Detailed Rationale

CRISIL Ratings has revised its outlook on the long term bank facilities of Cera Sanitaryware Limited (Cera) to ‘Positive’ from ‘Stable’ while reaffirming the rating at ‘CRISIL AA-’. The short term rating and commercial paper has been reaffirmed at ‘CRISIL A1+’.

 

The outlook revision reflects the strengthened business risk profile with sustained healthy revenue growth and operating profitability. In fiscal 2022, the company witnessed a moderate revenue growth of 20% to Rs 1,446 crore, driven by above-average demand for sanitaryware and faucetware with increasing penetration of organised players and benefit of relatively lower fixed cost structure and price hikes introduced in the light of rising input prices. This despite Rs 52 crore reversal against sales made in the first 3 quarters of fiscal 2022 in lieu of stake sale in a joint venture (JV), Anjani Tiles Ltd (Anjani Tiles). Subsequently, Cera reached 100% capacity utilisation in fiscal 2022 as compared to 66% in fiscal 2021. For the same comparative period, operating margin increased to 16.1% from 13.2% while return on capital employed (RoCE) improved to 19.7% from 13.4%.

 

Demand for sanitaryware, faucetware and ceramic tiles remains healthy with pick-up in real estate and construction activity post pandemic induced disruptions. Furthermore, increasing penetration of organised players and capacity expansion (capex) plans of Cera coupled with diversified product mix would help sustain healthy revenue growth of 10-12% over the medium term. Even as the low cost structure, manufacturing efficiencies and ability to pass on input price hikes should keep operating margin at about 16%.

 

Financial risk profile remains healthy, driven by networth of Rs 1029 crore as on March 31, 2022, and low debt. While the company has planned Rs 197 crore capex to expand its sanitaryware and faucetware capacities, the same is expected to be funded completely through internal accruals and liquidity. Gearing was low at 0.03 time as on March 31, 2022, while the debt to earnings before interest, tax, depreciation and amortisation (Ebitda) and interest coverage ratios were strong at 0.11 time and 50 times, respectively, in the fiscal. Financial risk profile is expected to remain healthy, supported by moderate operating performance and capex plans. Liquid surplus was robust at Rs 550 crore as on March 31, 2022.

 

The ratings continue to reflect the established position of the company in the domestic sanitaryware industry, backed by a diversified revenue profile with presence across markets in south, east, north and west. The company has 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 healthy, supported by strong debt metrics and healthy liquid surplus. These strengths are partially offset by the company’s modest presence in the faucetware and tiles segments, vulnerability to intensifying competition in the building products sector and exposure to risks inherent in the real estate sector.

Analytical Approach

CRISIL Ratings has combined the business and financial risk profiles of Cera and its JVs, Anjani Tiles (till mid-fiscal 2022), Packcart Packaging LLP and Race Polymer Arts LLP, as Cera holds a majority stake (51%) in each of them. Furthermore, there are significant operational and financial linkages among these entities. The company divested its stake in Anjani Tiles in fiscal 2022, following which this entity is no longer consolidated.

 

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 in the sanitaryware segment and diversified revenue profile: The company has a track record of nearly three decades, strong brand image and a large retail network in the sanitaryware industry. It is one of the leading players in this segment, which has been one of the largest revenue contributors over the years, accounting for around 46% of the turnover in fiscal 2022.

 

Over the past six years, the company 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 lower dependence on the sanitaryware business, besides improving the efficiency of the distribution network.

 

Intense competition and volatile demand from the real estate sector, have led to sluggish revenue growth for Cera’s sanitaryware business in the recent past. However, with improving demand prospects, revenue is likely to post healthy growth over the medium term. Cera has a diversified revenue profile, with sanitaryware, faucetware, tiles and other products accounting for 46%, 35%, 12% and 7%, respectively, for fiscal 2022. Also, the company has presence across various domestic markets in south, east, north and west, providing adequate geographical diversity.

 

Healthy financial risk profile: Networth was moderate at Rs 1029 crore and gearing low at 0.03 time, as on March 31, 2022. Expected cash accrual of more than Rs 200 crore over the medium term will comfortably fund capex of about Rs 120 crore in fiscal 2023 and incremental working capital requirement in line with revenue growth. Hence, reliance on debt is expected to be low, resulting in continuing strong debt metrics.

 

Weakness:

Exposure to intense competition: Cera operates in the highly fragmented mass and mid-market sanitaryware segments. Further, the lack of a well-entrenched premium brand may impact the company’s positioning among brand-conscious customers with higher paying capacity. Though Cera is taking steps to enhance its retail reach and product offerings, intense competition will continue to pose challenges over the medium term, aided by the entry of international players and rapid expansion of domestic players.

 

Susceptibility to risks inherent in the real estate sector: The growth prospects of the sanitaryware, faucet and tiles segments are linked to the macroeconomic scenario and the real estate industry in particular, exposing the company to inherent demand cyclicality. Around 30% of revenue comes from project sales, while the remaining comes from retail.

Liquidity: Strong

Expected cash accrual of more than Rs 200 crore per annum over the medium term should comfortably cover yearly debt obligation of Rs 1-2 crore. Liquid surplus was Rs 552 crore as on March 31, 2022. Bank lines of Rs 55 crore were utilised 14% on average (including commercial paper issued) over the 12 months through May 2022. A capex of around Rs 140 crore is to be incurred in fiscal 2023. Internal accrual and cash and equivalent will be sufficient to meet debt obligation, capex and investment requirement in JVs.

Outlook: Positive

Cera will continue to benefit from its established market position in the domestic sanitaryware segment and diversified revenue profile. It is expected to sustain its healthy operating performance, while maintaining its healthy financial risk profile over the medium term.

Rating Sensitivity Factors

Upward Factors:

• Revenue growth of more than 20% supported by better segmental diversity, and sustained healthy operating profitability above 16%
• Continued strong financial risk profile and debt metrics, backed by prudent working capital management and capital spend
• Maintenance of moderate liquidity

 

Downward Factors:

• Sluggish business performance or operating profitability below 12%, thereby impacting cash generation
• Large, debt-funded capex or acquisition or a significant stretch in the working capital cycle, leading to moderation in debt metrics
• Sharp reduction in liquid surplus

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 30,000 million tonne per annum and 21 lakh pieces per annum, respectively. The company has green energy power plants with installed capacity of 10.325 megawatt, which meet around 70% of its power requirement. The promoters (led by Mr Somany) held 54.48% stake as on March 31, 2022.

 

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. It is a captive unit that caters to the packaging requirement of Cera 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 manufactures glazed vitrified titles and has a 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 4.48 crore) with Shreeyam Ceramics LLP, for manufacturing plastic and products related to its business, such as seat covers, fittings and cisterns.

Any other information: Not applicable