Cera sees strong demand prospects
According to Anand Rathi, Sanitaryware and faucets, operating at 112% and 117% capacity, revenue grew 13% and 11% y/y respectively, while tile revenue fell 42% y/y (disposal of Anjani) leading to 1.7% y/y revenue growth to Rs4.4bn. The share of retail in overall turnover has been guided to remain at 68-72% and the share of outsourcing at 54%. Aided by rising demand and capacity expansion, revenues were guided to 2x and PAT to 2.5x every 3.5 years. We expect revenue to register a CAGR of 16% in FY22-24.
“Cost improvements and price increases in a high cost environment have boosted Cera’s operating performance. While its B/S continues to be net cash, its upcoming sanitaryware and faucet expansions would help it meet growing demand. We are upgrading our rating to a Buy, with a lower target price of Rs 5,171, at a PE of 30x FY24e,” Anand Rathi said.
Cera: better operational performance
Costs were contained in the fourth quarter despite high input prices, thanks to price increases, low gas costs (GAIL) as gas was available from isolated wells near the plant, at a Greater shop floor productivity and process efficiencies to elevate raw material to end product yields. EBITDA increased by 30.5% year-on-year to Rs 824 million. Further price increases are being finalized (FY22 sanitaryware ~21%, taps ~26%). Margins are guided to increase by at least 50 to 70 basis points per year. EBITDA is expected to register a CAGR of 18% in FY22-24.
According to Anand Rathi, to meet growing demand and already operating at high capacity, Cera is expanding its faucet and sanitary ware capabilities. This involves setting up a capacity of new sanitary installations of 100,000 SKUs pm and a capacity of brownfield taps of 125,000 SKUs pm in addition to a decongestion exercise of 25,000 SKUs pm The turnover of the assets for new faucets capacity will be 1.5x to 2x, sanitary about 1.75x. B/S continues to be net cash where net D/E was -0.6x in FY22.
Buy Godrej Consumer
Motilal Oswal has set a buy call on the stock of Godrej Consumer. The company sees a rise of at least 205 on the stock. “Godrej Consumer’s results in 4QFY22 were broadly in line.” While management indicated sequential gross margin pressure in 1QFY23, driven by palm oil cost inflation, the repeal of the ban Indonesian palm oil from 23 May 22 is potentially good news for the next quarter. The new senior management appointments at Unilever are a welcome move. Significant steps appear to have been taken to reduce complexity and SKUs, with the introduction of LUP in HI and Hair Color to drive category growth,” the company said. Thanks to better capital allocation in recent years, GCPL has already reached a cash level (excluding lease liabilities) of INR 3.7 billion at the end of FY22.
Price target of Rs 795 on the stock
According to Motilal Oswal, the highlighted detailed notes from January 22 and July 21 show that the national businesses of Godrej Consumer demonstrated a track record of strong sales growth in the first of the last decade, before losing their way to the second semester. Better capital allocation, a moratorium on acquisitions and an improvement in GAUM’s performance were already visible before the arrival of the new CEO on October 22. National and consolidated sales growth exceeded double digits over the past two years , much better than the sales CAGR of 4.1% between FY16 and FY20.
“With the new CEO’s investments focused on driving growth in the high-margin, high-RoCE domestic business, his medium-term earnings growth outlook is strong. Valuations at 36.9x FY24E EPS are inexpensive. We maintain our buy rating with a target price of 975 per share (45x FY24E EPS),” the company said.