Rating Rationale
August 07, 2020 | Mumbai
Cera Sanitaryware Limited
'CRISIL AA-/Stable/CRISIL A1+' assigned to bank debt: CP reaffirmed
 
Rating Action
Total Bank Loan Facilities Rated Rs.67 Crore
Long Term Rating CRISIL AA-/Stable (Assigned)
Short Term Rating CRISIL A1+ (Assigned)
 
Rs.30 Crore Commercial Paper CRISIL A1+ (Reaffirmed)
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL has assigned its 'CRISIL AA-/Stable/CRISIL A1+' ratings to the bank facilities of Cera Sanitaryware Ltd (Cera) and has reaffirmed the 'CRISIL A1+' rating on the commercial paper programme.
 
The ratings reflect Cera's established position in the domestic sanitaryware industry, backed by a well-diversified revenue profile with presence across various markets in south, east, north and west. The company has also diversified into allied building products such as faucets, tiles and wellness products, and benefits from its wide distribution network. Besides, operating efficiency is supported by a mix of manufacturing and outsourcing. The financial risk profile is strong supported by comfortable capital structure, moderate debt protection metrics, and healthy liquid surplus. These strengths are partially offset by the company's vulnerability to intensifying competition in the building products industry and exposure to the real estate sector.
 
Cera's operating performance will be subdued in fiscal 2021 due to supply disruptions in April and May 2020 and overall demand slowdown following the Covid-19 pandemic. While revenue is expected to decline around 20%, the operating margin will see a moderate impact and remain at 12-12.5% (compared with 13.5% in fiscal 2020) supported by various cost measures and improved product mix in the tiles segment. In fiscal 2020, revenue and margin moderated as the company was unable to book sizeable revenue during the peak sales period in March 2020 because of the nationwide lockdown.
 
The company is expected to prudently scale down its capital expenditure (capex) in fiscal 2021 to Rs 22 crore, which will be comfortably funded through internal accrual. The financial risk profile is thus likely to remain healthy, supported by steady cash generation and low reliance on external debt; gearing was at 0.11 time as on March 31, 2020. Moreover, liquidity is supported by sizeable unencumbered cash and equivalent of around Rs 250 crore as on July 31, 2020.

Analytical Approach

For arriving at the ratings, CRISIL has combined the business and financial risk profiles of Cera and its joint ventures (JVs): Anjani Tiles Ltd (Anjani Tiles), Packcart Packaging LLP and Race Polymer Arts LLP. Cera holds majority stake (51%) in each JV. Furthermore, there are significant operational and financial linkages among the entities.

Please refer Annexure - List of entities consolidated, which captures the list of entities considered and their analytical treatment of consolidation.

Key Rating Drivers & Detailed Description
Strengths
* Established market position: The company has a track record of nearly three decades, strong brand image, and a large retail network in the sanitaryware industry. Cera is one of the leading players in this segment, which has been one of the largest revenue contributors over the years, accounting for around 40% of turnover in fiscal 2020.  

* Well-diversified revenue with value proposition of complete bathroom solutions provider: Over the past six years, Cera has been leveraging its strong market position in the domestic sanitaryware industry by venturing into related business segments, such as faucets, tiles and wellness and allied products, thus becoming a complete bathroom solutions provider. Successful diversification into related businesses has helped scale up operations and lower dependence on the sanitaryware business. Revenue diversity also benefits from presence across various domestic markets in south, east, north and west.

* Strong financial risk profile: The financial risk profile is supported by healthy networth and low gearing, at Rs 777 crore and 0.11 time, respectively, as on March 31, 2020. Debt protection metrics are strong. Cash accrual is expected above Rs 90 crore per annum in the medium term, and will comfortably fund capex and incremental working capital requirement over the medium term. The capital structure and debt protection metrics are likely to remain strong over the medium term.

Weaknesses
* Susceptibility to intense competition: Cera operates in the highly fragmented mass and mid-market sanitaryware segments. Competition is also intense in the premium segment, where foreign players cater to brand-conscious customers with higher spending power. Lack of a well-entrenched premium brand may impact Cera's positioning among brand-conscious customers. Though Cera is taking steps to enhance its retail reach and product offerings, the competitive landscape will continue to pose a challenge over the medium term, given the entry of international players and expansion of domestic players at a rapid pace.

* Exposure to the real estate sector: Growth prospects of the sanitaryware, faucet and tiles segments are linked to the overall macroeconomic scenario and the real estate industry in particular, thus exposing the company to inherent demand cyclicality. Around 25% of revenue comes from project sales, while the remaining comes from retail. 
Liquidity Strong

Liquidity is likely to remain strong, driven by expected cash accrual of more than Rs 90 crore each in fiscals 2021 and 2022 and cash and equivalent of Rs 250 crore as on July 31, 2020. Bank lines of Rs 45 crore were utilised 20% on average (including commercial paper issued) over the six months through June 2020. The company has long term debt obligation of Rs 6 crore per fiscal with capex of Rs 22 crore in fiscal 2021 and Rs 40 crore in fiscal 2022. Internal accrual and cash and equivalent will be sufficient to meet debt obligation, capex, and investment requirement in various subsidiaries and JVs. With gearing at 0.11 time as on March 31, 2020, Cera has sufficient headroom to raise additional debt if required. Its unutilised bank lines are more than adequate to meet incremental working capital requirement needs over the next year.

