Detailed Rationale

CRISIL Ratings has reaffirmed its ‘CRISIL AA-/Stable/CRISIL A1+’ ratings on the bank facilities of CERA Sanitaryware Ltd (CERA), and has reaffirmed its 'CRISIL A1+' rating on the commercial paper programme.

 

Revenue remained stable at Rs 1,227 crore in fiscal 2021 (Rs 1,226 crore in fiscal 2020), driven by healthy growth from the second quarter, offsetting a steep 46% decline in the first quarter owing to the Covid-19 pandemic. Also, increased outsourcing to third parties helped mitigate the impact of temporary disruptions because of non-availability of labour in the third quarter. While gross margin was severely impacted by higher input prices, cost rationalisation measures ensured operating margin witnessed a marginal dip to 13.2% in fiscal 2021, from 13.9% in fiscal 2020.

 

Demand for sanitaryware, faucetware and tiles remains healthy. Resolution of labour issues and small price hikes are expected to help CERA register revenue growth of around 12-14% in fiscal 2022 and 8-10% thereafter. Furthermore, operating margin is expected to remain stable at 13-14%, with continued focus on costs.

 

The financial risk profile was healthy, driven by networth of Rs 883 crore as on March 31, 2021, and low debt. Gearing was low at 0.09 time as on March 31, 2021, while the debt to earnings before interest, tax, depreciation and amortisation (Ebitda) and interest coverage ratios were strong at 0.52 time and 18 times, respectively, in fiscal 2021. These metrics will remain strong, in the absence of significant capital expenditure (capex). Liquidity was strong, with surplus over Rs 400 crore.

 

The ratings continue to reflect the established position of the company in the domestic sanitaryware industry, backed by a diversified revenue profile with presence across various markets in south, east, north and west. The company has diversified into allied building products such as faucets, tiles and wellness products, and benefits from its wide distribution network. Besides, operating efficiency is supported by a mix of manufacturing and outsourcing. The financial risk profile is healthy, supported by strong debt metrics and healthy liquid surplus. These strengths are partially offset by the company’s modest presence in the faucetware and tiles segments, vulnerability to intensifying competition in the building products sector and exposure to risks inherent in the real estate sector.

Analytical Approach

CRISIL Ratings has combined the business and financial risk profiles of CERA and its joint ventures (JVs), Anjani Tiles Ltd (Anjani Tiles; till mid-fiscal 2022), Packcart Packaging LLP and Race Polymer Arts LLP, as CERA holds majority stake (51%) in each JV. Furthermore, there are significant operational and financial linkages among the entities. The company has planned to divest its stake in Anjani Tiles in fiscal 2022, following which this entity will no longer be consolidated. A memorandum of understanding (MoU) has been signed between CERA and Anjani Vishnu Holdings Ltd (AVHL) on August 17, 2021, for the sale of the former’s 51% stake in Anjani Tiles with the final instalment to be received on March 31, 2023.

 

Please refer Annexure - List of entities consolidated, which captures the list of entities considered and their analytical treatment of consolidation.

Key Rating Drivers & Detailed Description

Strengths:

• Established market position in the sanitaryware segment: The company has a track record of nearly three decades, strong brand image and a large retail network in the sanitaryware industry. It is one of the leading players in this segment, which has been one of the largest revenue contributors over the years, accounting for around 41% of turnover in fiscal 2021.

 

Over the past six years, the company has been leveraging its strong market position in the domestic sanitaryware industry by venturing into related business segments, such as faucets, tiles and wellness and allied products, thus becoming a complete bathroom solutions provider. Successful diversification into related businesses has helped lower dependence on the sanitaryware business, where sales stagnated at Rs 490-500 crore in fiscals 2020 and 2021 (Rs 563 crore in fiscal 2019), besides more efficiently utilising the distribution network.

 

Intense competition and volatile demand from real estate sector, have led to sluggish revenue growth for CERA’s sanitaryware business in the recent past. However, with improving demand prospects, revenue in the sanitaryware segment is likely to see steady recovery over the medium term. Also, the company has presence across various domestic markets in south, east, north and west, providing adequate geographical diversity.

 

• Healthy financial risk profile: Networth was healthy at Rs 883 crore, and gearing was low at 0.09 time, as on March 31, 2021. Debt protection metrics were strong, and will remain stable over the medium term in the absence of large capital expenditure (capex). Annual cash accruals are expected at around Rs 130-150 crore over the medium term, and will comfortably take care of incremental capex and working capital requirements. Hence, reliance on debt is expected to be low, resulting in continuing strong debt metrics over the medium term. Any large, debt-funded capex or acquisition, impacting the debt metrics materially, will be a monitorable.

 

Weaknesses:

• Modest presence in the faucetware and tiles segments: Faucetware, tiles and other products accounted for ~28%, 20% and 11% of CERA’s revenue in fiscal 2021, enhancing its revenue diversity. That said, CERA remains a modest player in both faucetware and tiles segments. Moreover, its revenue in the tiles segment has been shrinking in the absence of a large product portfolio and intense competition. Ability of CERA to enhance its market share in these segments can help further solidify its business.

 

• Exposure to intense competition: CERA operates in the highly fragmented mass and mid-market sanitaryware segments. Competition is also intense in the premium segment, where foreign players cater to brand-conscious customers with higher spending power. Lack of a well-entrenched premium brand may impact the company’s positioning among brand-conscious customers. Though CERA is taking steps to enhance its retail reach and product offerings, the competition will continue to pose challenges over the medium term, aided by the entry of international players and rapid expansion of domestic players.

