Ambit - Cera Sanitaryware - Initiation - Focused On The Inner Scorecard - 27feb2020

Cera Sanitaryware
BUY
INITIATING COVERAGE CRS IN EQUITY February 27, 2020
Focused on the inner scorecard Building Materials

Cera became leader (22% share) of mid-market sanitaryware through:
i) product innovation, ii) understanding of value-conscious customer, iii) Recommendation
brand-building (brandex ~10% of sales), and iv) high outsourcing mix Mcap (bn): `32/US$0.4
(~50%). Home-grown management helped drive 24% sales CAGR with 6M ADV (mn): `154/US$0.2
healthy RoCE (20%+) over FY09-19. There are near-term macro
CMP: 2,444
headwinds but Cera is best-positioned to ride on real estate recovery
TP (24 mths): 3,616
over FY21-25E due to focus on product positioning, brand-building and
strong balance sheet. Total Addressable Market now includes Upside (%): 48
faucetware/tiles, categories offering synergies and larger playing field
(2-3x market size) and opportunities to gain market share. With Flags
increased premiumization, Cera could post 17% sales CAGR with 25%+ Accounting: GREEN
RoIC and enough capital to build new adjacent categories. Our 2-year Predictability: AMBER
TP offers 48% upside. Stock trades at 18x FY22E P/E, which should
Earnings Momentum: GREEN
increase but unlikely to get closer to paints, adhesives and pipes.
Competitive position: STRONG Changes to this position: POSITIVE
Catalysts
Built sufficient scale with single product category - sanitaryware
 Over 15% sales CAGR in
Cera’s brand strategy involved offering innovative mid-market sanitaryware at
faucetware and tiles over FY19-22E.
competitive prices. Cera built product leadership and distribution reach in
sanitaryware for ~30 years before entering other categories. Now within  Increased contribution from
sanitaryware, Cera is building sub-brands (Senator and ISVEA); premium Senator brand (up to 10%
manufacturing/design acumen and balance sheet strength will aid expansion. sales by FY23E) from negligible
sales in FY19.
Prudent management has built a resilient business model
Apart from paints and adhesives, quality professional talent remains in
Performance (%)
shortage in building materials industry. Home-grown leadership (+20 years at
Cera) is akin to Asian Paints/Pidilite which remains quality and RoCE-focused. CRS IN SENSEX
140
Cera business model is built on i) high brandex (sales commissions 6%; 130
advertising 4% of sales) that translate into higher offtake and loyal distribution 120
feedback and ii) high outsourcing mix (~50%) that drives higher CE turnover. 110
100
Increased total addressable market through faucetware and tiles 90
80
Cera entered synergistic categories based on similar end-usage (faucetware in
Dec-19
Sep-19
Jul-19
Oct-19
Nov-19
Aug-19
Feb-19
Feb-20
Jan-20
Jun-19
Mar-19
May-19
Apr-19
2009) and raw material (tiles in 2014). Brand extensions into larger market
segments (2-3x sanitaryware) allow Cera to grow ahead of peers (faucetware+
tiles at 45% FY19 sales). Share of tiles/faucetware should increase to 27%/24%
of sales in next 5 years, driving overall sales CAGR of 21% (FY23-30). S Bl b A bit C it l R h
Sales growth + premiumization + stable RoIC => BUY and hold

Cera’s product positioning, distribution network and balance sheet strength
give us confidence of 17% sales CAGR in FY19-30E and 25%+ RoIC. P/E
should expand (similar to FY13-15) with growth recovery and expanding
market share in new categories. Our valuation implies 27x FY22E P/E, which
isn’t expensive but discount to electricals/paints is justified for smaller market,
capital intensity and limited opportunity to premiumize under existing brand.
Research Analysts
Key financials
Nitin Bhasin
Year to March FY18 FY19 FY20E FY21E FY22E
+91 22 6623 3241
Operating income (` mn) 11,853 13,515 13,784 15,301 17,465 nitin.bhasin@ambit.co
EBITDA (` mn) 1,774 1,983 2,040 2,264 2,637
Kanwalpreet Singh
EBITDA margin (%) 15.0% 14.7% 14.8% 14.8% 15.1%
+91 70382 32485
EPS (`) 79.3 88.5 101.7 114.0 133.2 kanwalpreet.singh@ambit.co
RoE (%) 18.8% 17.6% 17.6% 17.2% 17.7%
Dhruv Jain
RoCE (%) 21.6% 21.8% 19.8% 19.1% 19.3%
+91 22 6623 3177
P/E (x) 30.8 27.6 24.0 21.4 18.3 dhruv.jain@ambit.co
Source: Company, Ambit Capital research
kkavarana@40ridgecapital.com
Ambit Capital and / or its affiliates do and seek to do business including investment banking with companies covered in its research reports. As a result, investors should be aware that Ambit Capital
may have a conflict of interest that could affect the objectivity of this report. Investors should not consider this report as the only factor in making their investment decision.
Cera Sanitaryware
Snapshot of Company Financials

Profit and Loss Company Background
Year to Mar (` mn) FY19 FY20E FY21E
Established in 1980 by promoter Mr. Vikram Somany, Cera
Net revenues 13,515 13,784 15,301 Sanitaryware is one of India’s leading building material companies
EBITDA 1,983 2,040 2,264 with exposure across sanitaryware, faucetware and tiles.
Depreciation 280 289 321 Cera holds the largest market share in sanitaryware (~22%)
Interest expense 85 91 122
amongst organized players and has its manufacturing units, for
both sanitaryware and faucetware, at Kadi, Gujarat. Its tiles units
Other income 186 110 159 are JVs established at Nellore, Andhra Pradesh and Morbi, Gujarat.
Adjusted PBT 1,803 1,770 1,979
Cera’s distribution is met through 19 company-owned warehouses,
Tax 652 446 497 1400+ dealer network and 12k+ retail touchpoints.
Adjusted net profit 1,151 1,324 1,483
Profit and Loss Ratios
EBITDA Margin (%) 14.7% 14.8% 14.8%
Net profit margin (%) 8.5% 9.6% 9.7%
EV/ EBITDA (x) 16.2 15.6 13.9
P/E on adjusted basis (x) 27.6 24.0 21.4
Price/Sales (x) 2.4 2.3 2.1
Balance Sheet Cash flow

Year to Mar (` mn) FY19 FY20E FY21E Year to March (` mn) FY19 FY20E FY21E
Total Assets 11,908 13,092 14,969 PBT 1,803 1,770 1,979
Fixed Assets 4,049 3,942 3,925 Depreciation 280 289 321
Financial Assets 324 324 324 Tax 652 446 497
Current Assets 7,401 8,691 10,586 Net Working Capital (360) (67) (451)
Other Assets 134 134 134 Interest expense 85 91 122
Total Equity &Liabilities 11,908 13,092 14,969 CFO 1,244 1,743 1,667
Total networth 7,009 8,068 9,180 Capital Expenditure (567) (245) (304)
Total debt 842 910 1,361 CFI (567) (245) (304)
Other financial liabilities 2,526 2,467 2,761 Issuance of Equity - - -
Current Liabilities 1,531 1,544 1,668 Inc/Dec in Borrowings (56) 67 451
Balance Sheet ratios Net Dividends (156) (265) (371)
RoCE 21.8% 19.8% 19.1% Interest paid (85) (91) (122)
RoE 17.6% 17.6% 17.2% CFF (301) (288) (42)
Gross Debt/Equity (x) 0.1 0.1 0.1 Net change in cash (150) 512 654
Net debt (cash)/ Eq (x) -0.1 -0.2 -0.3 Closing cash balance 67 579 1,233
Cera’s product mix has changed significantly with greater share of tiles and faucetware
FY15 FY17 FY19
3% 2% 3%
13% 16%
21%
18% 53%
22% 60%
66% 24%
Sanitaryware Faucetware
Tiles Wellness
February 27, 2020 Ambit Capital Pvt. Ltd. Page 2

Cera Sanitaryware
Narrative in charts
Cera clocked 24% sales CAGR coupled with 20%+ RoCE over the last decade
During real-estate bull run: During real-estate slowdown: Y1 Y2
Sales CAGR: 33%, EBITDA CAGR: 25% Sales CAGR: 13%, EBITDA CAGR: 14%
35%
12
30%
9 25%
(`. bn)
6 20%
3 15%
0 10%
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY19
Sanitaryware Faucetware Tiles
Wellness EBIT margin (Y1) RoCE pre-tax (Y1)
Capital employed turnover (Y2)
Source: Ambit Capital research, Company. Note: Segment-wise sales prior to FY15 are not available and are assumed to be majorly from sanitaryware
Besides significant outsourcing, it is now resorting to Cera spends greatly on push and pull marketing; brandex
increased automation; employee base has stagnated is one of the highest in the industry
3,000
1000 8.0%
15%
2,500 800
6.5%
2,000 13% 600
(` mn)
5.0%
1,500 400
12% 3.5%
200
1,000
0 2.0%
500 10%
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY19
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY19
A&P spends
Total number of employees Sales commissions
Contractual employees A&P spend as % of sales (RHS)
Employee expense as % of sales (RHS) Sales commissions as % of sales (RHS)
Source: Ambit Capital research, Company Source: Ambit Capital research, Company
Cera has recently introduced more sub-brands to segment Focus on faucetware and tiles is likely to result in industry
its markets better leading growth - 17% sales CAGR over FY19-30E
Source: Ambit Capital research, Company Source: Ambit Capital research

Cera Sanitaryware
Exhibit 1: Porter’s five force analysis of Cera’s market categories
Bargaining power of suppliers Bargaining power of buyers

Moderate High
 Raw materials such as china/fire clay are easily  Customers have higher range of choices due to entry
available. Supply of cheaper APM natural gas is of many new players, both domestic and foreign.
advantage for players such as Cera.  Similarity of categories between players allows
 Oversupply of unorganized players in Morbi; buyers to seek discounts across wider product range
formalization of economy (due to GST and other especially in institutional segment.
measures) would lead to consolidation.
 Premium sanitaryware that is exported to India
enjoys premium due to better raw material supply
and higher quality glaze.
Competitive intensity
High
 Competitive intensity has increased due to brand
extensions by all major players; faucetware offers
highest scope to gain share due to unchecked
dominance by Jaquar over last three decades.
 Competition from foreign players is also high as they
are extending themselves beyond premium range to
more value-for-money products.
Barriers to entry Threat of substitution

Moderate Low
 Branding is important in sanitaryware and  Sanitaryware and faucetware are essential building
faucetware; however brands from other building products; premiumization will continue to happen.
materials can grow based on recall.  Tiles are preferred materials for construction; glossy
 Capital intensity is high which makes it more difficult tiles such as GVT are replacing demand for other
to enter; outsourcing from ceramic clusters such as materials such as marble.
Morbi possible.
Improving Unchanged Deteriorating
Source: Ambit Capital research

Cera Sanitaryware
Exhibit 2: SWOT analysis

Strengths Weaknesses
 Strong brand recall in sanitaryware, especially in mid-market segment,  Does not enjoy brand recall in premium category for sanitaryware.
with highest market share (22%) amongst organized players.  Cera may find it harder to build its presence in faucetware given the
 Strong distribution network: 19 company warehouses, 1400+ dealers strong brand recall that Jaguar enjoys due to both higher retail presence
and 12000+ retail touchpoints; focus now to increase realizations per and strong after-sales service.
touchpoint.  Cera is not regarded as a formidable player in tiles category; its offerings
 Home-grown leadership (many with 20+ years of experience) at both are less diverse and distribution reach is less than market leaders such as
mid/top management levels are expected to sustain Cera’s Kajaria and Somany.
differentiated business culture.
 Robust business model with ~50% outsourced manufacturing => high
RoCE of 20%+. Strong balance sheet strength with `1.7bn+ cash-
equivalents (as of 1HFY20) implies Cera can invest more aggressively
than its peers when sector recovers from slowdown.
Opportunities Threats
 Low market share in organized market for faucetware (5%) and tiles  Price wars may ensue from newer entrants in sanitaryware segment
(2%) implies opportunity to scale in much larger product categories (already sell at 10-15% discounts) especially in the mid-market segment.
(~2-3x sanitaryware market).  Some foreign brands are expanding very aggressively and targeting the
 Increased realizations across sanitaryware and faucetware; higher mix market across all product segments. Their ability to attract mid-market
of premium brand ‘Senator’ likely to imply higher value growth. customers could be detrimental to Cera’s growth outlook.
 Seed new product categories through brand extensions at minimal
investments and scale up based on market potential. Cera has
ambitions to provide total-home solutions and has already entered
water heaters and modular kitchen segments.
 Increased sustainability efforts offer opportunity to introduce innovative
and differentiated products; Cera has been a pioneer in the domestic
market with its water-saving WCs.

Cera Sanitaryware
From sanitaryware to complete bathroom

solutions
Cera’s evolution from sanitaryware to complete bathroom solutions company
has been an incremental and conservative journey. Starting as a standalone
sanitaryware player, Cera built scale for nearly two decades through right
outsourcing mix (~50%) and product offerings that appealed to the value
conscious Indian customer (mass market products ~40% FY19 sales). Only
once had it established brand and distribution reach, did it venture into
other synergistic categories - faucetware in 2009 and tiles in 2014. Cera’s
win-win relationships with its channel partners (coupled with high brandex)
translated to higher offtake over the years. The result is that Cera posted
healthy sales growth (24% CAGR over FY09-19) and high RoCE (20%+).
Amidst the growth slowdown post 2015, Cera has focused on better business
processes - implementation of SAP, increased automation and tighter control
on its working capital. These should pay good dividends in the long run.
Exhibit 3: Cera’s strong sales growth over the last decade has been coupled with best-in-class capital efficiency
During real-estate bull run: During real-estate slowdown: Y1 Y2

Sales CAGR: 33%, EBITDA CAGR: 25% Sales CAGR: 13%, EBITDA CAGR: 14% 35%
12
30%
9
(` bn)
25%
6 20%
3 15%
0 10%
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY19
Sanitaryware Faucetware Tiles
Wellness EBIT margin (Y1) RoCE pre-tax (Y1)
Source: Ambit Capital research, Company. Note: Segment-wise sales prior to FY15 are not available and are assumed to be majorly from sanitaryware
Building scale in sanitaryware (1980-2009)

For the first two decades of its existence, Cera focused only on sanitaryware. Its
tenacity to build its brand and scale is a niche market segment that is amongst the
smallest in the building materials space (with pre-existing branded leaders such as
Hindware and Parryware) is a testament of its long-term vision and execution.
Creating strong foothold in the sanitaryware market
The present business of sanitaryware (started in 1981) was originally part of
Madhusudan Industries. Following the erratic nature of the vegetable oil business
that the company was primarily engaged in, the sanitaryware division was hived off
and name changed to Cera Sanitaryware in 2002.
Since the promoters are from the Somany family (which also promoted Hindustan
Sanitaryware in 1960), they had sound technical understanding of sanitaryware.
Moreover as trade partners were well versed with the Somany family’s history in this
product category, Cera was quickly able to gain foothold in the market.
At the invitation of the Government of Gujarat, Mr. Vikram Somany seized the Cera enjoys lower fuel cost due to
opportunity to build the plant at Kadi which offered lower power costs and cleaner APM pricing; as per management
source of fuel from nearby gas fields. Along with fully computerized German kilns for Kadi plant has significant capacity
vitrification, Cera was able to make products with good sheen than were not to increase production over next 5-
available in the market until then. This provided a significant advantage versus 10 years
incumbents in early 1980s. As per management, the plant was profitable from the
first year.

