Cera Sanitaryware’s (CRS) 2QFY18 sales were 10% above EE (+18% yoy) while EBITDA was in line (+8% yoy) with EBITDA margins coming in at 15.6%, 145bps lower yoy on higher outsourcing and other expenses. Sanitary-ware/faucet-ware/tiles contributed 56%/22%/ 20% to 2QFY18 revenues. We believe stable demand recovery in sanitary-ware is still a few quarters away, while tiles and faucet-ware will continue to see better growth off a lower base. We raise our FY18/FY19 sales estimates by 2%/3% as we expect company to benefit from better faucet and tiles growth. We roll over to Mar’19 TP of Rs 3,538 (from a Dec’18 TP of Rs 3,153) at a 31x (30x earlier) TTM EPS of Rs 114/sh. Maintain ADD.
Post-GST restocking to normalize by 4QFY18: Sales jumped 18% yoy led by higher sales in the tiles (58% yoy) and faucet (24% yoy) segments, while sanitary-ware grew 8% yoy. Re-stocking at the dealer level, particularly in sanitary-ware, saw some revival during 2QFY18 but was below expectations with WC cycle stretching post GST and demand remaining subdued after RERA implementation. Gradual recovery in real estate demand, government thrust on affordable housing and higher penetration into central and north-eastern markets should help sustain the sales momentum in FY19E/FY20E. Plant utilization for sanitary-ware/faucet-ware/tiles stood at 98%/67%/80% during the quarter.
Tiles to continue to lead growth: Tiles (via JV)/faucet-ware segments contributed nearly 20%/22% to 2QFY18 topline. The company’s tiles sales have been gaining traction in southern India due to its competitive pricing versus other players in the region. CRS has upgraded the technology at its JV plant in Andhra Pradesh (AP) to manufacture higher-margin GVT, PVT and double-charge tiles (revenue contribution target at 30% over next two years). Capacity utilization at the plant improved to 80% from 60% in 4QFY17, and the JV is earning double-digit EBITDA margins. Going forward, we expect faucets/tiles to post revenue a 16%/37% CAGR over FY17-FY20E.
Operating performance to remain steady with EBITDA margin stability from 2HFY18: EBITDA margins were hit by higher contribution from low-margin outsourcing business and GST-related demand disruptions. Fuel costs declined 5% yoy in 1QFY18; RM and fuel costs are set to remain stable, going forward.
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Higher contribution from new products, premium product mix to fuel growth: We expect sales/EBITDA/PAT CAGR of 17%/18%/21% over FY17-FY20E and forecast margins to improve over time given (a) the on-going capacity expansion in sanitary-ware to cater to the premium segment, and (b) technology upgrades at faucet and tiles JVs to produce better quality and higher-margin products. Slow demand recovery and higher competitive pressures are key risks to our view.