 

• Susceptibility to risks inherent in the real estate sector: The growth prospects of the sanitaryware, faucet and tiles segments are linked to the macroeconomic scenario and the real estate industry in particular, exposing the company to inherent demand cyclicality. Around 30% of revenue comes from project sales, while the remaining comes from retail.

Liquidity: Strong

Liquidity is likely to remain strong, supported by expected cash accrual of Rs 130-150 crore per annum in fiscals 2022 and 2023. Liquid surplus was Rs 478 crore as on March 31, 2021. Bank lines of Rs 45 crore were utilised 16% on average (including commercial paper issued) over the six months through June 2021. The company has yearly debt obligation of around Rs 6 crore and capex is expected at around Rs 26 crore in fiscal 2022. Internal accrual and cash and equivalent will be sufficient to meet debt obligation, capex and investment requirement in subsidiaries and JVs. With low gearing, CERA has sufficient headroom to raise additional debt.

Outlook Stable

CERA will continue to benefit from its established market position in the domestic sanitaryware segment, diversified revenue, healthy operating efficiency and strong financial risk profile over the medium term.

Rating Sensitivity factors

Upward factors:

• Better than anticipated revenue growth, supported by improved revenues from all business segments, along with operating profitability of 14-15%, leading to annual cash generation of over Rs.175 crores
• Sustenance of strong financial risk profile and debt metrics, backed by prudent working capital management and capital spend.
• Maintenance of healthy liquidity

 

Downward factors:

• Sluggish business performance, impacting cash generation
• Large, debt-funded capex or acquisition or a significant stretch in the working capital cycle, leading to moderation in debt metrics (Debt/EBITDA of over 1.5-1.75 times)
• Sharp reduction in liquid surpluses.

About the Company

Incorporated in July 1998, CERA (formerly, Madhusudan Oil and Fats Ltd) is headed by Mr Vikram Somany; the company manufactures sanitaryware and faucets and outsources wellness products and tiles. The sanitaryware and faucet plants are in Kadi, Gujarat, with capacity of 30,000 MTPA and 21 lakh pieces per annum, respectively. The company has green energy power plants with installed capacity of 10.325 MW, which meet around 90% of its power requirement. The promoters (led by Mr Somany) held 54.48% stake as on August 17, 2021.

 

As on June 30, 2021, on a consolidated basis, CERA recorded revenue of Rs 228 crore with net profit of Rs 12 crore, compared with revenue of Rs 146 crore and net loss of Rs 2 crore for the corresponding quarter of the previous fiscal.

About the Group

Anjani Tiles

In fiscal 2016, CERA formed a JV, Anjani Tiles, with the Hyderabad-based Vishnu group to manufacture tiles. The Vishnu group has varied business interests, including education institutes, cement, ceramics and hotels. On August 17, 2021, CERA has finalised the terms and conditions of sale of the entire 51% stake in Anjani Tiles to the Vishnu group, which currently holds 49%.

 

Packcart Packaging LLP

In fiscal 2017, CERA established Packcart Packaging LLP, a JV with Ms Kinjal Bhatt (local entrepreneur) to manufacture corrugated boxes used for packaging. It is a captive unit that caters to the packaging requirement of CERA’s products.

 

Milo Tiles LLP

In August 2018, CERA formed Milo Tiles LLP (26% equity stake) with an existing supplier of tiles in Morbi, Gujarat. The firm will manufacture glazed vitrified titles and have capacity of 8,000 sq m per day.

 

Race Polymer Arts LLP

In May 2018, CERA set up Race Polymer Arts LLP, a JV (51% equity stake with investment of Rs 3.69 crore) with Shreeyam Ceramics LLP, for manufacturing plastic and products related to its business, such as seat covers, fittings and cisterns.

Key Financial Indicators

Particulars	Unit	2021	2020
Revenue	Rs crore	1,227	1,226
Profit after tax (PAT)	Rs crore	100	111
PAT margin	%	8.1	9.0
Adjusted debt / adjusted networth	Times	0.09	0.12
Interest coverage	Times	18.16	17.41

 

Any other information: Not applicable

Annexure - Details of Instrument(s)

ISIN	Name of instrument	Date of allotment	Coupon rate (%)	Maturity date	Issue size (Rs crore)	Complexity level	Rating assigned with outlook
NA	Commercial paper	NA	NA	7-365 days	30.00	Simple	CRISIL A1+
NA	Letter of credit & Bank Guarantee	NA	NA	NA	9.00	NA	CRISIL A1+
NA	Overdraft Facility	NA	NA	NA	1.00	NA	CRISIL AA-/Stable
NA	Letter of Credit	NA	NA	NA	23.00	NA	CRISIL A1+
NA	Bank Guarantee	NA	NA	NA	12.00	NA	CRISIL A1+
NA	Cash credit	NA	NA	NA	45.00	NA	CRISIL AA-/Stable
NA	Cash Credit / Overdraft facility	NA	NA	NA	10.00	NA	CRISIL AA-/Stable

 

Annexure – List of entities consolidated

Names of Entities Consolidated	Extent of Consolidation	Rationale for Consolidation
Anjani Tiles Ltd*	100%	CERA holds 51% stake in the entity. Significant financial and operational linkage with the parent.
Packcart Packaging LLP	100%	CERA holds 51% stake in the entity. Significant financial and operational linkage with the parent.
Race Polymer Arts LLP	100%	CERA holds 51% stake in the entity. Significant financial and operational linkage with the parent.