Cera Sanitaryware
Market gains through product differentiation and branding

In 1980s, Cera differentiated itself from competition by offering up to 21 different
coloured commodes versus 5-6 options offered by competition (which were primarily
shades of white). Additionally Cera focused on branding and was one of the first
companies to introduce celebrity endorsements in the category. It also brought a
number of innovations to the market such as the twin-flush cistern in 2000 that later
became an industry standard.
As early as 2006, Cera had introduced six Cera Bath Studios – large format
experience stores that displayed the entire product range to architects, institutional
buyers and retail customers. In 2008, retail presence was expanded through
distributor owned Cera Bath Galleries, the first of which opened in Delhi.
Expansion through opportunistic growth capital
Following tepid market conditions in FY06, the company offered share buyback in
which promoters participated (through Madhusudan Holdings) and raised their stake
from 58.4% to 60.3%. At offer price of `65/share, buyback occurred at ~6x FY06
PAT. This was followed by preferential allotment of 6 lakh preferential warrants to
promoters worth ~`74mn and private placement to strategic investor worth ~`85mn
to fund expansion and long-term working capital requirements. Sanitaryware
capacity at Kadi was expanded from 16500 to 24000 MTPA.
Leader emerges in bathroom solutions (2010-15)

Over FY10-15, Cera recorded sales/EBITDA CAGR of 34%/27% on the back of strong
demand for sanitaryware (beneficiary of real estate boom) and entry into faucetware.
This was coupled with higher branding and advertising expenditure that resulted in
higher offtake.
Exhibit 4: Cera resorted to increased outsourcing to grow Exhibit 5: Whilst EBIT margin fell, higher capital employed
sales 34% CAGR over FY10-15 turnover led to stable RoCE
Sales EBITDA EBITDA margin (RHS) CE turnover EBIT margin (RHS)

pre-tax RoCE (RHS)
10000 25% 2.5 35%
8000 2.2 30%

(` mn)
20%
6000 1.9 25%
4000 1.6 20%

15%
2000 1.3 15%
0 10% 1.0 10%

FY10
FY11
FY12
FY13
FY14
FY15
FY1
FY1
FY1
FY1
FY1
FY1
0
Sanitaryware – From challenger to leadership

Sanitaryware recorded higher sales growth on the back of real estate boom. Cera
expanded capacity from 2mn to 2.7mn pcs/year in FY11 and then 3.2mn pcs/year by
FY15. Cera’s Kadi operation became the single largest sanitaryware plant in India
with technological improvements such as fuel saving kiln, pressure casting system,
and new fireclay plant to produce large washbasins.

Cera Sanitaryware
Exhibit 6: Cera has opportunistically expanded capacity in sanitaryware and

faucetware whilst still meeting ~50% of its requirements through outsourcing
4 FY10 FY13 FY16
3.2
(mn pcs/year)
3 2.7
2
2
1 0.75
0.25
0
Sanitaryware Faucetware
Source: Ambit Capital research, Company. Note: The capacity represented here only relates to own
manufacturing and is not indicative for outsourced products.
Faucetware and tiles – Brand extension into synergistic markets

Following its experiment with outsourced faucetware, in 2010 Cera started “Replacement demand is much
manufacturing its own faucetware at Kadi (with initial capacity of 2500 pcs/day). higher in tiles and faucetware
Similar to sanitaryware, Cera employed the strategy to manufacture higher end because they are easier to replace -
products that required higher quality controls whilst outsourcing lower end products require no changing in piping and
and fixtures. By FY16, it expanded this capacity ~3x to 7500 pcs/day cater to the fastare less labour intensive.”
growing segment.  Bharat Mody in 2QFY16 con-
With its aim towards becoming a total home solutions provider, Cera extended its call
branded presence in tiles in FY13 and launched digital wall/floor tiles and vitrified
tiles in both soluble salt and double charge.
Brand building, distribution reach and after sales service continues
Cera’s focus on advertising was intended to create pull for its products and it roped in
Bollywood celebrities such as Dia Mirza and Sonam Kapoor as its brand endorsers.
After success with its Bath Studios (that are company owned showrooms that display
the entire range of products and with average store size of ~7k sq.ft.), Cera
introduced the concept of dealer-owned showrooms called Cera Bath Galleries with
average showroom size of <7k sq.ft.
Besides pull advertising, Cera also maintained push demand through high sales
incentives for dealers (~6% of sales). By FY16, Cera’s retail touchpoints grew to 14k.
Exhibit 7: Cera has spent considerably on brandex that Exhibit 8: …whilst increasing number of company
includes both push and pull marketing strategies… showrooms to attract more exacting customers
Brandex Brandex as % of sales (RHS) CERA Style Studio CERA Style Galleries (RHS)
1000 11% 12 180
800
9 135
(` mn)
10%
600
6 90
400
9%
3 45
200
0 8% 0 0
FY12
FY13
FY14
FY15
FY16
FY12
FY13
FY14
FY15
FY16
Source: Ambit Capital research, Company. Note: Brandex comprises of Source: Ambit Capital research, Company
advertising, sales promotions and sales commissions & incentives.
With entry into faucetware (shorter replacement cycle vs sanitaryware), Cera has
focused on building its after-sales service through Cera Care. Through its network of
250+ plumbers across the country, Cera provides home service within 48 hours of
complaint registration through its app or telephonic service.

Cera Sanitaryware
Proven resilience amid weak demand (2016-)

Even as the external environment was fraught with slowing real estate demand and
disruptions such as demonetization and GST, Cera posted strong sales/EBITDA
growth of 13%/14% over FY15-19. This was primarily due to stronger sales growth in
faucetware and tiles segments which grew from a smaller
base, increasing consolidated share from 30% to 45% of total sales by FY19. Cera’s
strong control over its working capital cycle and distribution ensured stronger balance
sheet strength than industry.
Scaling up the faucetware and tiles businesses
After successful outsourcing to build sales in tiles segment, Cera entered into JV with
Anjani Tiles in FY16 to produce vitrified floor tile with capacity of 10k sq.m. at project
cost of ~Rs680mn. Since Cera already had ~40% sales coming from South India,
production at Nellore, Andhra Pradesh reduced freight cost for tiles.
Exhibit 9: Faucetware and tiles accounted for 45% of FY19 sales; Cera is no longer a standalone sanitaryware player
Source: Ambit Capital research, Company
In FY19, Cera entered 26% JV with Milo Tiles LLP at Morbi with capacity of 7k sq.m. Since South India is the largest
Through a larger manufacturing footprint, Cera would be able to make further market for Cera, proximity of
inroads into Western and Northern markets. Over FY15-19, Cera recorded 28% sales Anjani Tiles helps lower freight
CAGR in the tiles segment. costs
In faucetware, Cera focused on import substitution including commissioning of
Zamac project for manufacturing handles. Over FY15-19, Cera recorded 17% sales JV with Milo Tiles makes use of the
CAGR in the faucetware segment. pre-existing ecosystem at Morbi
thereby providing economies of
Building a complete product portfolio scale
Exhibit 10: Introduction of new sub-brands implies Cera can play a larger field now


Cera Sanitaryware
Cera built its brand image as a value conscious player providing quality products for
the mass market. In the last few years it has extended its brand across more other
categories. In FY16, it made an exclusive tie up with Italian designer sanitaryware
brand ISVEA to penetrate the luxury segment, which was primarily being served in the
market by foreign competition. By FY19, it had over 50 showrooms in the country.
In FY18, with a view to target the affordable housing segment, Cera launched the
JEET brand. Given the low ticket products in this category, Cera has outsourced this
manufacturing whilst only using its brand to promote sales. Similarly in FY19, Cera
extended its offerings in the premium segment through Senator brand.
To further expand its branded reach in tier 2/3 cities, Cera introduced Style Centres
that are exclusive CERA retailers and display products without any additional cost
borne by retailer for display. Presently 2700+ Style Centres are operational and
company hopes to add 600 more such stores in next 2 years. Similarly for tiles,
branded expansion through showrooms is underway under CERA Tile Centres, 9 of
which are operational presently.
Exhibit 11: Cera plans to increase share of more premium Exhibit 12: South has been Cera’s biggest market and still
products in sales mix in the future offers scope for premiumization and higher realizations
FY19
FY19 Rest
Premium,
(Central +
15%
East), 20%
Mass
market, South, 40%
40%
Upper-
lower, 20%
Upper-
North +
upper,
West, 40%
25%
Business process improvements and seeding new markets

In a weak demand environment, Cera was able to maintain comfortable levels of
working capital. SAP implementation helped credit control - ERP automatically shuts
down fresh supplies to vendors with dues in excess of 45-60 days.
Exhibit 13: Cera maintained stable cash conversion despite the subdued market
100 Inventory days Receivable days

Payable days Cash conversion days
80
60
40
20
FY14
FY15
FY16
FY17
FY18
FY19
Cera also introduced automation in its design and manufacturing through robotic
glazing and 3D printing for sanitaryware and faucetware. These business process
improvements, besides right mix of outsourcing, have implied that Cera’s overall
permanent employee base has not grown significantly over the last five years even as
Cera has engaged more contractual workers.

Cera Sanitaryware
Exhibit 14: Even as employee count is constant, expense as % of sales has not “Focus on automation will continue
changed => Cera is focused on retaining talent despite increased automation because sanitaryware/faucetware
is labour intensive industries and
Total number of employees Contractual employees availability of skilled labour is a
Employee expense as % of sales (RHS) key challenge.
3,000
15% 3D printing allows reduction in
2,500 SKUs since the mould is designed
very fast and focus is on production
2,000 13% on faster selling products.
Whilst faucets will continue to have
1,500 higher SKUs as greater design
12%
variety is attractive to customers,
1,000
Cera is standardizing internal
500 10% parts.”
 Bharat Mody, 2QFY18 con-call
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY19
Based on dealer feedback, Cera has also seeded newer markets such as water
heaters and modular kitchens, especially in Kerala where it already enjoys significant
presence. This is in line with its overall aim of moving towards being a total home
solutions provider. However, these experiments have been at minimal cost and Cera
is unlikely to scale these segments unless it foresees sizeable return on investment in
the future.
Currently, these net negative working capital business segments are targeted towards
higher velocity dealers and employ completely outsourced manufacturing. We believe
these segments could develop into standalone segments similar to faucetware and
tiles. In case Cera is unable to build traction organically, it could discontinue these
products without any material effect on its overall business.

Cera Sanitaryware
Strong foundations help weather storms

Cera stands apart from peers on our IBAS framework. Senior management
consists of home-grown leaders who understand the mindset of the Indian
consumer and have built a resilient business model based on innovation,
brand development and outsourcing (~50%). Timely forays into faucetware
and tiles have provided Cera with a larger playing field (2-3x size of
sanitaryware market), the benefits of which it will continue to reap for the
next decade. This is evident from the fact that not only has Cera outsmarted
competition in terms of sales growth (13% CAGR, FY15-19) in a tough macro-
environment, there has been no deterioration of working capital. The result
of this has been above-average RoCE (20%+) during FY15-19.
Weighing on the IBAS framework

Innovation
Cera has been at the forefront of innovation in the sanitaryware market. In the
1980s, Cera outsmarted competition by introducing up to 21 colours (vs 5-6 colours
provided by competition). Over the years, its other innovations such as water-saving
twin-flush WCs (introduced in 2000), 4-litre flush WCs and one-piece WCs have
become industry standards.
Cera’s product launches have received multiple awards, including Product of the
Year, that are Neilsen-based consumer survey awards for innovation. In 2011, Cera’s
Snow-White glaze was awarded for its extra-whiteness and opacifier that add extra
gloss and sheen to the products. In 2012, Cera’s ‘nano technology’ again won the
award for its microbial free surface that impedes bacterial growth, resulting in a
healthier and cleaner environment. The following year, in 2013, Cera also made its
mark in the faucetware category with the award for its single-lever faucet.
Exhibit 15: Cera is focused on R&D to remain ahead of the curve
30 R&D expenses - as % of sales (RHS) 0.4%
25
0.3%
20
(` mn)
15 0.2%
10
0.1%
5
0 0.0%
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY19
Brand
Cera employs a mix of push and pull marketing to build its brand strength. It was the “We are more like Maruti than
first company in the sanitaryware segment to employ brand endorsements and since Toyota or others like Audi/BMW.
then it has roped in Bollywood celebrities such as Dia Mirza and Sonam Kapoor to Everybody makes profits at their
promote its premium image, whilst pricing its products as value for money. own level, but what is key for us
depends on our value proposition
In the 1980s, its first advertising campaign with the tagline ‘Your bathroom is a room
we offer to our customers. We are
too’ was successful in gaining mindshare with customers towards high quality
perceived as value for money for
sanitaryware. Its latest campaign ‘Kuch pal ghar ke naam’ has taken a step away
the quality we provide.”
from brand endorsement and tried to promote luxurious living with home as the
centre of one’s life. As Cera branches out from sanitaryware into a total home-  Bharat Mody, 3QFY17 con-call

Cera Sanitaryware
solutions company with faucetware and tiles as newer segments, the campaign
captures the future potential for the company.
Exhibit 16: Cera’s latest advertisement reflects its ambition Exhibit 17: Cera’s Style Studios offer customers to engage
to move towards total-home solutions with entire product range and make informed choices
Exhibit 18: Cera’s brandex has increased proportionally with sales, implying focus on
both push and pull marketing strategies
A&P spends Sales commissions

A&P spend as % of sales (RHS) Sales commissions as % of sales (RHS)
1000 8.0%
800
6.5%
600
(` mn)
5.0%
400
3.5%
200
0 2.0%
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY19
Architecture
 Outsourcing partners: Cera is focused on return on capital employed as “Enough capacity is available in
measure of business performance. Over the years, whilst it has gained leadership the industry. So those products
role in sanitaryware, it has been mindful that sanitaryware is a low asset turnover which we do not feel the need to
business. Especially in lower segments, return on investment is low. Thus Cera manufacture in our own plant,
outsources almost half of its manufacturing across both sanitaryware and which are not so technologically
faucetware. Whilst lower segment of sanitaryware does not have competition sensitive can always be
from imports (due to substantial freight costs), imports in higher-end sanitaryware manufactured in the JVs or
is remunerative using outsourcing model. Cera had sizeable Chinese imports obtained in outsource products.”
(~20% by volume and ~40% by value) of higher-end sanitaryware, but import
- Ayush Bagla, 3QFY19 con-call
dependency has been reducing over the last five years.
“We try to optimize production.

Low contributory margin products
are outsourced and we try to use or
own manufacturing for high value
items.”
- Bharat Mody, 3QFY16 con-call

Cera Sanitaryware
Exhibit 19: With improvement in manufacturing processes, Cera is resorting to “We have been importing premium
increased import substitution
product range from China due to
Value of imports - as % of COGS (RHS) inherent advantages with Chinese
1250 50%
clay, high productivity and
availability of skilled labour. We
1000 have contract manufacturing
40%
arrangements with 3-4 players and
750 this allows us to compete with
(` mn)
30% world class bands at good prices.”

