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					Cera Sanitaryware Ltd (CERA)

      Q3FY12 Result Update                            CMP: Rs. 205.05                                                February 07, 2011
          HDFCSec
           Scrip ID                            Industry                                   CMP                  Recommended Action
                                                                                                         Exit between Rs. 207 and Rs. 221
       CERSANEQNR                       Bathroom Furnishings                             205.05         Buy on dips between RS.165 to 179
                            th
In our report dated July 26 , 2011, we had recommended buying the stock at the then market price of Rs. 222.80 and
                                                                                                        th
averaging on dips to the Rs. 193-207 band for a target of Rs. 248. The stock hit a high of Rs. 243 on 26 July 2011 and hit a
                    th
low of Rs. 158 on 20 December 2011. The stock is currently trading at Rs. 205.05.

Cera Sanitaryware Ltd (CERA) recently declared its Q3FY12 results and reported net sales of Rs. 82.5 cr up 38.0% Y-o-Y and 12.5%
Q-o-Q. The company reported an Operating profit of Rs. 15.3 cr in Q3FY12 vis-à-vis profits of Rs. 13.1 cr in Q3FY11 and Rs. 14.0 cr in
Q2FY12. At the net level the company reported a profit of Rs. 7.9 cr vis-à-vis profits of Rs. 7.2 cr in Q3FY11 and Rs. 7.7 cr in Q2FY12.

Sales grew better than our expectation and in fact could outperform our original estimate for the year. Operating and Net Profit margins
are below our expectations however, absolute value of Operating and Net Profits remains in line with our estimates due to the higher
sales. Lower margins can be attributed to higher proportion of traded goods YoY and QoQ. Interest expense was significantly higher
than that in Q3FY11 and Q2FY12 while depreciation was flat QoQ but up YoY. However increased interest and depreciation were in
line with our estimates as these expenses were expected to increase due to the new faucet plant and the ongoing increase in capacity.

Quarterly Financials
Particulars (Rs. Cr)                              Q3FY12        Q3FY11        %YoY           Q2FY12        % QoQ      Q1FY12       Q4FY11
Net Sales                                           82.5          59.8        38.0%            73.3         12.5%       64.6         75.5
Other Income                                         1.6           0.8        102.6%            2.3        -30.0%        0.9          2.5
Total Income                                        84.1          60.6        38.8%            75.6         11.2%       65.6         77.9
Operating Expense                                   68.8          47.5        45.0%            61.6         11.7%       52.5         63.1
Operating Profit                                    15.3          13.1         16.6%           14.0          9.0%       13.1         14.8
OPM (%)                                            16.6%         20.6%                        16.0%                    18.8%        16.4%
Interest                                             1.1           0.8            47.6%         0.8        37.3%         0.7          0.7
Depreciation                                         1.9           1.5            24.1%         1.9         0.0%         1.9          1.9
PBT                                                 12.3          10.8            13.3%        11.3         8.5%        10.5         12.3
Tax                                                  4.3           3.6            20.5%         3.7        18.2%         3.6          4.1
PAT                                                  7.9           7.2             9.8%         7.7         3.8%         6.9          8.2
NPM (%)                                             9.6%         12.1%                        10.4%                    10.7%        10.9%
EPS                                                  6.3            5.7           9.8%            6.0       3.8%         5.5          6.5
P/E                                                  8.2            9.0                           8.5                    9.4          7.9
                                                                                                                    (Source: HDFC Sec, Company)


Some of the key highlights of the quarter are as follows:
•     CERA reported an increase in sales – 38.0% YoY and 12.5% QoQ. Increase in sales could be attributed to higher traded
      purchases, high utilization levels, additional sales from the faucet plant and strong marketing efforts.

•     Operating margins were down 400 bps YoY but up 60 bps QoQ due to higher operating expenses. Raw material cost was not too
      high however trading activity increased YoY and QoQ.

