
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CERA NIFTY

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