500 - Bharat Mody, 1QFY16 con-call
20%
250
0 10%
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY19
Source: Ambit Capital research, Company. Note: CIF value of imports used till FY17, post FY17 total foreign
exchange is used as proxy for value of imports.
 Retail presence through display centres: Cera has 10 Style Studios across the
country with average area of >7k sq.ft. These company-owned, company-
operated stores offer displays of the entire product range for architects,
developers and retail customers. However, sales are not made through these
centres and a customer must approach dealers for final purchase. Through this
model, Cera builds brand image without hurting sales of its dealers. On the other
hand, through its 140+ Cera Style Galleries (that dealer-owned and operated),
Cera incentivizes dealers to have their own display centres for a selection of fast
selling products. Even here, the dealer is not required to carry any inventory for
the display units. This retail presence is now being extended to tiles.
 Dealers are incentivized to push sales: Cera’s dealership/distributorship
model of ~14k retail touchpoints incentivizes trade partners to push sales
through higher sales commissions. Sanitaryware follows a two-tier distribution
system whereby products are directly moved to dealers from 19 company
warehouses. Thereby dealers are not required to hold inventory on their books
and goods are delivered in maximum 48 hours. Asset-light model and prompt
sales realizations convert into higher return on capital for dealers, leading to
long-term symbiotic relationships. Thus during crunch time, Cera’s dealers are
unlikely to switch to competition.
 Focus on after-sales service has increased: Post entry into faucetware, Cera
has focused on improving its after-sales service. It has 400+ technicians on its
rolls who are required to service any consumer complaint within 48 hours. Cera
also organizes plumber meetings to educate them about products and processes.
Strategic Assets
As with any mid-sized company trying to expand its total addressable market by “As far as taking advantage of
entering new segments and thus grow faster than industry peers, the driver at the opportunities that are currently
helm of affairs is the most strategic asset. present or may present themselves
in future, we have always done
Whilst Vikram Somany’s family background in sanitaryware helped Cera quickly gain
that. Conservatism at Cera only
foothold, his vision to see Cera emerge into a total bathroom solutions provider has
restricts itself to our balance sheet.
translated into tangible gains. Diversification into tiles and faucetware (~45% FY19
There is absolutely no conservatism
sales) reflects Mr. Somany’s business acumen and long-sighted approach. He is ably
in product or market place
supported by a diverse Board of Directors with cross-functional experience. Ms.
behavior.”
Deepshikha Khaitan, daughter of Mr. Somany, has played a strategic role as the
Vice-Chairperson since 2014. In February 2020, she was appointed as the Jt. - Ayush Bagla, 2QFY20 con-call
Managing Director for period of 5 years with effect from April, 2020.

Cera Sanitaryware
Exhibit 20: Cera’s board comprises directors with cross-functional expertise; board attendance improved significantly in last
few years
Education (highest
Directors Since Age Designation Independent Background
qualification)
Chairperson, MD, ED,
Vikram Somany 2001 70 No B.Sc. Promoter of the company
Promoter
Vice Chairperson, Non- B.S.c (Hons.) in
Deepshikha Khaitan 2014 44 No Daughter of Vikram Somany
Executive Director, Promoter Economics, LLB
B.A. - Management
Ayush Bagla 2018 46 Executive Director No Expertise in finance and financial services
Studies
CEO of Cera Sanitaryware, with company
Atul Sanghvi 2014 57 Executive Director No MBA -Marketing
since 1999, ex-VP Marketing & Sales
Expertise in product and business
B.Tech., Banaras
Surendra Singh Baid 2018 68 Non-Executive Director Yes development, sales & marketing personnel
Hindu University
management
Lalit Kumar Bohania 2013 56 Non-Executive Director Yes NA Expertise in accounts and finance
LLM - University of
Akriti Jain 2018 33 Non-Executive Director Yes Expertise in legal matters
London
B.A. - Business
Sajan Kumar Pasari 2004 72 Non-Executive Director Yes Businessman
Administration
Expertise in finance and accounts; Director,
JK Taparia 2016 71 Non-Executive Director Yes C.A.
Anjani Tiles
Source: nseinfobase.com, Ambit Capital research, Company. Note: NA stands for not available.
Exhibit 21: Remuneration of the board of directors is well below statutory limits
Remuneration to BoD -as % of PBT (RHS)
100 12%
80 10%
(` mn)
60 8%
40 6%
20 4%
0 2%
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY19
Cera management consists of home-grown leaders, having spent two decades with
the company, and is led by CEO Mr. Atul Sanghvi, who took over in 2019. The
erstwhile CEO Mr. SC Kothari himself was an industry veteran who worked with Cera
from 1985 and retired as CEO in 2007. Following the untimely death of Mr. Vidush
Somany, son of promoter Mr. Vikram Somany, in FY13, Mr. Kothari resumed his role
as CEO and successfully led the company through its strongest growth phase.
Exhibit 22: Cera leadership boasts many home-grown leaders who have been with the company for over two decades
No. of
KMP Designation Education Expertise
years
In charge of all aspects of manufacturing, marketing and
Atul Sanghvi 34 CEO MBA Marketing
corporate affairs; part of CERA leadership for over 20 years
Leads financial, commercial, banking, budgeting and cost
Rajesh Shah 33 CFO/COO (Fin. & Comm.) B.Com/ACA
control functions
B.Com/LLB/FCS, ACIS
Narendra Patel 30 President/Company Secretary Leads secretarial, legal and compliance functions
(London)
Ramchandra Patil 17 Vice President (Works) Diploma, Ceramic Tech In charge of the Kadi plant
Devising media, marketing and positioning strategies and their
PK Shashidharan 27 Senior VP (Marketing) MA (English)
execution
Leads sales function, dealer interactions, market feedback and
Abbey Rodrigues 22 Senior VP (Sales) B.Com./PGDMSM
CRM

Cera Sanitaryware
Cera has a good track record of capital allocation. Cera does not deploy capital
unless it has already had success from an outsourced model that only uses brand pull
to sell its products. Only after initial success does Cera go for own manufacturing,
that too for those segments where it can itself add value in terms of quality and
process engineering.
With building materials sector under pressure since the onset of the real estate “Capex is planned with aim to
slowdown, some companies resorted to looser credit terms to push sales. However, in bring additional revenue, increase
hindsight, this proved to be detrimental as these companies have faced ballooning brand power or result in cost-
receivables and write-downs. However, Cera bucked that trend by disallowing looser saving.
credit terms.
We look for >18-20% RoCE for any
Additionally, Cera has focused on retail sales (~70% FY19 sales), especially in tier incremental capex and payback
2/3 cities, that have been more immune to slowdown than institutional sales in top period of 3-4 years. ”
cities. Since sanitaryware is typically installed in projects only in the last mile, 6 - Bharat Mody, 2QFY18/1QFY19
months before completion, Cera has not faced any issues with receivables from con-calls
larger projects.
Exhibit 23: Cera has opportunistically raised equity capital Exhibit 24: …to fund capex and build pool of liquid
whilst keeping debt capital low… investments
Sources of funds FY09-19 Net change Application of funds FY09-19

Net in cash
borrowings 4%
3%
Dividends Investments
and interest Equity 18%
income raised
3% 13%
Interest paid
7% Capex
62%
Dividends
CFO 9%
81%
Synergistic product categories provide opportunity to

scale up further
Cera built scale in sanitaryware first…
From the outset, Cera enjoyed many advantages. It recruited ex-HSIL employees,
who in association with the Somany family had existing knowledge of technology,
processes and markets in the sanitaryware segment. Furthermore, Cera tapped into
the customers’ minds through differentiated products and advertising strategy. To the
credit of Mr. Vikram Somany, when the sanitaryware business had scaled up
sufficiently, he exited the oil business to focus exclusively on sanitaryware. This focus
as a single category player remained until Cera had built product leadership.
Moreover, Cera was mindful to position itself well in a crowded marketplace.
Whereas lower realization products did not enjoy sufficient return on investment,
imports were crowding out the premium segment. By focusing exclusively on the
middle segment, which accounted for majority of sales, and building its leadership as
value-for-money, Cera build significant brand recall on par with existing peers such
as HSIL and Parryware. This market segmentation allowed Cera to avoid competition
with importers/foreign players and being pigeonholed with cheaper products from
unorganized competitors.
…before entering larger and faster growing segments

Cera Sanitaryware
Exhibit 25: Through faucetware and tiles, Cera entered categories that are more attractive than sanitaryware in terms of
growth and industry dynamics
Product Market
Overall
After Scope Return attractive Right to win? What Cera is doing
Brand Replacement
sales Size to on -ness
affinity cycle
service grow^ capital
Established brand
especially in mid-market Increasing range of offerings
Sanitary-ware ++ ++ + + + ++ ++ segment; creation of sub- through sub-brands such as
brands likely to lead to JEET and Senator
more traction
Sanitaryware and Fighting competition through
faucetware are synergistic; extended warranty (15 years vs
Faucet-ware +++ +++ +++ ++ ++ +++ +++
significant opportunity to 10 years for established peers),
cross-sell focus on after-sales service
Synergy with other product
segments; focus on high- Focus more on GVT tiles where
Tiles + + ++ +++ +++ ++ ++ end tiles with superior pricing is highest and designs
design quality likely to lead are more important
to improved sales
Source: Ambit Capital research, Company. Note: ^ for lesser market share, scope to grow increases and vice-versa. Note +++: most attractive, ++: moderately
attractive, +: least attractive
As an extension towards complete bathroom solutions, Cera entered the faucetware
segment. Over FY08-09, Cera outsourced its manufacturing to build sales on a trial
basis before building own manufacturing capabilities at Kadi in FY11.
Jaquar had almost monopolistic presence in the segment having built significant
brand recall for its products. It had originally introduced Jaquar products in 1986,
with almost negligible interest from dealers who did not anticipate a market for its
premium products. Similar to Cera, Jaquar had focused on being a single-category
player. Jaquar’s healthy RoCE (20%+) and strong industry tailwinds induced Cera to
also built competencies in this segment.
Whilst entry into faucetware was synergistic due to complimentary bathroom
products, extension into tiles was warranted further by similarity with sanitaryware in
raw materials and manufacturing process. However, since tiles is also a capital
intensive business with lower brand recall, Cera has opportunistically entered into JVs
where manufacturing is handled by the partner and Cera only focuses on selling and
distribution.
Exhibit 26: Jaquar is the industry leader in terms of combined sales of faucetware and
sanitaryware; Cera has grown the second best in the industry
30000 FY15 FY19

15%
22500
(` mn)
11% 2%
15000
24% 35%
7500
0
Cera
Jaquar^
Kajaria#
HSIL
Somany
Source: Ambit Capital research, Company. Note: The numbers above the bars indicate sales CAGR over FY15-19.
^ For Jaquar, data for FY19 is not available. # For Kajaria, data for FY15 is not available.
Next stop – Total home solutions?

More recently, Cera entered water heaters at the behest of its dealers. Similarly it
introduced Italian-made modular kitchens in FY19, extending its presence from just
kitchen sinks. Cera provides modular kitchens at highly competitive prices (as per
management retail cost is ~Rs2.5 lakh/kitchen in select markets such as Kerala). This
negative working capital business operates on credit from the manufacturer and
customer advances, providing high optionality for Cera to scale in case of sufficient
customer demand.

Cera Sanitaryware
Cera has ambitions to build a larger portfolio of products and provide total home
solutions. However, the journey is likely to be incremental, with scale through
outsourced manufacturing before building own manufacturing capabilities. Cera has
demonstrated superior capital allocation decisions in the past. We believe any brand
extensions into other home categories are likely to be scaled only if it is RoCE-
accretive in the long run.
Cera scores well amongst peers in building materials

Robust business model built on right outsourcing mix…
Sanitaryware and tiles are capital-intensive businesses with lower gross asset turns
compared to faucetware and other home building materials such as paints and
adhesives. Additionally, the largest segment is for mass market categories where
realizations are lower (<Rs4k/water closet). In comparison to domestic
manufacturers, global peers deal in more premium products. Thus smaller domestic
manufacturers enjoy lower return on investment and are unable to incur significant
brandex to scale.
Certain larger players such as Cera have built a robust model based on outsourcing
and branding. Through third-party manufacturing, these companies enjoy fungible
capacity at their disposal without capital investment on their own books. Lower
segment products (such as affordable housing) are entirely outsourced, and the
companies focus on faster selling products with decent return profiles. Cera enjoys an
ecosystem of third-party manufacturers that are committed to increasing
manufacturing scale without their own branded portfolios. In return, Cera provides
R&D expertise to its partners to improve quality and processes. Besides sanitaryware
and faucetware (where ~50% of manufacturing is outsourced), Cera also outsources
tiles manufacturing. More recently it entered GVT tiles with manufacturing through its
JV partners Anjani tiles (51% stake) and Milo tiles (26% stake). Compared to ceramic
and wall tiles, GVT has higher realizations and better brand recall due to larger tile
sizes and contemporary designs.
Exhibit 27: Cera outsources significant portion of its finished goods…
Purchases as % of COGS FY13 FY14 FY15 FY16 FY17 FY18 FY19 Average
Cera 77% 82% 86% 84% 78% 83% 81% 82%
HSIL 53% 55% 54% 53% 55% 62% 45% 54%
Kajaria 55% 46% 48% 32% 29% 39% 39% 41%
Somany 76% 78% 86% 81% 37% 45% 50% 65%
Jaguar NA NA NA 30% 32% 29% NA 30%
Roca Bathroom NA 54% 68% 63% 62% NA NA 62%
Source: Ambit Capital research, Company, MCA filings
Exhibit 28: …that leads to lower fixed capital investment…

Gross asset turnover FY13 FY14 FY15 FY16 FY17 FY18 FY19 Average
Cera 3.2 3.4 3.3 3.1 2.7 2.5 2.6 3.0
HSIL 1.0 0.9 0.9 1.0 1.2 1.2 1.2 1.1
Kajaria 1.9 1.9 1.9 1.7 1.6 1.6 1.8 1.8
Somany 2.7 3.0 3.3 3.0 2.9 2.7 2.3 2.8
Jaguar 4.2 4.9 4.6 3.3 2.9 3.0 NA 3.8
Roca Bathroom NA 1.9 1.6 1.8 2.2 NA NA 1.9
Exhibit 29: …and thus higher capital turnover

Capital employed turnover FY13 FY14 FY15 FY16 FY17 FY18 FY19 Average
Cera 2.2 2.5 2.3 2.0 1.7 1.7 1.7 2.0
HSIL 0.9 0.9 1.0 1.0 0.9 0.8 0.9 0.9
Kajaria 2.5 2.4 2.3 1.9 1.7 1.7 1.7 2.0
Somany 3.4 3.5 3.6 3.0 1.9 1.5 1.4 2.6
Jaguar 3.2 3.4 2.9 2.4 2.2 2.3 NA 2.7
Roca Bathroom NA 1.6 1.4 1.3 1.2 NA NA 1.3

Cera Sanitaryware
Over time, Cera built significant recall with its client base such that additional spends
on brandex and dealer incentives translate into pricing power (prices reviewed every
6 months) and higher margins.
…and superior branding and distribution reach