Particulars (Rs. Cr)                                       Q3FY12         Q3FY11           %YoY         Q2FY12      % QoQ           FY11
Raw Material costs                                           8.7            4.1           112.8%          8.8       -0.5%            21.8
% of sales                                                   10.6           6.8                          12.0                        9.0
Stock Adjustment                                            -10.7          -5.7           88.6%          -7.1       51.8%           -10.4
% of sales                                                  -13.0          -9.5                          -9.6                       -4.3
Purchase of Traded Goods                                     34.4          22.6           52.2%          26.1       31.7%           75.1
% of sales                                                   41.8          37.8                          35.7                       30.9
Staff Cost                                                   10.7           7.7           39.0%          10.2       4.8%            32.3
% of sales                                                   13.0          12.9                          13.9                       13.3
Power & fuel                                                 4.4            3.6           21.6%           3.8       17.9%           12.3

Retail Research                                                                                                                             1
% of sales                                                 5.4            6.1                        5.1                           5.1
Freight & Forwarding                                       0.0            0.0            -           0.0             -             13.3
% of sales                                                 0.0            0.0                        0.0                           5.5
Brokerage, Commission & Discount                           0.0            0.0            -           0.0             -             13.2
% of sales                                                 0.0            0.0                        0.0                           5.4
Operating & Other expenses                                 21.3          15.1         40.9%         19.8           7.5%            39.7
% of sales                                                 25.8          25.3                       27.0                           16.4
                                                                                                  (Source: Company Reports, HDFC Sec Research)

•   Net Margins were down 250 bps YoY and 80 bps QoQ. The increase in interest and depreciation expense was expected as the
    company is in the process of increasing its capacity from 2.2 million pieces per annum to 2.7 million pieces per annum at an
    approximate cost of Rs. 60 cr. The expansion is nearing completion and the added capacities are expected to go on stream early
    in FY13. Moreover, the company also has a functional faucet plant since January 2011 with a capacity of 2500 pieces/day. The
    sanitaryware capacity is being fully utilized while the faucet utilization is being ramped up gradually. The drop in net margins YoY
    and QoQ can be attributed to an increase in interest expense and an increase in the tax rate.

•   The sanitaryware industry continues its double-digit growth despite a slowdown in real estate growth due to the poor global
    financial condition. The industry is expect to grow at ~12-15% per year with a resurgence of the real estate activities in the country.
    ~93% of the country’s demand is new demand while only ~7% demand is replacement demand. CERA has a market share of
    ~20% in the Indian sanitaryware industry.

•   Capacity utilization and realization was up in FY11 indicating strong demand for CERA’s products. Good growth in the quarter
    indicates good volume and value growth as well. The company continues maintaining good relations with architects and
    retailers/dealers, helping its sales.

•   FII’s increased their stake in the company by 0.5% to 3.6% in Q2FY12 and marginally increased their stake in Q3FY12 as well.

•   H2 is historically a better quarter for the industry and for CERA as construction activities get back on stream after the monsoon.
    Looking at the healthy growth reported by the company only in H1 as well as that in Q3FY12, one can only expect the year to end
    on a good note.

•   Cera Sanitaryware Ltd is in parleys with several firms to acquire a brand and a facility in Italy with a view to cater to the high-end
    sanitaryware segment in India.

•   Cera plans to increase its faucet plant capacity to 5000 pieces/day from the current 2500 pieces/day capacity at an estimated cost
    of Rs. 40-50 cr. The company intends to spend ~Rs. 140 cr on total capacity expansion (including presently ongoing expansion of
    the sanitaryware division and expansion of the faucet plant) in the next two years.

•   Cera’s Snow White won the award for product of the year for innovation in the sanitaryware segment for 2011 by Nielson.

Concerns
•   Interest expense increased 47.6% YoY and 37.3% QoQ due to higher loans in FY12 (loans at the end of H1FY12 were at Rs. 33.3
    cr vs Rs. 37.9 cr in Mar 2011 and Rs. 28.7 cr in Sept 2010). However, an increase in loans could be an increase in working capital
    loans due to additional activity. For H1FY12, the increase in inventory (Rs. 59.2 in Sept 2011 cr vs Rs. 50.0 cr in Mar 2011 amd
    Rs. 40.0 cr in Sept 2010), loans and advance (Rs. 41.6 cr in Sept 2011 vs Rs. 20.5 cr in Mar 2011 and Rs. 13.0 cr in Sept 2010)
    and liabilities and provisions (Rs. 89.0 cr in Sept 2011 vs Rs. 75.4 cr in Mar 2011 and Rs. 57.4 cr in Sept 2010), all indicate an
    increase in current assets.

•   Competition remains high from organized and unorganized players. The organized market accounts for only ~60-65% of the
    industry. Imitation products by the unorganized market remain a threat. Within the organized market, HSIL and Parry, being the 2
    largest players, pose a significant threat to CERA. Both HSIL and Parry have ~40% market share of the organized market while
    CERA has only ~20%.

•   The real estate industry of India has slowed down in the past two quarters, partly due to a prolonged monsoon and partly due to a
    financial crunch. With rising interest rates, real estate sales have been hit and hence construction has slowed down. While this
    slowdown is not reflected in CERA’s sales we cannot rule out the possibility of such a situation.

