CERA

I have made quite a bit of my fortune from real estate and allied companies over the years from the likes of NBCC, Godrej Properties, Visaka, HIL and Repco Housing Finance. However, I have hardly had any exposure to real estate via the stock market in the last couple of years. I think the time has come to re-look at the industry.

First off, never, never, never paint the entire industry with one brush. This industry always has pockets of stupendous growth along with de-growth at the same time. CERA is one company I think is falling on the right side of disruption in the RE industry.

The MAIN LEADS

• A product with a lifespan of 20 years and a warranty of 10 years has a price differential of just 500-1500 rupees when compared to the unorganised products in the sanitary ware industry.
• While the overall market is growing, unorganised market is still 30-50% of almost all products. Size of pie and marketshare of pie for CERA are growing.
• As per the new RERA requirements, builders have to clearly state the brand of the fittings in the marketing brochure after which they can give the clients options to upgrade but not reduce the quality based on the success fo the project.

The SUPPORTING CAST

• Builders have been misrepresenting the quality of cement, bricks, building chemicals, paints etc that they claim to use and have been able to get away with it for years. Sanitary on the other hand is something that the builder can’t cheat you with, as it is visible to the eye unlike cement or sand. Builders of good repute automatically use CERA/Hindware/Parryware and beyond. Unscrupulous builders who claim to be using good materials will definitely use branded Sanitary as if it were the certificate to the entire building quality. Think of it like goons performing public poojas not for Bhakti, but for associated good boy image. Total win-win for CERA here.
• CERA is a BHARAT story, not an INDIA story. It’s been a killer product in the Tier 2 and Tier 3 cities simply because of their excellent distribution network and focus on the same for so damn long. Also there is a new wave of Desh Prem and Desh Pride, (Kajaraia Akshay Kumar Ad) and CERA is bang in the centre of it.
• Cost of plumbers have gone up 5x in the last 5 years. Maintenance therefore is not cheap anymore and this automatically makes you want maintenance free quality products. CERA says most of its popular items are just 500-1500 rupees more than unbranded and unwarranted products. Small price to pay to avoid big problems.
• The market share of organised players in the industry are only increasing. When builders are organised they take 75-80% of the sale consideration in white money and therefore the costs too is spent in white. With its price being the closes to the unorganised players and still giving GST receipts, Cera is the ultimate cost option.
• The RE market is growly, albeit in pockets and at different speeds i.e the SIZE of POND is growing and CERA’s marketshare in this too increasing. This is equivalent to the and increase in EPS and PE 😉

• CERA has a 3 pronged approach to the entire business.
  • JEET – Outsourcing/Contract Manufacturing – There is a massive over capacity in Morbi for Tiles and Sanitary. CERA simply outsources all its low margin products and has a great bargaining power, essentially making it a trading business with Pricing Power.
  • CERA – Own Manufacturing – CERA has incessantly been automating process after process for consistency, quality and effiency. With this they have been able to bring out great quality products and the cheapest price. Their automation endeavours are not just in manufacturing, but all routine work as well.
  • SENATOR & ISVEA – High End Trading – CERA also imports from Italian designers and sells them in India. . Usually a lot of people will use CERA in the their bathrooms are use a fancy Italian brand in the Half Toilet/ Guest Toilet/ Hand-wash area. A typical Indian thing, but CERA has got the mentally spot on.
• There is huge move to electro-mechanical thanks to COVID. Taps are being replaced by sensors. Faucets which used to cost lower than 3,000 rs are now being replaced with sensor based jets which cost 10-25,000 a pice and this demand is up about 20x. Almost all commercial areas will be sensor based only.
• CERA has most of its demand from the small and individual customers today. Most of these people live in buildings that have 5 floors or less. These buildings are usually completed in 12-18 months and do not get into never ending delays like the 15-50 floor skyscrapers we see in cities. A demand vacuum is unlikely.
• CERA has a unique model of selling thru the distributors as much as possible. In fact, they prefer not to sell directly. In Hyd when I went to a flagship store, they told me that their biggest store in the country does not sell. It was a pure and pure experience centre only. The will give you a BOQ but you have got to go buy from the distributor only. I had the same expense with Tesla in Los Angeles. You could experience the Tesla but all bookings had to be done online only.
  • Selling directly involves a lot of credit risk and CERA is clear than for a product that has a sub 10% PAT margin, taking credit risk makes absolutely no sense and they try their best to restrain from it. At the same time they supply directly to the likes of Godrej Properties who have a close to 0 credit risk.
• Manufacturing facility is very close. to the raw material sources.
• CERA was one of the first movers towards a complete GAS BASED production process. With Gas Exchanges coming up, its RM costs may further come down due to a better price discovery.
  • Read the Annual Reports of IEX and Petronet LNG and you will know why gas is the fuel of the immediate future in India.
• When the entire industry is struggles with OVERCAPACITY the odds actually tilt more in favour of CERA. When companies operate at 30-40% of their capacity as they are not able to sell, their cost of production is higher than CERA. CERA uses this position of advance to get them to manufacture for them at a very low margin because it basically allows the outsourcers to be able to meet their fixed costs and make their money on unbranded stuff.
• With GST and its effect on warehouses, logistics costs have been rationalised to a great extent.
• CERA has taken two financial structures extremely seriously
  • They are Debt Free and all CAPEX is only from internal accruals.
  • They have a low Fixed Cost and a high Variable Cost model.
• They spend about 90-100 cr a year on Advertising and Marketing & they have been doing it consistently for a while.
• Money that they saved in efficient manufacturing and sourcing is then spent extremely well on branding. This is simply about moving money from EPS to PE. I love it.
• The factories of the past were built for efficiency and scale and the factories of the future are being built for Agility. CERA is in a good sweet spot between them.
• CERA is investing massively in automating these processes – and today scale + automation is a deadly combination
  • Anti Bacterial Glazing
  • Grinding
  • Polishing
  • Electroplating
• The have 0 Chinese dependance.
• A complete “aatmanirbhar” made in India Product.
• Tiles
  • Of the 800+ tile manufacturers in Morbi hardly any of them have a brand or marketing capability. CERA has used and abused this by buying from them at rock bottom prices, branding it and using its distribution channel to sell.
  • Why re-invent the same wheel ?

About 3 years CERA was written about extensively about how it was run by an intelligent fanatic and all. Ever since the industry has had headwinds and has become a taboo of sorts. In the last 3 years the best of the best players have only grown from strength to strength and this is only going to continue.

Look at the shareholding pattern and you see there has been a massive accumulation by the FII. Nalanda has picked up about 10%. Yes 10%. They have been buying since Dec 2019.

When you look at the promoter, it is clear that he is an Outlier, and Intelligent Fanatic and loves innovation and disruption. Look at the Balance Sheet and you will notice that he does not get excited easily and when you look at the way he has increased product lines, it is clear that this man has already paid his price in failures elsewhere and is therefore conservative aggressive.

It seems unlikely that CERA will trade below a PE of 30 given its Brand value and distribution. Taking that into consideration even if you look at sales growth of 100% from here, at 2000 cr sales I think they will be able to turn out a PAT of 200-230 cr. At the the company will be valued at about 6000-7,500 cr. In not too distant a future.

Yea tatti company nahi, sone ki chidiya hai.