Sanitaryware and faucetware are the only two categories amongst building materials “Pricing is reviewed every 6 months
where the brand name is visible on the product. Thus customers are brand conscious and any increases in input cost and
and within market segments some brands are clearly preferable over others. Jaquar ability for the market to bear a
and Cera both have extended their brand into allied categories. Whilst Cera has price increase are factored in
found success in faucetware, Jaquar has built a strong base in sanitaryware. Tile whilst taking decision.”
manufacturers such as Kajaria and Somany enjoy lesser brand premium in these - Ayush Bagla, 3QFY19 con-call
categories with fewer offerings and sell at 15-20% discount to the industry leaders.
Exhibit 30: Cera and Jaquar are best placed in terms of product range and synergy
Product Categories
Company Range Synergy Comments
Tiles Faucetware Sanitaryware Others
Jaquar has synergistic presence in sanitaryware and faucetware; even
Jaquar - as its range in sanitaryware is lesser than competition it enjoys very
strong brand recall that aids sales
Cera has strong presence across sanitaryware, faucetware and tiles; it
Cera -
has successfully extended its brand
Kajaria is the king in tiles but brand equity is harder to leverage from
Kajaria tiles to bathroom products; recently entered plywood business but that
may be much harder to scale
HSIL had significant first-mover advantage in sanitaryware but is finding
HSIL - it harder to extend its brand successfully to other categories such as
pipes; had entered tiles but rolled back later
Somany's extension into bathroom products is yet to scale but doing
Somany -
well in South India
Roca has not been very aggressive in growing into newer categories
Roca Bathroom - -
and its presence is more in South India
Source: Ambit Capital research, Company, Note: - Strong; - Relatively Strong; - Average; - Relatively weak. Note: Others denotes other product
categories in building materials space
Whilst Cera and HSIL are leaders in the mass segment, Kohler and other “We have pricing power in
international brands, such as Grohe and Toto, are making headway in the premium sanitaryware and because of the
segment. Presently the mid-market segment forms the largest portion of the market brand promise; there is lot of
and Cera has done well to become the largest player in this segment (followed by customer pull as well. So there are
HSIL which lost its numero uno position in the last two years). Brand extensions into many developers who have made
other segments through Senator (premium) and Jeet (affordable housing) are up their mind to buy CERA
welcome, but we believe growth will continue to come from the mid-market segment, products.”
which is getting premiumized itself through newer offerings and features. - Ayush Bagla, 3QFY19 con-call
Exhibit 31: Competitive intensity is highest at either ends of the spectrum; Cera enjoys presence across all segments but is
strongest in mid-market
Segment Basic Standard Premium Luxury
Market size (Rs mn) 13500 13500 9000 4000
Share of organized 10% 75% 100% 100%
Key players
Competitive intensity High Moderate High High

Source: Ambit Capital research, Status Quo and Outlook 2022: India Ceramics Industry report by Messe Muenchen India & EAC International Consulting 2018
Cera employs both push and pull strategy to promote sales. Amongst its peers, Cera
has the highest spend on advertising and dealer commissions, indicating focus on
both branding and channel incentives. We believe this ability to focus on brand
building whilst also maintaining strong returns on investment is likely to help Cera
grow faster than the industry.

Cera Sanitaryware
Exhibit 32: Bathroom-solutions companies use both push and pull strategies to
increase sales; Cera’s implementation of dealer-level ERP software is likely to help
Source: Ambit Capital research; 2018 Geberit analyst conference presentation
Exhibit 33: Margins are a function of outsourcing mix and different product category exposures; we like that Cera is one of
the highest spenders on brandex in the industry
Roca
Cera HSIL# Kajaria Somany Jaguar^ Remarks
Bathroom$
Sales (FY19) 13515 27124 29562 17151 30298 7925
3-yr sales CAGR 13.1% 11.1% 7.0% 0.1% 18.6% 0.5% Jaquar and Cera have grown consistently in a
weaker demand environment through brand
extension into complimentary bathroom
5-yr sales CAGR 15.3% 7.9% 10.0% 6.3% 19.2% NA categories, tiles growth has slowed down
considerably
COGS 43.5% 39.5% 32.6% 37.2% 56.2% 42.0% Gross margins are not comparable strictly
Gross margin 56.5% 60.5% 67.4% 62.8% 43.8% 58.0% because many players outsource production.
Power and fuel cost is highest for tiles and least
Power & fuel cost 4.2% 12.6% 19.2% 20.4% 0.7% 7.2%
for faucetware
Employee cost 12.4% 13.7% 11.7% 12.7% 9.8% 12.7% Almost similar for all players
Tile manufacturers have higher manufacturing
Manufacturing expense 3.0% 10.2% 9.4% 8.2% 1.4% 2.8%
costs than sanitaryware and faucetware
General & admin cost 4.2% 3.2% 2.4% 3.8% 4.5% 4.7% Almost similar for all players
Selling & advertising cost
14.9% 5.7% 5.5% 6.3% 10.1% 16.7%
(I+II+III)
All brands focus on advertising, albeit to
Advertising expense (I) 3.8% 4.7% 3.1% 3.5% 4.6% 5.3%
different extent on absolute basis
Cera's dealer incentives are the highest in the
industry; HSIL's expense may be skewed due to
Sales commissions & incentives (II) 5.7% 0.3% 0.5% 0.3% 1.2% 5.3%
packaging business. Dealer margins in tiles are
lower as % of sales.
Cera focuses on both push and pull strategies;
Adv. + dealer incentives (I+II) 9.5% 5.0% 3.6% 3.7% 5.8% 10.6%
amongst the highest expenses in the industry
Sanitaryware and faucetware have higher
Freight costs (III) 5.4% 0.7% 1.9% 2.5% 4.3% 6.1%
freight costs compared to tiles
Other expenses 2.3% 2.2% 1.3% 0.5% 0.8% 0.6%
Operating margins are highest in sanitaryware
EBITDA margin 15.0% 12.1% 16.8% 10.9% 14.7% 14.0% and lowest in tiles, company-specific margins
are skewed by the extent of outsourcing
Source: Company, Ambit Capital research. Note: all line items except sales and sales CAGR are median values over last three years. ^ For Jaquar data is
available up to FY18, $ For Roca, data is available up to FY17. # For HSIL, sales are for consolidated entity and not bathroom solutions alone.
Since sanitaryware is a bulky product, Cera holds inventory at its 19 national

warehouses from where the product is shipped to the dealer post sale typically within
48 hours. Inventory days are not significantly different between top players, although
Jaquar has higher inventory days possibly due to larger faucetware sales and higher
number of SKUs.

Cera Sanitaryware
Exhibit 34: Cera’s inventory has not bloated in the last five years…
Inventory days FY13 FY14 FY15 FY16 FY17 FY18 FY19 Median
Cera 70 58 56 53 54 60 58 58
HSIL 84 87 87 90 87 91 77 87
Kajaria 51 38 51 58 53 51 50 51
Somany 42 26 32 30 47 55 54 42
Jaguar 77 68 50 82 78 75 NA 76
Roca Bathroom NA 51 61 55 53 NA NA 54
With a weak demand environment, receivables have bloated across segments, “Liquidity in the channel is very
especially in tiles as players seek to increase sales through higher credit days and
tight. We could have grown much
discounts. Whilst Cera’s has also increased, receivables have been stable. We note faster but we exercise control on
how Jaquar has maintained low receivable days, indicative of the brand power it our working capital and recoveries
enjoys in the market. and therefore we compromised on
Exhibit 35: …receivables are in check relatively despite weak demand environment…
growth but we have always
managed working capital better on
Receivable days FY13 FY14 FY15 FY16 FY17 FY18 FY19 Median
that part.”
Cera 62 59 72 74 80 83 81 74
HSIL 81 82 76 72 70 83 79 79
Kajaria 33 33 35 41 49 61 59 41
Somany 61 62 61 68 90 107 89 68
Jaguar 20 25 28 31 28 39 NA 28
Source: Company, Ambit Capital research, MCA filings
Cera has managed to increase payable days slightly to keep cash conversion in check
though for the industry as a whole it has remained stable. Again, Jaquar outshines
with highest payable days, indicating its strength from scale and brand.
Exhibit 36: …and payable days comparable to industry average
Payable days FY13 FY14 FY15 FY16 FY17 FY18 FY19 Median
Cera 47 45 46 55 71 67 67 55
HSIL 34 30 27 29 35 35 36 34
Kajaria 38 30 40 44 38 35 38 38
Somany 56 51 49 43 35 50 42 49
Jaguar 62 60 50 63 59 69 NA 61
Whilst other players faced incremental challenges in cash conversion, Cera
maintained working capital discipline (implemented SAP in FY17). Its ability to grow
faster than industry amid weak demand is a testament to its robust processes.
Exhibit 37: Whilst other players face pressure, Cera’s conversion cycle is stable…
Cash conversion cycle FY13 FY14 FY15 FY16 FY17 FY18 FY19 Median
Cera 85 71 81 72 63 75 72 72
HSIL 131 140 137 134 122 139 120 134
Kajaria 46 41 45 55 63 77 71 55
Somany 46 37 44 54 102 113 101 54
Jaguar 35 33 28 50 47 45 NA 40
Source: Company, Ambit Capital research, MCA filings
Exhibit 38: …translating into healthier cash conversion compared to listed peers
pre-tax CFO/EBITDA FY13 FY14 FY15 FY16 FY17 FY18 FY19 Average
Cera 83% 91% 60% 102% 87% 73% 91% 84%
HSIL 25% 70% 91% 121% 97% 33% 109% 78%
Kajaria 59% 81% 73% 92% 94% 80% 100% 83%
Somany 101% 107% 43% 59% 71% 77% 72% 76%
Jaguar 119% 85% 84% 85% 98% 108% NA 97%

Cera Sanitaryware
Exhibit 39: Jaquar, Cera and Kajaria are already stalwarts in their respective categories and are best-placed to ride out
through the slowdown unscathed due to both superior products and scale
Product Architecture
Overall
Company Brand Comments
Range Synergy Manufacturing Distribution rank
Equity
Jaquar enjoys significant scale and brand equity; has
Jaquar successfully extended into newer categories such as
sanitaryware and lighting
Cera rose from challenger status to leadership in sanitaryware;
Cera successfully extending brand into faucetware and tiles; scale
should increase due to entry into larger product categories
Kajaria enjoys significant scale and brand equity; has entered
Kajaria newer categories such as sanitaryware/faucetware/plywood but
may find it harder to scale
HSIL enjoys significant scale and brand equity but has been
HSIL unable to leverage it due to diversification into packaging and
pipes
Somany is no.2 branded player in tiles; attempts to diversify
Somany
into sanitaryware and faucetware yet to yield results
Roca has good branded presence in the South but has not been
Roca Bathroom aggressive in extending itself into newer categories or
geographies
Source: Ambit Capital research, Company, Note: - Strong; - Relatively Strong; - Average; - Relatively weak
Jaquar, Cera and Kajaria score highest on our IBAS framework. They are leaders in
their own market segments (faucetware, sanitaryware and tiles respectively) and are
successfully extending their brands into allied segments. Focus on innovation and
brand coupled with scale has translated with more robust business models vs peers.
Robust business model led to superior metrics and growth record
Exhibit 40: Cera recorded strong growth compared to peers over last five years…
5-yr sales
Sales growth FY13 FY14 FY15 FY16 FY17 FY18 FY19
CAGR
Cera 53% 36% 24% 14% 8% 18% 14% 15%
HSIL 20% 6% 7% 0% 5% 9% 20% 8%
Kajaria 21% 16% 19% 10% 6% 6% 9% 10%
Somany 20% 20% 22% 11% 1% -1% 0% 6%
Jaguar 33% 31% 10% 13% 20% 23% NA 16%
Roca Bathroom NA NA -1% 0% 3% NA NA 1%
Source: Company, Ambit Capital research, MCA filings. Note: For Jaquar and Roca 4-yr and 3-yr sales CAGR
computed up to available data year.
In a weak demand environment, Cera and Jaquar have outpaced peers in terms of
sales growth. Brand consciousness and market leadership has translated into growth
in allied segments. We like Cera’s entry into faucetware since it is ~2.5x size of
sanitaryware (and growing faster than sanitaryware due to lower ticket size and
higher replacement cycle). Whilst Jaquar had monopolistic presence in faucetware,
we believe Cera can continue building momentum and quickly achieve no.2 spot in
this category. Its focus on product differentiation and after-sales service (Cera offers
15 year warranty vs 10 years for Jaquar) is a strong indication of its challenger status
to Jaquar.
Whilst Kajaria scores well on all other parameters, its growth has been sub-par to
Jaquar and Cera, primarily due to market leadership in tiles (and thus lesser room to
grow market share) and entry into smaller markets (sanitaryware/faucetware)
compared to its existing market of tiles.
Exhibit 41: …with healthy and stable margin profile…
EBIT margin FY13 FY14 FY15 FY16 FY17 FY18 FY19 Median
Cera 13.5% 12.5% 12.4% 13.4% 15.2% 12.7% 12.6% 12.7%
HSIL 9.4% 7.7% 10.5% 10.1% 8.5% 7.0% 6.1% 8.5%
Kajaria 12.7% 13.0% 13.6% 15.9% 16.3% 13.6% 12.2% 13.6%
Somany 6.2% 4.7% 5.2% 6.7% 11.7% 8.4% 6.9% 6.7%
Jaguar 5.6% 6.7% 12.8% 15.8% 13.1% 10.4% NA 11.6%
Roca Bathroom NA 9.9% 9.4% 10.3% 10.8% NA NA 10.1%

Cera Sanitaryware
Exhibit 42: …that translated into high RoCE, one of the best in the industry…
RoCE pre-tax FY13 FY14 FY15 FY16 FY17 FY18 FY19 Median
Cera 30% 31% 28% 26% 26% 22% 22% 26%
HSIL 8% 7% 10% 10% 8% 6% 6% 8%
Kajaria 31% 31% 31% 31% 28% 23% 21% 31%
Somany 21% 16% 19% 20% 23% 13% 10% 19%
Jaguar 18% 23% 37% 38% 29% 24% NA 27%
Exhibit 43: …and high return on equity