•   CERA is a net importer with majority imports from China. The Dollar has appreciated a lot vs the Rupee over the past two quarters
    and CERA could have experienced some forex loss. However, the extent of the loss is unknown but “other expenses” have
    increased in the quarter (40.9% YoY and 7.5% QoQ) as well as in 9MFY12, which could be partly due to a forex loss. However, the
    rupee has regained its strength. Any repeated appreciation of the USD will lead to larger forex losses.


Retail Research                                                                                                                           2
•     The company operates in an industry that is seasonal in nature. H1 is usually slower than H2 due to a slowdown in construction
      activity. That being said, H1 was still good for CERA H2 has taken off on a good note, which only makes us optimistic about the
      remainder of the year.

•     Loans and advances doubled in H1FY12 over FY11 to Rs. 41.6 cr. This indicates temporary deployment of surplus funds.

•     An increase in estimated cost of expansion could expose the company to further loans and higher interest obligations.

Conclusion
CERA’s business performance in Q3FY12 was in line with our expectations especially at the operating and net levels and above our
expectations at the sales level. An improvement in the standard of living and an increase in disposable income will lead to demand for
higher end products, which are more profitable. The industry is expected to continue its double-digit growth and CERA is expected to
outperform the industry as it ramps up its capacity. Capacity is expected to increase from 2.0 mn units per year to 2.7 million units per
year over the next two years. Moreover, an increase in utilization of the faucet plant will add to the top line.

Raw material prices, forex risk and high competition are the biggest concerns for the company. An increase in loans YoY (after which
the company still has a strong balance sheet with a debt/equity of 0.3), seasonality of the industry and a slowdown in the economy
(especially the real estate sector) are some other concerns. However, the seasonal nature of the industry indicates better times ahead
for the next quarter.

We maintain our FY12 and FY13 estimates with a possible overachievement in the top line but similar levels of profit due to a slight
drop in margins. However, it appears that the market has underrated the stock despite the company’s strong performance. While the
company’s performance remains good and profits are in line with our expectations, the earnings multiple that we had expected earlier
might not be met. This may be due to the fact that the sequential growth in profits is not in line with that of the sales, trading activity has
shot up sharply in Q3FY12 compared to Q2FY12 and Q3FY11, benefits of expansion are not yet fully visible etc. The stock can be
valued at 7.5-8x FY13E EPS.

Hence existing investors can exit the stock in the Rs. 207 to Rs. 221 band. However we continue to be encouraged by the medium term
performance/prospects and feel that CERA seems to be a good buy at 6-6.5x FY13E EPS i.e. in the Rs. 165 to Rs. 179 band for the
target mentioned earlier (i.e. 7.5-8x FY13E EPS).

Financials
Annual Profit & Loss Account
Particulars (Rs. Cr)                            FY07         FY08       FY09        FY10        FY11        %YoY       FY12 (E)     FY13 (E)
Net Sales                                       106.7       128.1       159.5       191.4       243.0        27.0%       278.4        331.3
Other Income                                     0.9         2.4         1.9         2.5         5.1        105.4%        4.0          5.0
Total Income                                    107.6       130.4       161.4       193.8       248.0       28.0%        282.4        336.3
Operating Expense                                87.8       106.8       130.0       155.3       197.2       27.0%        225.7        270.0
% of sales                                      82.3%       83.4%       81.5%      81.2%        81.2%                    81.1%       81.5%
Operating Profit                                 19.8        23.7        31.4       38.5         50.8       31.8%         56.7        66.3
OPM %                                           17.7%       16.6%       18.5%      18.8%        18.8%                    18.9%       18.5%
Interest                                         2.3         3.2         4.0        2.5          2.7         7.6%         3.0         4.1
Depreciation                                      3.5         4.9         5.9        6.1          6.5        7.0%          7.9          9.8
PBT                                              14.0        15.5        21.5       29.9         41.5       38.9%         45.8         52.4
Exceptional Items                                 0.0         0.0        -1.6        0.0         0.0                      0.0          0.0
Net Tax                                           4.9         5.5        6.8        10.3         15.0       45.6%         15.2         17.5
Effective Tax Rate %                            35.2%       35.3%       31.6%      34.4%        36.1%                    33.2%       33.4%
PAT                                               9.1        10.1        13.1       19.6         26.5       35.3%         30.6         34.9
NPM %                                            8.5%        7.8%       8.2%       10.2%        10.9%                    11.0%       10.5%
EPS                                               7.2         7.9       10.3        15.5         21.0       35.3%         24.1        27.6
P/E                                              28.6        25.8        19.8       13.2         9.8                      8.5          7.4
                                                                                                             (Source: HDFC Sec, Company Reports)

