Anand Rathi Share and Stock Brokers has maintained a BUY rating on Cera Sanitaryware Ltd. (CRS), revising the target price to Rs 9,899, up from Rs 8,740. This represents a notable 26% upside from the current market price of Rs 7,870. The company’s robust growth strategy, enhanced production capacity, and improved margin outlook are expected to drive long-term value for investors.

Mixed H1 Performance but Positive Outlook

1. Flat Revenue Growth
Revenue for H1 FY25 remained flat at Rs 8.9 billion, impacted by heatwaves, the general elections in Q1, and extended monsoons in Q2. This led to subdued demand, particularly in rural markets.

2. Margins Under Pressure
The EBITDA margin dipped 190 basis points year-over-year to 14.6%, primarily due to operating de-leverage and higher input costs. Gross margins also contracted slightly by 21 basis points to 53.6%, reflecting sustained cost pressures.

3. PAT Improvement
Profit after tax (PAT) rose marginally by 1.7% year-over-year to Rs 1.2 billion, driven by higher other income and tax reversals.

Capacity Expansion to Boost Market Share

1. Sanitaryware and Faucets Expansion

Sanitaryware utilization is set to increase to 120% from the current 89%, with plans to add 1.2 million pieces annually through a greenfield project in Gujarat by FY27.
Faucet production capacity will grow by 100,000 pieces annually, reaching 400,000 pieces, with utilization currently at 93%.
2. Long-Term Revenue Potential
The Gujarat expansion is expected to generate Rs 3 billion in annual revenue at optimal utilization, contributing significantly to the company’s growth trajectory.

Innovative Product Line Driving Growth

1. Contribution of New Products
Products launched after 2021 contributed 34% to total revenue in H1 FY25, showcasing the company’s focus on innovation and premium product offerings.

2. Luxury Segment Aspirations
Cera Sanitaryware aims to scale up the luxury segment’s revenue contribution to 10% by FY30, reflecting its strategy to tap into high-margin categories.

Operational Efficiency and Margin Recovery

1. Price Adjustments

The company implemented price hikes of 1% for sanitaryware and 6% for faucets in September 2024.
Reduced discounts and cost optimization initiatives are expected to gradually improve margins.
2. Favorable Gas Pricing
With 76% of gas sourced from GAIL at subsidized rates, compared to 70% in Q2 FY24, the blended gas price has remained below industry averages, easing input cost pressures.

Financial Outlook: Strong Growth Ahead

Key Risks to Consider

1. Economic Slowdown
A downturn in the real estate sector could dampen demand for Cera’s products, impacting revenue growth.

2. Competitive Landscape
Intensifying competition in the sanitaryware and faucets market may exert pressure on pricing and margins.

3. Cost Volatility
Sustained increases in input costs, particularly energy and raw materials, could hinder margin recovery.

Valuation: Premium Growth at a Reasonable Price

Anand Rathi Research uses a 40.6x FY27E earnings multiple to value Cera Sanitaryware, leading to a revised target price of Rs 9,899. This valuation reflects the company’s strong growth prospects, robust balance sheet with a net cash surplus of Rs 7.9 billion, and strategic focus on high-margin segments.