RoE FY13 FY14 FY15 FY16 FY17 FY18 FY19 Median
Cera 29% 26% 24% 22% 21% 19% 18% 22%
HSIL 8% 3% 7% 8% 7% 5% 5% 7%
Kajaria 33% 28% 28% 27% 24% 19% 15% 27%
Somany 23% 15% 19% 19% 21% 13% 8% 19%
Jaguar 19% 24% 25% 28% 22% 17% NA 23%
Whilst certain companies enjoy higher margins from focus on more premium “Since >50% of business is
categories within the same market segment (e.g. Kajaria has higher margins than outsourced, not right to look at
Somany due to greater exposure to GVT tiles), comparison on basis on operating EBITDA margin. Better to look at
margins alone is not a sufficient criterion. Tiles and sanitaryware are capital intensive RoE/RoCE, as outsourcing
businesses and all major players resort to outsourcing. The outsourcing mix (by increases, EBITDA margin will
product segments within each market category) leads to different asset turnover as actually decline.”
evinced in exhibit 28. Thus return on investment (RoCE/RoE) is a better measure for - Bharat Mody, 1QFY19 con-call
robustness of business model. Kajaria, Jaquar and Cera stand above their peers in
this regard. The ability to fund future growth is also illustrated by lower net
debt:equity compared to peers.
Exhibit 44: Cera has comfortable net debt to equity ratio
Net debt/equity FY13 FY14 FY15 FY16 FY17 FY18 FY19 Median
Cera 0.1 0.1 0.1 0.0 0.1 0.1 0.1 0.1
HSIL 0.8 0.9 0.4 0.3 0.4 0.6 0.7 0.6
Kajaria 0.7 0.4 0.3 0.2 0.1 0.0 -0.1 0.2
Somany 0.8 0.3 0.5 0.2 0.6 0.6 0.7 0.6
Jaguar 0.0 -0.1 -0.1 0.0 -0.1 0.0 NA 0.0
Roca Bathroom NA -0.2 -0.1 -0.2 -0.3 NA NA -0.2
Exhibit 45: Overall, Jaquar and Cera score top marks whilst Kajaria comes second
Financial
Company Product Architecture Growth Overall Comments
Strength
Jaquar Jaquar and Cera are clear leaders; whilst Jaquar has the benefit of
greater scale, Cera's entry into faucetware is likely to translate into
Cera stronger sales growth
Combined with scale and strong brand equity, Kajaria has the best
financial metrics. However, sales growth has been sub-par from
Kajaria concentration in tiles; its ability to grow fast may be constrained by the
fact that sanitaryware/faucetware are smaller markets than tiles;
leadership in plywood yet to be ascertained
HSIL diversification into unrelated categories such as packaging and
pipes may be hurting returns; in FY19 HSIL demerged its business into
HSIL manufacturing and retail, we believe the retail business would enjoy
higher returns on capital and may grow faster due to strong brand
equity
Demand slowdown has hurt Somany's growth and working capital
position; whilst brand extensions into sanitaryware/faucetware is
Somany
exciting, smaller market sizes compared to tiles makes us wary on
future growth prospects
Roca has not shown strong intent to grow outside its legacy
Roca Bathroom
businesses; sales growth may be muted
Source: Ambit Capital research, Company, Note:
kkavarana@40ridgecapital.com - Strong; - Relatively Strong; - Average; - Relatively weak

Cera Sanitaryware
Exhibit 46: Discussions with trade channel partners indicate a segmented market; Cera is playing to its strengths in the
mid-market segment
Stakeholder Comments
 We are wary of making credit sales to institutional buyers so we connect them directly to the company.
 Cera is conservative about extending credit to dealers, sales have been impacted but our collections are very healthy
compared to other dealers.
Cera dealer
 Cera has significantly improved its after-sales service in faucetware and claims service in 48 hours; it has been offering
longer warranty (15 years) for last 2-3 years to attract customers.
 Whilst prices of some products have been changed, no major price hike has been taken in the last 2 years.
 No sales are made from the style studio; we connect customers directly to dealers for sales.
 Cera's premium range Senator and luxury range ISVEA are imported from Turkey and Italy respectively; for similar design
specifications price difference of `5-6k due to difference in raw material quality and freight charges.
 Whilst other well-established faucetware brands have significant pull, cross-selling opportunity is significant when the
Cera Style Studio
customer has come only to look for sanitaryware products.
employee
 Cera has the entire range of tiles but is more focused on larger GVT tiles now; it recently launched its Grande Slab
collection.
 Do not display JEET products in the studio; these are completely outsourced and sales are made directly to institutional
buyers.
 Newer entrants such as Kajaria and Somany are pricing their product at discounts of 10-15% to established players.
 The market for imported premium and luxury sanitaryware is different; it's unlikely that any dealer would keep the entire
range of products.
 Kohler has been very aggressive in the market, both in terms of marketing and its range of products including value-for-
money category. Other international brands have more niche presence.
Multi-brand
dealer  In the mid-market segment, customers prefer whiter WCs, coloured or creamish white products are considered less
appealing.
 The market is moving towards rimless WCs and nano-technology that prevents bacterial growth; cost differential can be
up to Rs 8-10k compared to a rimmed WC.
 Preference for any brand in the institutional segment depends on type of building; in more luxurious construction foreign
brands are preferred; Cera and Hindware are most preferred brands in mid-market projects.
 Jaquar is perceived by customers as an international brand; sanitaryware sales are improving since customers want one-
Jaquar dealer
stop solutions
 There is significant discounting in tiles based on type and branding especially in the institutional segment.
Tiles dealer  Kajaria's tiles are technically superior because they are fired at higher temperatures but quality is not a deal breaker.
 Larger GVT tiles with new designs are preferred now; ability to offer better range is advantageous for tile companies.
Amongst listed building material companies, both domestic and global, Cera stands
out with strong sales growth and high return on capital employed. Compared to
industry leaders, Cera is much smaller in size and we believe this provides it the
opportunity to continue growing healthily for next two decades in terms of both
organic sales growth and expansion into allied product categories.

Cera Sanitaryware
Exhibit 47: Cera stands out in the industry in terms of growth and capital efficiency
5-year 5-year Net
M Cap Sales Post-tax Net debt:
Company sales EBIT EBIT (%) fixed asset
(USD mn) (USD mn) RoCE (%) equity (x)
CAGR CAGR turns (x)
Domestic Sanitaryware
Cera Sanitaryware Ltd 454 193 13% 14% 14% 12.6% 0.1 3.7
HSIL Ltd 47 382 8% 0% 4.5% 6.2% 0.8 1.3
Global sanitaryware
Villeroy & Boch AG 448 1,008 1% 3% 12.6% 5.9% 0.3 3.7
TOTO Ltd 7,687 5,287 1% NA 8.7% 6.9% 0.2 3
Geberit 19,961 3,105 5% 7% 20.0% 22.8% 0.9 3.7
Domestic tiles
Kajaria Ceramics Ltd 1,143 423 10% 10% 14.2% 12.2% 0.1 2.5
Somany Ceramics Ltd 132 244 7% 12% 7.2% 7.0% 0.7 2.4
Global tiles and flooring
Ras Al Khaimah Ceramics 402 756 -4% 3% 5.9% 11.2% 0.6 2.1
Mohawk Industries Inc 9,587 9,984 5% 4% 7.0% 11.0% 0.4 2
Saudi Ceramic Co 486 274 -5% NA -2.0% -15.6% 0.7 0.6
Domestic paints
Asian Paints Ltd 23,174 2,748 9% 13% 22.7% 16.1% 0.1 3.5
Berger Paints India Ltd 6,769 859 9% 15% 18.5% 12.4% 0.2 4.7
Domestic electricals
Havells India Ltd 5,833 1,432 17% 14% 19.6% 10.3% 0 6
Bajaj Electricals Ltd 465 950 10% 46% 10.3% 4.5% 1.5 18.8
Finolex Cables Ltd 771 440 6% NA 15.8% 13.9% 0 7.4
V-Guard Industries Ltd 1,369 371 11% 13% 20.3% 7.8% 0 11.3
Domestic adhesives
Pidilite Industries Ltd 9,380 1,006 11% 17% 22.4% 17.7% 0 6.1
Domestic pipes
Astral Poly Technik Ltd 2,409 359 19% 19% 16.3% 12.1% 0.1 2.8
Supreme Industries Ltd 2,010 796 8% 6% 21.1% 10.8% 0.1 3.5
Domestic plyboards
Century Plyboards India Ltd 540 326 11% 18% 11.7% 10.6% 0.5 2.6
Greenply Industries Ltd 277 202 -4% -14% 8.7% 8.9% 0.7 5.4
Global pipes and plastic
Berry Global Group Inc 6,160 8,878 13% 24% 6.7% 11.0% 7 1.9
China Lesso Group Holdings Ltd 3,309 3,591 12% 16% 11.7% 15.3% 0.8 2.5
Polypipe Group plc 1,300 578 7% 18% 10.3% 15.2% 0.6 3.4
Wienerberger AG 3,142 3,904 4% -216% 8.7% 7.3% 0.4 2
Source: Company, Ambit Capital research, Bloomberg

Cera Sanitaryware
Long runway beyond the hazy horizon

Despite tough macros (real estate slowdown, regulatory shocks including
demonetization, GST and the NBFC crisis), Cera delivered healthy 13%/14%
sales/EBITDA CAGR in FY15-19. As one of the fastest-growing building
material companies and increasing total addressable market (TAM), Cera is
better placed to take advantage of sectoral turnaround when it occurs. Cera’s
businesses offer immense scope for premiumization and growth in
faucetware and tiles is likely to piggyback on the strong brand developed
over the last 3 decades. Even as growth is likely to be tepid in the near term
(11% CAGR, FY19-23E), Cera can post 17% sales CAGR with strong RoIC
(25%+) over FY20-30E. Our 2-year DCF-based TP of `3616 implies 27x FY22E
P/E, which is inexpensive considering long growth runway.
Real estate has been in doldrums with multiple negative events
The real estate sector has been in doldrums for the last couple of years for multiple “The overall growth has been
reasons. Oversupply following the last real estate cycle, especially in tier 1 cities, led subdued, and this has been for last
to huge unsold inventory. Both sales and new launches have declined continuously almost about more than two years,
since 2014, implying that unsold inventory is still high for strong institutional demand the entire construction industry has
to kick in. been passing through. Whether I
mean, lot of changes coming in, in
Exhibit 48: Unsold inventory in top 8 cities has been declining but is still high
terms of the RERA Act also some of
compared to annual sales
the recessionary conditions, but lot
800,000 New Launches Sales Unsold Inventory of excess inventory of the finished
(no. of residential units)
goods in terms of the built-up

600,000 property, which are still lying
vacant, at the builders command.
400,000 Now, all put together, the general
growth of that we as a part of the
200,000 building material industry have
witnessed earlier prior to FY 2015
that growth has been slowed
-
down.”
1H2019
2013
2014
2015
2016
2017
2018
Source: Knight Frank, Ambit Capital research, Company. Note: Data is for top 8 cities in India.
On the regulatory front, events such as demonetization and GST brought much
uncertainty to the market. In light of the NBFC liquidity crunch starting Sep 2018,
improvements in regulations under RERA have been ineffective to revive the market.
AUM growth of housing finance companies (HFCs) has been negatively impacted,
including developer loans.
Exhibit 49: NBFC liquidity crisis weakened AUM growth for Exhibit 50: …which further impacted developers’ loan
HFCs in FY19… growth
24% 23% 12,000 35% 2,400
21% 29%
22% 30% 27% 2,200
20% 20%
20% 10,000 25% 2,000
18% 20% 1,800
8,000 14%
16% 15% 1,600
14% 12% 6,000 10% 1,400
12% 5% 1,200
10% 4,000 0% 1,000
FY15
FY16
FY17
FY18
FY19
FY17
FY18
FY19
AUM of HFCs (YoY change %) Developer loans (YoY change %)

AUM of HFCs (RHS) Developer loans (RHS)
Source: Company, Ambit Capital research. Note: AUM includes following Source: Company, Ambit Capital research. Note: develop loans includes
HFCs: HDFC, LICHF, DHFL, GRHF, PNBHF, REPCO and CANF. loans given by HDFC (developer + non-developer), LICHF, IHL, DHFL, PEL,
PNBHF. EDEL, L&T FS, JMF and IIFL. DHFL FY19 data represents 3QFY19 as
per availability.

Cera Sanitaryware
Whilst retail demand (~70% of Cera’s sales) in tier 2/3 cities has been more robust
compared to institutional sales in tier 1 cities, channel financing issues at dealer level
is proving to be challenge. Dealers are stretched for credit and many companies in
the building materials space have had to extend longer credit lines to incentivize
sales. Combined with an overall slowdown in rural consumption, sales growth of
building material companies has been seriously impacted.
What does history teach us? FY16-20 could be akin to FY96-99
We believe the current phase is akin to 1996-99, when demand for building
materials (paints) declined sharply but recovered after a couple of years post
correction in housing inventory (and thus prices), spurring demand for building
materials.
We understand that demonetization, GST and other regulatory challenges have
constrained channel financing. The pain was exacerbated post NBFC crisis as
financial institutions further pulled back on working capital financing, especially
related to the real estate sector. Commentary from leading building material
companies on channel problems is similar to that from FY96-99.
Exhibit 51: Asian Paints’ commentary in FY97 – Similar to challenges faced by dealers
and distribution channel now
The paints market was sluggish during the year. The poor availability of credit and its
high cost adversely affected dealer offtake. Protests by the trading community against
new levies and legislations in different parts of the company also affected sales.
Stick with the winner increasing its TAM

Building material players are facing growth challenges
Growth of building materials companies, which was quite strong until FY15, was reset
following overall slowdown in real estate and introduction of regulatory norms such
as demonetization and GST. Average quarterly growth rate for listed building
material companies fell from ~19% YoY over FY12-15 to ~7% YoY over FY15-
1HFY20.
Whilst pain has been felt across all segments, some pockets have been more resilient
to the overall slowdown than others. For example, sanitaryware industry (only listed
players considered) reported average quarterly growth of ~10% YoY vs ~1% for tiles.
Even as Kajaria, market leader in tiles, posted better growth (8% CAGR, FY15-19)
than industry, the slowdown in tiles indicates how sanitaryware industry as a whole
has been more resilient due to more oligopolistic nature and higher brand affinity.
Exhibit 52: Structural reset in growth of all building Exhibit 53: Sanitaryware growth has been more resilient
material companies post FY15 in the slowdown compared to tiles
40% 40%
Growth rate YoY
Growth rate YoY
30% 30%
20% 20%
10%
10%
0%
0%
-10%
2QFY12
4QFY12
2QFY13
4QFY13
2QFY14
4QFY14
2QFY15
4QFY15
2QFY16
4QFY16
2QFY17
4QFY17
2QFY18
4QFY18
2QFY19
4QFY19
2QFY20
2QFY12
4QFY12
2QFY13
4QFY13
2QFY14
4QFY14
2QFY15
4QFY15
2QFY16
4QFY16
2QFY17
4QFY17
2QFY18
4QFY18
2QFY19
4QFY19
2QFY20
Building materials (BM) BM ex-paints/adhesives Tiles Sanitaryware

Source: Ambit Capital research, Company. Note: For sectoral growth rates, Source: Ambit Capital research, Company. Note: For sectoral growth rates,
sales of listed firms in each category were considered. sales of listed firms in each category were considered.