Balance Sheet
Particulars (Rs. Cr)                               FY07      FY08       FY09      FY10      FY11 (E)     FY11 (A)     FY12 (E)      FY13 (E)
SOURCES OF FUNDS
Shareholders' Funds:
 Capital                                            3.6        3.5       3.1        3.1        6.3          6.3          6.3           6.3
Retail Research                                                                                                                               3
 Reserves & Surplus                                    44.1        55.3       67.5       85.4        108.2          105.2         132.1         163.3
                                                       47.7        58.8       70.6       88.5        114.6          111.6         138.4         169.6

Loan Funds:
 Secured Loans                                         24.4        31.6       33.7       25.6         29.0          37.6          32.0          34.2
 Unsecured Loans                                        5.1         7.5        1.9        1.6         2.0           0.2           2.5           6.0
                                                       29.5        39.1       35.6       27.2         31.0          37.9          34.5          40.2

Net Deferred Tax                                        9.1        12.3       13.7       13.2         13.7          13.9          14.8          16.0

Total                                                  86.4       110.2      119.8       128.9       159.2          163.3         187.7         225.8

APPLICATION OF FUNDS
Fixed Assets:
 Gross Block                                           63.3        94.2       98.8       98.8        114.0          113.1         144.2         168.2
 Depreciation                                          13.9        18.6       24.5       30.2         36.8           34.8          42.7          52.5
 Net Block                                             49.4        75.6       74.3       68.6         77.2           78.3         101.5         115.7
 Capital WIP                                           10.0         0.9        0.2        2.2         4.0            6.1           4.0           3.0
                                                       59.5        76.5       74.5       70.8         81.2           84.4         105.5         118.7

Investments                                             0.0        0.0         0.0        0.0          1.5           7.8           1.5           1.5
Current Assets:
  Inventories                                          20.3        26.6       26.9       36.4         46.0           50.0          52.0          63.2
  Sundry Debtors                                       22.4        25.7       30.7       33.1         41.0           38.8          46.0          56.6
  Cash & Bank Balances                                 10.7        10.7       21.6       34.1         38.2           36.5          43.7          55.2
  Other Current Assets                                  0.0         0.6        0.6        1.1         0.0            0.7           0.0           0.0
  Loans & Advances                                      9.4         7.6        9.0       15.7         18.2           20.5          19.9          24.0
                                                       62.8        71.3       88.8       120.3       143.4          146.5         161.6         199.0

Current Liabilities                                    28.6        31.2       32.7       45.3         51.0          52.7          56.0          67.0
Provisions                                              7.4         6.5       10.9       17.0         16.0          22.7          25.0          26.5
                                                       36.0        37.7       43.6       62.2         67.0          75.4          81.0          93.5

Net Current Assets                                     26.8        33.6       45.2       58.1         76.4          71.0          80.6          105.5

Misc Expenses                                           0.1        0.1         0.1        0.1          0.1           0.0           0.1           0.1

Total                                                  86.4       110.2      119.8       128.9       159.2          163.3         187.7         225.8
                                                                                                                      (Source: HDFC Sec, Company Reports)




Analyst: Kushal Sanghrajka (kushal.sanghrajka@hdfcsec.com)
RETAIL RESEARCH Fax: (022) 3075 3435
Corporate Office: HDFC Securities Limited, I Think Techno Campus, Bulding –B. ”Alpha”, Office Floor 8, Near Kanjurmarg Station, Opp. Crompton
Greaves, Kanjurmarg (East), Mumbai 400 042 Fax: (022) 30753435 Website: www.hdfcsec.com Email: hdfcsecretailresearch@hdfcsec.com

Disclaimer: This document has been prepared by HDFC Securities Limited and is meant for sole use by the recipient and not for circulation. This
document is not to be reported or copied or made available to others. It should not be considered to be taken as an offer to sell or a solicitation to buy
any security. The information contained herein is from sources believed reliable. We do not represent that it is accurate or complete and it should not be
relied upon as such. We may have from time to time positions or options on, and buy and sell securities referred to herein. We may from time to time
solicit from, or perform investment banking, or other services for, any company mentioned in this document. This report is intended for Retail Clients
only and not for any other category of clients, including, but not limited to, Institutional Clients




Retail Research                                                                                                                                         4

				
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