CERA is going up the Digestive System

Industry

• Sanitary marketshare of HSIL, CERA and Parry are almost the same. This is a clear Oligopoly. The market size is about 3,000-4,000 cr and the organised story has already played out as over 80% of the market is now organised and it will stay that way. The price differential between the organised and the unorganised is so little that it is a no brainer given that the organised market comes with a warranty.
• In the Faucet market CERA, though just a 11 year old player is already at the No 2 position. The market size here is 8,000-10,00 cr and is about 60-70% organised.
• The metros of Delhi, Mumbai and Bengaluru see a continuous onslaught of new players and MNC players. This has made the competition intense and the the dealers are always spoilt for choice and demand a lot of freebies. While CERA does compete here, it’s sweet spot is Bharat. They had 27% sales in Tier 1 and Tier 2 and 54% in Tier 3. MNC’s do not have the bandwidth or the attitude to deal with Bharat & CERA has a stronghold there.

the Tile business

CERA is just a marginal player in the tiles industry, but it is greatly profitable. Its low margin solubles business is less than 7% of the sale. 55% of its business comes from high margin GVT. Despite it not being a bestselling brand yet, it sells over 50% on a cash-n-carry basis. 1/3rd of its production is from its JV partner and 2/3rds are from 3rd party vendors. No wonder then 50% of its product has 0 inventory days. Every sale is profitable.

There has been no CAPEX at all. As of now CERA has no plans to begin manufacturing tiles. Given that they have no capex, they have no need to run after exports to run the plant at optimum capacity. The business is a simple branding and trading business. CERA claims that it is slowly beginning to see some pricing power in the tiles industry.

Growth & Capacity Addition

Despite the real estate headwinds over the last decade, CERA has been able to double its sales every 5 years, 2010-15 and 2015-2020. Because of the larger base, the company expected to double sales only in 2027, but given the tailwinds, they think they can double again by 2025 itself. The worse case scenario is a 15-17% growth.

The company had 10 large format display and customer engagement centres of 8,000- 12,000 sfqt in major cities. These centres, did not engage in sales, and only generated leads for the dealers after the customer experience. This model has done extremely well.

CERA now plans to use its cash pile to invest 1.5 cr per outlet into a few dealer outlets instead of the old model of 3.5 cr on exclusive company outlets.

Last year CERA launched 75 products in sanitary business and 11 products in faucetware. There is a lot of scope for price conscious innovation.

CERA was an early adopter of just-in-time philosophy which has brought its inventory and WIP days down by a 3rd. It is also a huge believer of distributed and outsourced manufacturing. It’s philosophy is simple, if it can get capacity that meets its quality and efficiency on lease, it will not re-invent the wheel and go and add capacity for no use.

While the competition has been China dependant, CERA took made-in-india seriously and largely became self sufficient. Also, it did not expand volume capacity and it doesnot need to keep running around for export orders. Its capex over the last few years was more about increase value than volume. It has continuously been innovating for value ads in house and been outsourcing everything else.

Almost the entire incremental sales, will come from outsourced vendors, without compromise on the margins.

Other points

• Ad-spend used to be 4% of sales, given that there is demand scenario ad shortage of product, the adspend is likely to be just 1.5% of sales.
• Dividend policy has been confirmed at 14-16% of PAT.
• Both the plants are running at 85-90% capacity.
• Sitting on a cash pile of 480 cr. Expect to use this, to spruce up the dealer showrooms and pump into working capitlal to catch the pent up demand.
• Had 2 price hikes last year and expect to hike again this year, due to increase in brass prices and transportation costs.
• Variable to fixed cost is 80:20.

the Kitchen

If the non-stick ware statistics are anything to go by, there is a massive upgrade in the tooling of indian kitchens. TTK Prestige, Stove Kraft, Butterfly and Hawkins have all been reporting astounding numbers over the last few quarters. Not difficult to imagine then that kitchens are being given a lot more importance today. Also, there are lakhs of houses that would like a new kitchen, can afford to pay for it, but do not want the hassle of renovation.

Cera is experimenting with something of a game changer. Just like the IKEA kitchens that can be sort of assembled over night and which come as one big unit, CERA has tied up with this Italian guy “Senator Cucine” who will ship you a 100% kitchen with all the white goods included. While this sounds expensive, the ballpark price that CERA is trying to achieve is that of a carpentered kitchen. If they can crack this, the demand is crazy in india.

As of now, the modular kitchens are a tradeoff between convenience and strength. This should not be the case.

Cera has been able to change the price:quality:luxury equation in both the sanitary as well as the faucet business. Its principles have been the same, kill the fixed cost and make a profit on every sale or don’t play at all. The kitchen market is desperate for a player like this. If they manage to crack this equation as well, this business can big. Just imagine being able to get the Italian manufactured kitchen, sitting in a tier 2 town in India.

I am super exited about how this pans out. Low probalitity, but definitely a “Heads I win big, Tails I don’t loose much” situation.

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My Cera Initiation post – https://biginvestorblog.com/2020/10/21/cera/