Cera Sanitaryware
But Cera is likely to outpace peers on back of faucetware and tiles growth
As noted previously, Cera has successfully diversified its product mix from
sanitaryware to faucetware and tiles. Synergies imply that Cera could extend its
brand successfully into these categories. Since the markets are larger and Cera is still
a challenger compared to industry leaders, it has a long run-way for growth in these
segments.
Exhibit 54: Cera is likely to grow faster due to entry into larger categories of
faucetware and tiles (by market size) and where its market share is also low presently
Source: Ambit Capital research, Company. Note: The size of the bigger grey bubble is relative size of the
organized industry whilst the inner red bubble is share of Cera in the organized market. Relative sales growth
represents estimated growth for Cera in individual categories and not for industry as a whole.
Cera has continuously increased is total addressable market (TAM). By FY09, Cera
was already a sizeable player in sanitaryware with ~12% market share of organized
segment. Growth would have stalled without management vision to extend the Cera
brand beyond its original product market. As of FY19, organized markets of
faucetware (~`60bn) and tiles (~`110bn) are many times bigger than the
sanitaryware market. As per FY19 sales, we estimate Cera has ~5% and ~2% market
share of organized segment of faucetware and tiles respectively. Low market share
and significant unorganized presence in tiles (60%) and faucetware (50%) indicates
that brand conscious and value-for money players such as Cera have a long runway
of growth ahead. Cera outpaced peers over FY15-19 in sales growth; we expect this
trend to continue over the next 3 years due to expansion in faucetware and tiles.
Cera’s valuation premium is justified but multiplies are likely to trade lower
than mature BM categories
Exhibit 55: Cera’s P/E re-rated due to strong EPS growth; Exhibit 56: So also with P/B multiple, which has
post FY15 it has de-rated and remained range-bound normalized post FY15 to ~4x with 18% RoE
50 50% 10 60%
40 40% 8 48%
30 30% 6 36%
20 20% 4 24%
10 10% 2 12%
0 0% 0 0%
Mar-09
Mar-10
Mar-11
Mar-12
Mar-13
Mar-14
Mar-15
Mar-16
Mar-17
Mar-18
Mar-19
Mar-09
Mar-10
Mar-11
Mar-12
Mar-13
Mar-14
Mar-15
Mar-16
Mar-17
Mar-18
Mar-19
1yr fwd P/E 3 yr avg P/E 1 yr fwd PB 3 yr avg P/B

+1 SD -1 SD +1 SD -1 SD
EPS growth (RHS) BVPS growth (RHS)
Source: Ambit Capital research, Bloomberg Source: Ambit Capital research, Bloomberg

Cera Sanitaryware
Whilst Cera enjoys significant competitive advantages over peers, we believe Cera’s
multiples could continue to trade at a discount to those of more mature building
material companies (such as paints and light electricals) due to sector-specific
characteristics.
Larger categories such as paints and light electricals enjoy premiums from faster
replacement cycles whilst one-time large-ticket purchases in terms of
sanitaryware/tiles reduce repeatability of purchases. Thus customer mindshare is lost,
which implies Cera must continuously employ more aggressive push marketing
strategies whilst more mature building material companies enjoy stronger customer
pull.
Exhibit 57: Cera’s business segments are less attractive than other BM segments and it may not trade at similar multiples
to paints and electricals in the near term
Market size Share of Share of Replacement Ticket size Brand Competitive Overall sector
Segment
(` bn) organized IHBM cycle of purchase affinity intensity attractiveness
Paints 500 80% 31% +++ ++ +++ +++ +++
Electricals 400 65% 25% +++ +++ +++ +++ +++
Tiles 250 40% 16% + + + ++ +
Pipes 200 75% 10% + ++ ++ + ++
Plyboards 160 40% 10% + + + ++ +
Faucetware 80 60% 5% ++ +++ +++ ++ ++
Sanitaryware 40 75% 3% + ++ ++ + +
Source: Ambit Capital research, Company. Note: +: least attractive, ++: moderately attractive, +++: most attractive
Other characteristics such as sector size also have a bearing on competitive intensity
and dynamics. Sanitaryware is a much smaller category and increasing competition is
likely to erode ability for players to make abnormal returns. Whilst Cera has very
healthy RoCE, sanitaryware sales have recorded sub-par growth rates (7% CAGR over
FY15-19). Even as growth has been bolstered through faucetware and tiles (21%
sales CAGR over FY15-19), larger scale and ability to reinvest cashflows in less
competitive segments implies that paints/electrical companies are likely to continue
trading at a premium to Cera.
Exhibit 58: All building material segments recorded strong Exhibit 59: …but in the slowdown more mature segments
growth and healthy efficiency ratios over FY11-15… have been outliers in terms of both growth and efficiency
3.8 FY11-15 3.8

FY15-19
3.4 Paints
3.4
Electricals
CE turnover
3.0
CE turnover
3.0 Electricals
Sanitaryware 2.6 Pipes Paints
2.6
Pipes 2.2 Adhesives
2.2
Tiles 1.8
1.8 Adhesives Sanitaryware Tiles
1.4
1.4 8% 12% 16% 20% 24%
8% 10% 12% 14% 16%
EBIT margin
EBIT margin
Source: Ambit Capital research, Company. Note: size of the bubble denotes Source: Ambit Capital research, Company. Note: size of the bubble denotes
relative earnings growth over FY11-15. Median CE turnover and EBIT margin relative earnings growth over FY15-19 scaled to growth over FY11-15.
have been computed for leaders in each category over the period. Median CE turnover and EBIT margin have been computed for leaders in
each category over the period.

Cera Sanitaryware
Exhibit 60: Paints/adhesive/electrical companies have always traded at a premium to other BM segments; the divergence
has become more pronounced over the last 2 years
90
75
60
TTM PE
45
30
15
0
Mar-12
Mar-13
Mar-14
Mar-15
Mar-16
Mar-17
Mar-18
Mar-19
Sep-12
Sep-13
Sep-14
Sep-15
Sep-16
Sep-17
Sep-18
Sep-19
Berger Asian Paints Pidilite V-Guard Astral Kajaria Supreme Cera
Source: Ambit Capital research, Bloomberg
Exhibit 61: Similarly in terms of PB, these companies enjoy higher multiples compared to other building materials
segments such as sanitaryware or tiles
20
16
TTM PB
12
8
4
0
Mar-13
Mar-14
Mar-15
Mar-16
Mar-17
Mar-18
Mar-19
Sep-13
Sep-14
Sep-15
Sep-16
Sep-17
Sep-18
Sep-19
Berger Asian Paints Pidilite V-Guard Astral Kajaria Supreme Cera
2-year DCF-based valuation: `3616 (48% upside)

Exhibit 62: Cera’s growth is most likely to come from market share gains in faucetware and tiles
Current base (FY19) – Rs mn Expected Future scenario (FY30) – Rs mn
organized
Organized Cera's sales stats Cera's expected sales stats Cera's implied
Segment market sales Organized
market sales CAGR
Market CAGR market size Market
size (A) Sales (B) share (A/B) Sales mix (FY19-30) (X) share (Y)
Sales (X*Y) Sales mix
Sanitaryware 31,500 7,028 22% 55% 11% 99,280 23% 22,611 32% 11%
Faucetware 58,500 3,108 5% 24% 12% 203,495 11% 22,803 33% 20%
Tiles 110,000 2,703 2% 21% 10% 313,843 8% 24,450 35% 22%
Total sales 12,839 69,863 17%
Despite the real estate slowdown that is hurting growth prospects of building material Assumptions for WACC
companies, we believe Cera can continue to outpace industry growth. We Item Value
conservatively estimate 11% sales CAGR over FY19-23E before reversion to 21% over Cost of equity 14%
FY23-30E post revival in the economy and real estate sector. We believe our 17% Cost of debt 10%
sales CAGR estimate over FY19-30E is not aggressive. Whilst we have calculated
Debt/(debt+equity) 0%
incremental sales from market share gains, our industry growth assumption across
categories is not aggressive (~11% CAGR). With revival of real estate sector and Corporate tax rate 25%
further shift from unorganized to organized (that we have not explicitly modeled for), WACC 14%
there is significant upside potential to our sales growth estimates for Cera. Fade period (H-model) 10 years
Terminal growth rate
5%
(post FY30)
Source: Ambit Capital Research

Cera Sanitaryware
Additionally Cera has been known to enter new categories after every 4-5 years (as it
did in faucetware and tiles earlier). It is already seeding new product segments such
as water heaters and modular kitchens, fulfilling its long term ambition to become a
total-home solutions provider. Along with its existing wellness category, we believe
the share of such products could double to 8% of sales by FY30.
Exhibit 63: We expect tile and faucetware to grow faster than sanitaryware and the
mix to be almost equally divided between main segments by FY30E.
FY19 FY30E
3% 8%
21% 30%
32%
53%
24%
30%
Sanitaryware Faucetware Tiles Wellness

Sanitaryware Faucetware Tiles Wellness
As Cera’s scale increases over the next decade, we expect working capital turnover to
improve from 3.5x to 4.2x over FY19-FY30E, especially due to reduction in receivable
days. We also believe gross block turnover will improve (from 2.7x to 3.2x over FY19-
30E) from increased exposure to tiles and faucetware, both of which offer higher
asset turns than sanitaryware.
Our H-model DCF model implies 27x FY22 PE, which we believe is not aggressive for
a well-managed business that has a significant runway of growth with increasing total
addressable market and premiumization in its product categories.
Exhibit 64: RoIC is likely to revert to 25%+ over FY20-23E Exhibit 65: PAT growth likely to be subdued in FY20 but
bounce back over FY21-23E
EBIT margin(RHS) pre-tax RoIC 35% RoE PAT growth (RHS) 40%
40% 16%
30%
35% 30%
25%
14%
30% 20%
20%
15%
25%
12% 10% 10%
20%
5%
15% 10% 0% 0%
FY13
FY14
FY15
FY16
FY17
FY18
FY19
FY13
FY14
FY15
FY16
FY17
FY18
FY19
FY20E
FY21E
FY22E
FY23E
FY20E
FY21E
FY22E
FY23E
Source: Ambit Capital research Source: Ambit Capital research

Cera Sanitaryware
Exhibit 66: Cera is already free cash flow generating and Exhibit 67: …as capex/CFO declines and net debt/equity
we expect this trend to continue… becomes negative
CFO Free cash flow FCF (Rs. mn) Net debt/equity (RHS)
2500
Capex/CFO (RHS)
2000 1,500 2.5
1500 2.0
(` mn)
1,000
1000 1.5
500
500 1.0
0
0 0.5
(500) -500 0.0
(1000) -1,000 -0.5
FY13
FY14
FY15
FY16
FY17
FY18
FY19
FY20E
FY21E
FY22E
FY23E
FY13
FY14
FY15
FY16
FY17
FY18
FY19
FY20E
FY21E
FY22E
Source: Ambit Capital research FY23E Source: Ambit Capital research

Cera Sanitaryware
Exhibit 68: Key assumptions

FY18 FY19 FY20E FY21E FY22E Comments
Profit and Loss
Sales (` mn) 11,853 13,515 13,784 15,301 17,465
Sales growth 17.5% 14.0% 2.0% 11.0% 14.1%
Sanitaryware 6,638 7,163 7,235 7,741 8,361
-growth rate 10% 8% 1% 7% 8%
Faucetware 2,608 3,109 3,233 3,718 4,461 Expect 9% sales CAGR over FY19-22E following slowdown in
building materials sector; expect sales growth to revert to 17%
-growth rate 18% 19% 4% 15% 20% by FY23E
Tiles 2,371 2,703 2,771 3,186 3,824
-growth rate 47% 14% 3% 15% 20%
Wellness 237 541 546 655 819
-growth rate 18% 128% 1% 20% 25%
Expect gross margin to remain stable as Cera continues to
Gross margin 56.5% 55.2% 55.5% 55.5% 55.5%
outsource significant portion of its products
Employee cost (% of sales) 12.6% 12.2% 12.5% 12.5% 12.5% Expect employee cost to remain stable
General & admin expenses
4.2% 4.0% 4.0% 4.0% 3.8% Expect G&A expense to remain stable
(% of sales)
Power & fuel expenses
4.6% 4.2% 4.2% 4.2% 4.2% Expect power & fuel expense to remain stable
(% of sales)
A&P spends (% of sales) 3.8% 3.9% 4.0% 4.0% 4.0% Expect A&P expense to remain stable
Manufacturing expense
3.0% 2.9% 3.0% 3.0% 2.9% Expect manufacturing expense to remain stable
(% of sales)
Freight and forwarding
5.4% 5.6% 5.5% 5.5% 5.5% Expect freight costs to remain stable
expenses (% of sales)
Other expenditure (% of sales) 8.0% 7.7% 7.5% 7.5% 7.5% Expect other expenses to remain stable
EBITDA (` mn) 1,774 1,983 2,040 2,264 2,637 Expect 40bps improvement in EBITDAM by FY22E due to
EBITDA margin 15.0% 14.7% 14.8% 14.8% 15.1% business process improvements such as increased automation
Depreciation (` mn) 271 280 289 321 367

Expect 15% PAT CAGR over FY19-22E driven mostly through
PAT (` mn) 1,060 1,151 1,324 1,483 1,733
improvement in operating margins and reduced tax outgo
EPS 79.3 88.5 101.7 114.0 133.2
Balance Sheet
Capex (` mn) 576 567 245 304 583 Expect ~`500mn of capex each year
Debtors days 83 81 80 80 75
Inventories days 60 58 58 58 58 Expect WC cycle to improve slightly
Creditors days 67 67 67 67 67
Net debt/ equity -0.1 -0.1 -0.2 -0.3 -0.4 Expect Cera to be remain debt-free
Cash flow statement
Operating cash flow (` mn) 754 1,244 1,743 1,667 2,127 Free cash to increase with increasing CFO and fixed capex
Free cash flow (` mn) 39 440 1,286 1,020 1,077 needs
What is already factored in?

We do a reverse DCF on the current stock price to ascertain what the market has
already factored in. With similar assumptions as stated in the previous section and
EBIT margin 14% over FY20-30, current prices estimate 13% sales CAGR over FY20-
30 vs our estimate of 17% sales CAGR.
We believe Cera could surprise the markets on the upside. Even as sales are likely to
slow down in the next 3 years on the back of overall slump in the real estate sector,
Cera is likely to outpace industry growth. Additionally, as the real estate sector
recovers, Cera should easily grow >17% sales CAGR over FY24-30E.
Assuming no changes in capital efficiency, the heat-map below indicates the
sensitivity of our implied FY22E PE multiple (based on implied DCF calculation) to
changes in sales CAGR and normalized EBIT margin over FY20-30.