Outlook: Stable

Cera will continue to benefit from its established market position, diversified revenue profile and healthy financial risk profile over the medium term, even as operating performance remains subdued in fiscal 2021 due to the economic slowdown.

Rating Sensitivity Factors
Upward factors:
* Strengthening of market position, leading to sustained healthy revenue growth of 15% and operating profitability above 14%
* Sustenance of strong financial risk profile and liquidity

Downward factors:
* Large, debt-funded capex or acquisition, or significant stretch in the working capital cycle, weakening the credit metrics with gearing increasing over 1-1.2 times
* Significantly lower-than-expected revenue or a steep decline in profitability, impacting cash generation.

About the Company

Incorporated in July 1998, Cera (formerly, Madhusudan Oil and Fats Ltd) is headed by Mr Vikram Somany; the company manufactures sanitaryware and faucets and outsources wellness products and tiles. The sanitaryware and faucet plants are in Kadi, Gujarat, with capacity of 36 lakh and 18.5 lakh pieces per annum, respectively. The company has green energy power plants with total installed capacity of 10.325 MW, which meet around 90% of its power requirement. The promoters (led by Mr Somany) held 55% stake as on July 31, 2020. 

For the quarter ending June 30, 2020, on a consolidated basis Cera recorded a revenue of Rs 146 crore with net loss of Rs 2 crore compared to revenues of Rs 271 crore and net profit of Rs 17 crore for the corresponding quarter of the previous year.
 
Anjani Tiles
In fiscal 2016, Cera formed a JV, Anjani Tiles, with the Hyderabad-based Vishnu group to manufacture tiles. The Vishnu group has varied business interests, including educational institutions, cement, ceramics, and hotels. 
 
Packcart Packaging LLP
In fiscal 2017, Cera established Packcart Packaging LLP, a JV with Ms Kinjal Bhatt (local entrepreneur) to manufacture corrugated boxes used for packaging. This is a captive unit that caters to the packaging requirement of Cera's products. 
 
Milo Tiles LLP
In August 2018, Cera formed Milo Tiles LLP (26% equity stake) with an existing supplier of tiles in Morbi, Gujarat. The firm will manufacture glazed vitrified titles and have capacity of 8,000 square metre per day. 
 
Race Polymer Arts LLP
In May 2018, Cera set up Race Polymer Arts LLP, a JV (51% equity stake with investment of Rs 6 crore) with Shreeyam Ceramics LLP, for manufacturing plastic and products related to its business, such as seat covers, fittings, and cisterns.

Key Financial Indicators
Particulars Unit 2020 2019
Revenue Rs crore 1,224 1,354
Profit After Tax (PAT) Rs crore 111 115
PAT Margin % 9.0 8.5
Adjusted debt/adjusted networth Times 0.11 0.13
Interest coverage Times 18.28 26.30

Any other information: Not applicable

Note on complexity levels of the rated instrument:
CRISIL complexity levels are assigned to various types of financial instruments and are included (where applicable) in the Annexure -- Details of Instrument in this Rating Rationale. For more details on the CRISIL complexity levels, please visit www.crisil.com/complexity-levels.
Annexure - Details of Instrument(s)
ISIN Name of instrument Date of allotment Coupon rate (%) Maturity date Issue size (Rs.Crore) Complexity level Rating assigned with outlook
NA Commercial paper NA NA 7-365 days 30.00 Simple CRISIL A1+
NA Vendor financing NA NA NA 10.00 NA CRISIL A1+
NA Letter of credit NA NA NA 12.00 NA CRISIL A1+
NA Bank guarantee NA NA NA 10.00 NA CRISIL A1+
NA Cash credit NA NA NA 35.00 NA CRISIL AA-/Stable
 
Annexure - List of Entities Consolidated
Names of entities consolidated Extent of consolidation Rationale for consolidation
Anjani Tiles Ltd 100% Cera holds 51% stake in the entity. Significant financial and operational linkage with the parent.
Packcart Packaging LLP 100% Cera holds 51% stake in the entity. Significant financial and operational linkage with the parent.
Race Polymer Arts LLP 100% Cera holds 51% stake in the entity. Significant financial and operational linkage with the parent.
Annexure - Rating History for last 3 Years
  Current 2020 (History) 2019  2018  2017  Start of 2017
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Commercial Paper  ST  30.00  CRISIL A1+      24-12-19  CRISIL A1+  28-12-18  CRISIL A1+  11-12-17  CRISIL A1+  -- 
Short Term Debt (Including Commercial Paper)  ST                      CRISIL A1+ 
Vendor Financing  ST  10.00  CRISIL A1+    --    --    --    --  -- 
Fund-based Bank Facilities  LT/ST  35.00  CRISIL AA-/Stable    --    --    --    --  -- 
Non Fund-based Bank Facilities  LT/ST  22.00  CRISIL A1+    --    --    --    --  -- 
All amounts are in Rs.Cr.
Annexure - Details of various bank facilities
Current facilities Previous facilities
Facility Amount (Rs.Crore) Rating Facility Amount (Rs.Crore) Rating
Vendor Financing 10 CRISIL A1+ -- 0 --
Letter of Credit 12 CRISIL A1+ -- 0 --
Bank Guarantee 10 CRISIL A1+ -- 0 --
Cash Credit 35 CRISIL AA-/Stable -- 0 --
Total 67 -- Total 0 --
Links to related criteria
CRISILs Approach to Financial Ratios
Rating criteria for manufaturing and service sector companies
CRISILs Criteria for Consolidation
CRISILs Criteria for rating short term debt

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