Cera Sanitaryware
Exhibit 69: On 1-year fwd P/E, Cera is trading one std. Exhibit 70: Our valuation estimate of 27x FY22E P/E is at
dev. below its 3-year average 48% upside to current implied multiple of 18x
1yr fwd P/E 3 yr avg P/E

50 +1 SD -1 SD
40
30
20
10
0
Aug-14
Aug-15
Aug-16
Aug-17
Aug-18
Apr-14
Apr-15
Dec-13
Apr-16
Dec-14
Apr-17
Dec-15
Apr-18
Dec-16
Apr-19
Dec-17
Dec-18
Relatively well-placed within the building materials space

Cera is well-placed in relation to other building materials segments both in terms of
sales growth and pre-tax RoIC (>25%). We expect Cera’s addressable market to
increase from greater sales offtake in faucetware and tiles over the next decade,
translating into 17% sales CAGR over FY20-30E. Cera is expected to trade at a
discount to more mature BM segments such as paints and electricals but difference in
multiples would narrow over the next decade from greater scale and multi-segment
presence that offers higher replacement demand (e.g. faucetware) and still greater
brand affinity.
Exhibit 71: Cera is well-placed amongst domestic and global peers in terms of relative valuations
Net fixed Post-
Revenue EBIT EV/EBITDA EBITDA
Mcap asset P/E (x) CAGR (FY19-21) RoE tax
growth growth (x) margin
turns (x) RoCE
(USD FY15- FY15-
FY19 FY20 FY21 FY20 FY21 Sales EBITDA EPS FY20 FY21 FY20 FY21 FY19
mn) 19 19
Domestic sanitaryware
Cera Sanitaryware Ltd 454 13% 14% 3.7 15.6 14.0 24.1 21.5 6% 7% 13% 15% 15% 17% 17% 15%
HSIL Ltd 47 8% 0% 1.3 3.6 3.2 3.6 2.7 14% 25% 41% 13% 13% 6% 8% 4%
Domestic tiles
Kajaria Ceramics Ltd 1,143 10% 10% 2.5 17 14.6 28.2 23.9 9% 9% 20% 15% 16% 17% 18% 14%
Somany Ceramics Ltd 132 7% 12% 2.4 8.2 7 16.3 11.2 7% 20% 37% 10% 10% 9% 12% 7%
Median 9% 11% 2.5 11.3 9.9 19.1 15.7 9% 17% 29% 14% 14% 13% 15% 11%
Global sanitaryware
Villeroy & Boch AG 448 1% 3% 3.7 5.7 5.5 10.5 10 4% 5% 8% 10% 10% DNA DNA DNA
TOTO Ltd 7,687 1% NA 3.0 12.2 10.8 27.4 24.6 2% 5% 1% 11% 12% 9% 9% 8%
Giberit 19,691 5% 7% 3.7 22 21 29 28 5% 5% 3% 29% 29% 33% 30% 18%
Median 1% 5% 3.7 11.3 9.9 19.1 15.7 9% 17% 29% 14% 14% 13% 15% 11%
Global tiles and flooring
Ras Al Khaimah Ceramics 402 -4% 3% 2.1 6.9 6.4 5.7 5.1 5% 9% 12% 17% 18% 9% 10% DNA
Mohawk Industries Inc 9,587 5% 4% 2.0 7.9 7.4 12.5 11.3 2% 6% 10% 16% 16% 9% 9% DNA
Saudi Ceramic Co 486 -5% NA 0.6 11.7 8.9 19.8 11.6 9% 30% DNA 19% 23% 7% 11% DNA
Median -4% 4% 2.0 7.9 7.4 12.5 11.3 4% 6% 9% 16% 16% 9% 10% 8%
Domestic paints
Asian Paints Ltd 23,174 9% 13% 3.5 38 32.4 56.5 48.3 13% 18% 22% 20% 21% 28% 29% 23%
Berger Paints India Ltd 6,769 9% 15% 4.7 43.1 37 66.2 56.7 13% 20% 29% 17% 17% 27% 27% 18%

Cera Sanitaryware
Net fixed Post-

Revenue EBIT EV/EBITDA EBITDA
Mcap asset P/E (x) CAGR (FY19-21) RoE tax
growth growth (x) margin
turns (x) RoCE
(USD FY15- FY15- FY15-
FY20 FY21 FY20 FY21 Sales EBITDA EPS FY20 FY21 FY20 FY21 FY19
mn) 19 19 19
Domestic electricals
Havells India Ltd 5,833 17% 14% 6 34 27.4 49.2 39.6 10% 9% 11% 11% 12% 19% 21% 20%
Bajaj Electricals Ltd 465 10% 46% 18.8 27.2 14.6 309.7 23 -6% -11% -16% 3% 6% 5% 13% 10%
Finolex Cables Ltd 771 6% NA 7.4 9.9 8.9 12 10.8 6% 5% 12% 14% 15% 16% 15% 16%
V-Guard Industries Ltd 1,369 11% 13% 11.3 31.5 27.4 15.9 36.6 13% 24% 26% 10% 10% 23% 23% 20%
Domestic adhesives
Pidilite Industries Ltd 9,380 11% 17% 6.1 40.6 35.4 54.9 47.4 10% 15% 23% 21% 22% 27% 27% 22%
Domestic pipes
Astral Poly Technik Ltd 2,409 9% 18% 2.6 35.6 29.8 56.8 45.3 19% 22% 34% 16% 16% 20% 21% 16%
Supreme Industries Ltd 2,010 9% -14% 5.4 17.8 15.1 29.4 24.8 9% 8% 14% 14% 14% 22% 23% 21%
Domestic plywood
Century Plyboards India
540 11% 18% 2.6 11.5 10.1 19.6 16.1 9% 14% 18% 15% 16% 18% 19% 12%
Ltd
Greenply Industries Ltd 277 -4% -14% 5.4 12.2 10.7 18.9 15.4 -1% 2% 25% 12% 12% 27% 26% 9%
Median 9% 15% 5.4 15 12.9 24.5 20.5 9% 11% 22% 14% 15% 21% 22% 14%
Source: Ambit Capital research, Bloomberg, Company

Cera Sanitaryware
Catalysts and Risks

Risks
 Competition from more aggressive brands: Despite very strong recall in the
mid-value segment, Cera lacks brand strength in more premium categories.
Although it is trying to fill the gap through its newly launched Senator sub-brand,
we believe it is unlikely to enjoy significant recall until it hives this off with its own
marketing and retail presence. This is unlikely to happen in the near term
however as Senator does not contribute meaningfully to total sales presently. The
market for premium sanitaryware is catered by imported brands including Kohler
which is expanding aggressively.
Even in the mid-market segment, Jaquar, Kajaria and Somany have made
inroads; their aggressive expansion and underpricing could pose a challenge to
Cera’s dominance if it is unable to innovate and bring competitive products to the
market.
 Inability to build strong brand and after-sales service in faucetware:
Faucetware category requires brand building and strong after-sales service. As
faucetware has lower replacement cycle than sanitaryware and tiles, customers
are wary of buying lesser known brands. Jaquar is the market leader in this
category in terms of both product offerings and pricing. In order to build
momentum, Cera has continuously built its after-sales team and is offering higher
warranty period (15 years vs 10 years for Jaquar). Nevertheless Cera is still
perceived primarily as a sanitaryware player; to achieve number two position in
faucetware Cera would require more brandex and capacity building measures.
 Inability to find the right outsourcing partners: Cera’s business model is built
on significant share of outsourcing for manufacturing, especially of lower
realizations product as well as premium products that are imported. Whilst Cera
has successfully managed any risks related to the same in the past through
technical collaborations, its ability to grow is contingent on finding similar
partners in the future. Change in industry structure or sudden increase in raw
materials is likely to hurt Cera’s growth prospects and profitability.
 Diversification into non-synergistic product categories, a risk if not
executed well: As growth in primary product categories has slowed for major
players, they diversified into other building materials and retail segments. The
most diversified operations are those of HSIL which along with its sanitaryware
and faucetware divisions is also into packaging products due to legacy issues.
More recently HSIL diversified into CVPC pipes along with consumer durable
segments and home furniture. Diversification may not translate into high growth
and high RoCE as demonstrated in the case of HSIL. We believe this could be due
to difference in trade channels across product categories and inability to extend
brand into non-synergistic product categories, where other established players
already have market leadership and pricing power. In order to unlock value, HSIL
demerged its operations horizontally in FY19 with parent HSIL focusing on
manufacturing (including packaging) and Somany Home Innovations (SHIL)
focusing on selling and distribution of retail products.
Besides brand extensions across tiles, sanitaryware and faucetware by major
players (as noted previously in this report), example of other diversifications
include Kajaria’s entry into plywood and Jaquar’s foray into LED lighting.
Whilst we believe Cera has significant room to grow in faucetware and tiles, from
relatively smaller market shares in these categories, any product category
expansions and sales growth without strong returns on capital are likely to
decrease shareholder value.

Cera Sanitaryware
Catalysts
 Increased market share in faucetware and tiles: Our hypothesis of industry
leading sales growth is cornered on increasing market share in faucetware and
tiles. We believe both these categories offer significant synergies with the primary
business of sanitaryware either in terms of similarity of trade channels, brand
loyalty or commonality of raw materials. As per our estimate Cera has 5% and
2% market share in organized segment of faucetware and tiles. Its ability to
increase share to 10% and 5% in those categories by FY25 would translate to
significant sales growth and thus rerating of stock from present levels.
 Improvement in realizations and increased offtake of ‘Senator’: Launch of
‘Senator’ sub-brand indicates Cera’s intention to cater to the premium segment
of the sanitaryware market. We believe this segment can have stand-alone retail
presence and branding once sufficient volumes have been built. Cera is likely to
weather the growth slowdown much better with increase in realizations through
increased offtake of more premium products in both sanitaryware and
faucetware.
 From bathroom-solutions to home-solutions; ability to leverage balance
sheet strength: Whilst Indian real-estate is going through a prolonged
slowdown that may well last over FY21/22, we believe Cera could instead seed
other product categories in-line with its long term vision to become a total home-
solutions company. Already Cera has extended its brands into water-heaters and
modular kitchen segments.
With liquid investments (Rs1.7bn+ as of 1HFY20; ~1/3 of Cera’s gross fixed
assets) and high free cash flow generation (~Rs0.5bn/year FY20 onwards), Cera
would not only be able to add capacities in existing categories with demand
revival in the real estate sector but may also acquire smaller regional brands in
related categories. We believe Cera also has the management capacity (due to its
home-grown mid-level leadership) to drive investments better than many of its
peers.
 Could Cera’s business be an attractive acquisition target? Cross-segmental
expansions seen over the last decade (e.g. Astral’s entry into adhesives and
Kajaria’s entry into plywood) indicate that larger BM companies are seeking to
broaden their product offerings in search for sales growth (as their market share
in primary segments begins to stabilize). Diversification can either be organic or
inorganic, but there have been a few instances of larger companies acquiring
smaller regional players. In the same vein, sanitaryware is a much smaller
segment compared to other BM categories (such as pipes, electricals and paints)
and product adjacencies might induce industry leaders to look at potential
acquisition targets. Whilst we believe Cera’s business is highly scalable on its
own, the possibility of acquisition cannot be ruled out.
Exhibit 72: Explanation of our accounting score
Segment Score Comments
Cera scores high on parameters related to contingent liabilities, change in auditors' remuneration, change in
Accounting GREEN depreciation rate and CWIP/gross block. Other parameters that Cera scores low in our HAWK framework are not a
cause for concern.
Predictability is low due to seasonal variation in sales and high correlation with real estate demand. Cera has usually
met its earnings guidance as expressed during conference calls and analyst meetings. Management has guided its
Predictability AMBER
long-term strategic direction of being total-home solutions provider and has successfully expanded its addressable
market in the past.
Limited coverage on this stock by other analysts. Earnings momentum has been positive due to sales growth, relatively
Earnings Momentum GREEN
stable margin profile and debt-free status.
Exhibit 73: Our revenue/EBITDA/PAT estimate for FY22E are 7%/13%/11% higher than consensus
Ambit Consensus Divergence
` mn
FY20E FY21E FY22E FY20E FY21E FY22E FY20E FY21E FY22E
Revenue 13,894 15,459 17,670 13,446 14,799 16,494 3% 4% 7%
EBITDA 2,040 2,264 2,637 1,842 2,077 2,344 11% 9% 13%
PAT 1,324 1,483 1,733 1,173 1,363 1,565 13% 9% 11%

Cera Sanitaryware
Ambit’s HAWK analysis

Exhibit 74: Cera’s forensic score Exhibit 75: Cera’s greatness score
Source: Ambit Capital research, Ambit ‘HAWK’ Source: Ambit Capital research, Ambit ‘HAWK’
Exhibit 76: Break-up of Cera’s forensic score Exhibit 77: Break-up of Cera’s greatness score
Exhibit 78: Evolution of forensic score Exhibit 79: Evolution of greatness

Cera Sanitaryware
Financials - Consolidated
Balance sheet
Year to March (` mn) FY17 FY18 FY19 FY20E FY21E FY22E
Shareholders' equity 65 65 65 65 65 65
Reserves & surpluses 5,156 5,991 6,944 8,003 9,115 10,328
Total networth 5,222 6,056 7,009 8,068 9,180 10,393
Minority interest 39 67 103 103 103 103
Borrowings 935 918 842 910 1,361 1,765
Other non-current liabilities 183 236 293 293 293 293
Deferred tax liability 409 391 436 436 436 436
Trade Payables 847 944 1,109 1,123 1,246 1,422
Other current liabilities 1,811 1,847 2,114 2,159 2,350 2,622
Total liabilities 9,446 10,459 11,908 13,092 14,969 17,036
Gross block 4,464 4,864 5,336 5,581 5,885 6,468
Net block 3,436 3,591 3,845 3,738 3,720 3,937
Capital work-in-progress 2 49 190 190 190 190
Intangible assets 13 7 14 14 14 14
Financial assets 393 421 458 458 458 458
Total non-current assets 3,844 4,068 4,507 4,400 4,383 4,600
Cash & equivalents 1,297 1,322 1,681 2,890 4,210 5,480
Debtors 2,208 2,680 2,984 3,021 3,354 3,589
Inventory 1,495 1,935 2,158 2,201 2,443 2,788
Current financial assets 102 132 184 184 184 184
Other current assets 500 320 395 395 395 395
Total current assets 5,602 6,389 7,401 8,691 10,586 12,435
Total assets 9,446 10,457 11,908 13,092 14,969 17,035
Income statement
Revenue 10,085 11,853 13,515 13,784 15,301 17,465
% growth 8.0% 17.5% 14.0% 2.0% 11.0% 14.1%
Gross profit 5,711 6,697 7,454 7,650 8,492 9,693
Gross margin 56.6% 56.5% 55.2% 55.5% 55.5% 55.5%
% growth 15.9% 17.3% 11.3% 2.6% 11.0% 14.1%
Power & fuel costs (as % of sales) 3.5% 4.6% 4.2% 4.2% 4.2% 4.2%
Selling & promotional costs (as % of
8.9% 9.5% 9.8% 10.0% 10.0% 10.0%
sales)
EBITDA (excl. OI) 1,756 1,774 1,983 2,040 2,264 2,637
EBITDA margin 17.4% 15.0% 14.7% 14.8% 14.8% 15.1%
% growth 24.3% 1.0% 11.8% 2.9% 11.0% 16.5%
Depreciation 222 271 280 289 321 367
EBIT 1,534 1,502 1,703 1,751 1,943 2,270
EBIT margin 15.2% 12.7% 12.6% 12.7% 12.7% 13.0%
Interest expenditure 98 98 85 91 122 159
Non-operating income 146 144 186 110 159 205
Adjusted PBT 1,582 1,548 1,803 1,770 1,979 2,317
PBT margin 15.7% 13.1% 13.3% 12.8% 12.9% 13.3%
Tax 580 488 652 446 497 584
Adjusted PAT/ Net profit 1,002 1,060 1,151 1,324 1,483 1,733
PAT margin 9.9% 8.9% 8.5% 9.6% 9.7% 9.9%
% growth 19.7% 5.8% 8.5% 15.0% 12.0% 16.9%
Extra Ordinary Items - - -
Reported PAT / Net profit 1,002 1,060 1,151 1,324 1,483 1,733
Reported Consolidated net profit 1,002 1,060 1,151 1,324 1,483 1,733

Cera Sanitaryware
Cash flow statement

PBT 1,582 1,549 1,803 1,770 1,979 2,317
Depreciation 222 271 280 289 321 367
Interest income (37) (17) (16) - - -
Interest expense 98 98 85 91 122 159
Changes in working capital (76) (686) (360) (67) (451) (404)
Taxes (512) (534) (567) (446) (497) (584)
Others (252) 80 94 106 191 273
Cash flow from operations 1,025 762 1,319 1,743 1,667 2,127
Capex (712) (576) (567) (245) (304) (583)
(Incr) / decr in investments (381) (130) (383) (697) (667) (851)
Interest/Dividend Received 37 237 10 - - -
Others 18 13 (193) - - -
Cash flow from investments (1,038) (456) (1,132) (942) (971) (1,434)
Net borrowings 171 (83) (56) 67 451 404
Issuance of equity 77 25 - - - -
Interest expense (98) (92) (74) (91) (122) (159)
Dividend paid (117) (156) (156) (265) (371) (520)
Others
Cash flow from financing 32 (307) (286) (288) (42) (274)
Net change in cash 2 5 (150) 512 654 418
Closing cash balance 211 222 67 579 1,233 1,651
Free cash flow 406 39 440 1,286 1,020 1,077
Ratio analysis
Year to March FY17 FY18 FY19 FY20E FY21E FY22E
EBITDA margin (%) - ex. OI 17.4% 15.0% 14.7% 14.8% 14.8% 15.1%
EBIT margin (%) - ex. OI 15.2% 12.7% 12.6% 12.7% 12.7% 13.0%
PBT margin (%) - ex.OI 14.2% 11.8% 12.0% 12.0% 11.9% 12.1%
Net profit margin (%) 9.9% 8.9% 8.5% 9.6% 9.7% 9.9%
Dividend payout ratio (%) 11.5% 15.1% 13.6% 20.0% 25.0% 30.0%
Net debt: equity (x) (0.0) (0.1) (0.1) (0.2) (0.3) (0.4)
Avg. working capital turnover (x) 3.7 3.6 3.5 3.4 3.5 3.7
Avg. gross block turnover (x) 2.7 2.5 2.7 2.5 2.6 2.7
Pre-tax CFO/EBITDA 87% 73% 91% 107% 96% 103%
Capex/post-tax CFO 70% 76% 46% 14% 18% 27%
Pre-tax RoCE (%) 26.2% 21.6% 21.8% 19.8% 19.1% 19.3%
RoE (%) 21.2% 18.8% 17.6% 17.6% 17.2% 17.7%
Valuation parameters
EPS (`) 78.2 79.3 88.5 101.7 114.0 133.2
Diluted EPS (`) 78.2 79.3 88.5 101.7 114.0 133.2
Book value per share (`) 401.3 465.5 538.7 620.1 705.6 798.9
Dividend per share (`) 9.0 12.0 12.0 20.3 28.5 40.0
P/E (x) 31.8 30.8 27.6 24.0 21.4 18.3
P/BV (x) 6.1 5.3 4.5 3.9 3.5 3.1
EV/EBIT (x) 20.9 21.5 18.9 18.1 16.2 13.9
EV/EBITDA (x) 18.3 18.2 16.2 15.6 13.9 12.0
Price/Sales (x) 3.2 2.7 2.4 2.3 2.1 1.8

Cera Sanitaryware
Exhibit 80: Quarterly snapshot

Rs mn 4QFY18 FY18 1QFY19 2QFY18 3QFY19 4QFY19 FY19 1QFY20 2QFY20 3QFY20
Revenue 3,609 11,853 2,818 3,324 3,203 4,156 13,515 2,712 3,294 3,252
YoY growth 16.0% 17.5% 20.1% 12.4% 10.1% 15.2% 14.0% -3.8% -0.9% 1.5%
Gross profit 1,871 6,697 1,638 1,845 1,794 2,175 7,454 1,566 1,804 1,711
Gross profit margin (%) 51.8% 56.5% 58.1% 55.5% 56.0% 52.3% 55.2% 57.8% 54.8% 52.6%
Employee expense 380 1,493 398 406 407 397 1,655 411 421 424
-as % of sales 11% 13% 14% 12% 13% 10% 12% 15% 13% 13%
Other expenses 981 3,430 866 961 921 1,116 3,817 803 952 837
-as % of sales 27% 29% 31% 29% 29% 27% 28% 30% 29% 26%
Operating Expenses 1,361 4,923 1,264 1,367 1,328 1,513 5,471 1,214 1,373 1,262
EBITDA 510 1,774 373 478 466 662 1,983 353 431 449
EBITDA margin (%) 14.1% 15.0% 13.2% 14.4% 14.6% 15.9% 14.7% 13.0% 13.1% 13.8%
YoY growth -1.4% 1.0% 12.7% 3.7% 14.8% 29.9% 11.8% -5.5% -10.0% -3.8%
Depreciation 66 271 62 69 69 80 280 91 95 96
EBIT 444 1,502 311 409 398 582 1,703 261 335 353
EBIT margin (%) 12.3% 12.7% 11.0% 12.3% 12.4% 14.0% 12.6% 9.6% 10.2% 10.8%
Interest expense 19 98 18 18 19 31 85 25 24 25
Other income 47 144 23 46 49 69 186 33 47 50
PBT 471 1,548 316 438 428 621 1,803 269 358 378
PBT margin (%) 13.1% 13.1% 11.2% 13.2% 13.3% 14.9% 13.3% 9.9% 10.9% 11.6%
Tax Expenses 165 488 112 149 156 234 652 97 63 96
PAT 306 1,060 204 289 272 387 1,151 172 293 283
PAT margin (%) 8.5% 8.9% 7.2% 8.7% 8.5% 9.3% 8.5% 6.3% 8.9% 8.7%
YoY growth -5.2% 6.0% 5.6% 5.9% 17.7% 26.3% 8.7% -15.8% 1.4% 4.1%

Cera Sanitaryware
Other monitorables w.r.t stock

Exhibit 81: Promoter shareholding has been stable over Exhibit 82: No major insider transactions observed in the last
the years one year
Promoter shareholding (%)

60.0%
55.0%
50.0%
45.0%
40.0%
35.0%
30.0%
FY15
FY16
FY17
FY18
FY19
9MFY20
Source: Ambit Capital research, Company, BSE filings Source: Ambit Capital research, Bloomberg
Exhibit 83: Cera’s total delivery percent has averaged Exhibit 84: …while stock liquidity has been quite low (6M
~60% over last one year… ADV of US$ 0.2mn)
Delivery percent (RHS) Price Volume ('000 shares, RHS) Value (Rsmn)
250 80
3,500 100
70
3,000 200
80 60
Fig in `
`mn
2,500 150 50
60 40
2,000 100 30
40
1,500 20
50
1,000 20 10
0 0
500 0
Aug-18
May-18
Jun-18
Oct-18
Nov-18
Mar-18
Sep-18
Feb-18
Apr-18
Jan-18
Jul-18
Dec-18
Jan-19
Aug-18
May-18
Jun-18
Oct-18
Nov-18
Mar-18
Sep-18
Feb-18
Apr-18
Jan-18
Jul-18
Dec-18
Jan-19

Exhibit 85: No major observations on watch-out investors
Source: www.watchoutinvestors.com, Ambit Capital research

Cera Sanitaryware
Institutional Equities Team

Research Analysts
Name Industry Sectors Desk-Phone E-mail
Nitin Bhasin - Head of Research E&C / Infra / Cement / Home Building / Aviation (022) 66233241 nitin.bhasin@ambit.co
Ajit Kumar, CFA, FRM Banking / Financial Services (022) 66233252 ajit.kumar@ambit.co
Amandeep Singh Grover Mid-Caps / Hotels / Real Estate (022) 66233082 amandeep.grover@ambit.co
Ashish Kanodia, CFA Consumer Discretionary (022) 66233264 ashish.kanodia@ambit.co
Ashwin Mehta, CFA Technology (022) 6623 3295 ashwin.mehta@ambit.co
Basudeb Banerjee Automobiles / Auto Ancillaries (022) 66233141 basudeb.banerjee@ambit.co
Darshan Mehta E&C / Infrastructure / Aviation (022) 66233174 darshan.mehta@ambit.co
Deep Shah Media / Telecom / Oil & Gas (022) 66233064 deep.shah@ambit.co
Dhruv Jain Mid-Caps (022) 66233177 dhruv.jain@ambit.co
Karan Khanna, CFA Mid-Caps / Hotels / Real Estate (022) 66233251 karan.khanna@ambit.co
Karan Kokane Automobiles / Auto Ancillaries (022) 66233028 karan.kokane@ambit.co
Kushagra Bhattar Healthcare (022) 66233062 kushagra.bhattar@ambit.co
Nikhil Mathur, CFA Healthcare (022) 66233220 nikhil.mathur@ambit.co
Pankaj Agarwal, CFA Banking / Financial Services (022) 66233206 pankaj.agarwal@ambit.co
Prateek Maheshwari Cement (022) 66233234 prateek.maheshwari@ambit.co
Ritesh Gupta, CFA Consumer Discretionary / Agri & Chemicals (022) 66233242 ritesh.gupta@ambit.co
Satyadeep Jain, CFA Metals & Mining (022) 66233246 satyadeep.jain@ambit.co
Shreya Khandelwal Banking / Financial Services (022) 6623 3292 shreya.khandelwal@ambit.co
Sumit Shekhar Economy / Strategy (022) 66233229 sumit.shekhar@ambit.co
Udit Kariwala, CFA Banking / Financial Services (022) 66233197 udit.kariwala@ambit.co
Varun Ginodia, CFA E&C / Infrastructure / Aviation (022) 66233174 varun.ginodia@ambit.co
Vinit Powle Strategy / Forensic Accounting (022) 66233149 vinit.powle@ambit.co
Vivekanand Subbaraman, CFA Media / Telecom / Oil & Gas (022) 66233261 vivekanand.s@ambit.co
Sales
Name Regions Desk-Phone E-mail
Dhiraj Agarwal - MD & Head of Sales India (022) 66233253 dhiraj.agarwal@ambit.co
Bhavin Shah India (022) 66233186 bhavin.shah@ambit.co
Dharmen Shah India / Asia (022) 66233289 dharmen.shah@ambit.co
Abhishek Raichura UK & Europe (022) 66233287 abhishek.raichura@ambit.co
Pranav Verma Asia (022) 66233214 pranav.verma@ambit.co
USA / Canada
Hitakshi Mehra Americas +1(646) 793 6751 hitakshi.mehra@ambitamerica.co
Achint Bhagat, CFA Americas +1(646) 793 6752 achint.bhagat@ambitamerica.co
Singapore
Srinivas Radhakrishnan Singapore +65 6536 0481 srinivas.radhakrishnan@ambit.co
Sundeep Parate Singapore +65 6536 1918 sundeep.parate@ambit.co
Production
Sajid Merchant Production (022) 66233247 sajid.merchant@ambit.co
Sharoz G Hussain Production (022) 66233183 sharoz.hussain@ambit.co
Jestin George Editor (022) 66233272 jestin.george@ambit.co
Richard Mugutmal Editor (022) 66233273 richard.mugutmal@ambit.co
Nikhil Pillai Database (022) 66233265 nikhil.pillai@ambit.co
Babyson John Database (022) 66233209 babyson.john@ambit.co

Cera Sanitaryware
Cera Sanitaryware Ltd (CRS IN, BUY)
4,100
3,600
3,100
2,600
2,100
1,600
1,100
600
100
Aug-18
Aug-19
Aug-17
Jun-17
Jun-18
Jun-19
Oct-19
Oct-17
Oct-18
Feb-17
Feb-18
Feb-19
Feb-20
Apr-17
Apr-18
Apr-19
Dec-19
Dec-17
Dec-18
Cera Sanitaryware Ltd
Source: Bloomberg, Ambit Capital research

Cera Sanitaryware
Explanation of Investment Rating

Investment Rating Expected return (over 12-month)
BUY >10%
SELL <10%
NO STANCE We have forward looking estimates for the stock but we refrain from assigning valuation and recommendation
UNDER REVIEW We will revisit our recommendation, valuation and estimates on the stock following recent events
NOT RATED We do not have any forward looking estimates, valuation or recommendation for the stock
POSITIVE We have a positive view on the sector and most of stocks under our coverage in the sector are BUYs
NEGATIVE We have a negative view on the sector and most of stocks under our coverage in the sector are SELLs
* In case the recommendation given by the Research Analyst becomes inconsistent with the rating legend, the Research Analyst shall within 28 days of the inconsistency, take appropriate measures (like
change in stance/estimates) to make the recommendation consistent with the rating legend.
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Cera Sanitaryware
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Cera Sanitaryware

Focused on the inner scorecard Building Materials

Sales growth + premiumization + stable RoIC => BUY and hold

Snapshot of Company Financials

Balance Sheet Cash flow

FY15 FY17 FY19

February 27, 2020 Ambit Capital Pvt. Ltd. Page 2

During real-estate bull run: During real-estate slowdown: Y1 Y2

Source: Ambit Capital research, Company Source: Ambit Capital research

February 27, 2020 Ambit Capital Pvt. Ltd. Page 3

Exhibit 1: Porter’s five force analysis of Cera’s market categories

Bargaining power of suppliers Bargaining power of buyers

Barriers to entry Threat of substitution

Improving Unchanged Deteriorating

Source: Ambit Capital research

February 27, 2020 Ambit Capital Pvt. Ltd. Page 4

Exhibit 2: SWOT analysis

February 27, 2020 Ambit Capital Pvt. Ltd. Page 5

From sanitaryware to complete bathroom

During real-estate bull run: During real-estate slowdown: Y1 Y2

Building scale in sanitaryware (1980-2009)

February 27, 2020 Ambit Capital Pvt. Ltd. Page 6

Market gains through product differentiation and branding

Leader emerges in bathroom solutions (2010-15)

Sales EBITDA EBITDA margin (RHS) CE turnover EBIT margin (RHS)

8000 2.2 30%

4000 1.6 20%

0 10% 1.0 10%

Sanitaryware – From challenger to leadership

February 27, 2020 Ambit Capital Pvt. Ltd. Page 7

Exhibit 6: Cera has opportunistically expanded capacity in sanitaryware and

Faucetware and tiles – Brand extension into synergistic markets

February 27, 2020 Ambit Capital Pvt. Ltd. Page 8

Proven resilience amid weak demand (2016-)

Source: Ambit Capital research, Company

Source: Company, Ambit Capital research

February 27, 2020 Ambit Capital Pvt. Ltd. Page 9

Business process improvements and seeding new markets

100 Inventory days Receivable days

Source: Company, Ambit Capital research

February 27, 2020 Ambit Capital Pvt. Ltd. Page 10

February 27, 2020 Ambit Capital Pvt. Ltd. Page 11

Strong foundations help weather storms

Weighing on the IBAS framework

30 R&D expenses - as % of sales (RHS) 0.4%

Source: Ambit Capital research, Company

February 27, 2020 Ambit Capital Pvt. Ltd. Page 12

A&P spends Sales commissions

Source: Company, Ambit Capital research

“We try to optimize production.

February 27, 2020 Ambit Capital Pvt. Ltd. Page 13

30% world class bands at good prices.”

February 27, 2020 Ambit Capital Pvt. Ltd. Page 14

Source: Ambit Capital research, Company

February 27, 2020 Ambit Capital Pvt. Ltd. Page 15

Sources of funds FY09-19 Net change Application of funds FY09-19

Synergistic product categories provide opportunity to

February 27, 2020 Ambit Capital Pvt. Ltd. Page 16

30000 FY15 FY19

Next stop – Total home solutions?

February 27, 2020 Ambit Capital Pvt. Ltd. Page 17

Cera scores well amongst peers in building materials

Exhibit 28: …that leads to lower fixed capital investment…