Detailed Rationale

CRISIL Ratings has reaffirmed its ‘CRISIL AA/Stable/CRISIL A1+’ ratings on the bank loan facilities and commercial paper of CERA Sanitaryware Ltd (Cera).

 

Revenue grew 4% (on year) to Rs 1,871 crore in fiscal 2024 owing to muted demand conditions across the industry. Capacity utilisation, though healthy, was lower than the previous year. Demand for sanitaryware, faucetware and ceramic tiles remains healthy, with pick-up in real estate and construction activities. Furthermore, increasing penetration of organised players and capacity expansion (capital expenditure [capex]) plans coupled with new product development, especially in the premium segments, should help Cera sustain healthy revenue growth of 12-15% over the medium term.

 

Operating profitability, too, remained healthy at 15.3% in fiscal 2024 (16.4% in fiscal 2023) owing to higher discounts and rebates as well as marginal increase in input cost. It is expected to remain at ~16% over the medium term, supported by a lean fixed cost structure, premiumisation of product portfolio and efficiency improvements being undertaken across the board.

 

The financial risk profile remains strong, driven by networth of Rs 1,358 crore as on March 31, 2024, and low debt. While the company has planned a capex of Rs 125-130 crore to expand its sanitaryware capacities, it is expected to be funded completely through cash accrual and surplus liquidity. Gearing was low at 0.02 time as on March 31, 2024, while the debt to earnings before interest, taxes, depreciation, and amortisation (Ebitda) and interest coverage ratios were strong at 0.07 time and 50 times, respectively, in fiscal 2024. The financial risk profile is expected to remain strong, supported by steady operating performance and prudent funding of capex.

 

The ratings continue to reflect Cera’s established position 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 strong financial risk profile emanates from healthy cash generating ability, low debt levels and robust liquidity. 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), 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.

 

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 and diversified revenue profile: Cera 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 47% of turnover in fiscal 2024.

 

Over the past few years, Cera 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, besides improving the efficiency of the distribution network.

 

Intense competition and volatile demand from the real estate sector led to sluggish revenue growth in fiscal 2024. However, with improving demand prospects expected and demand from real estate to remain healthy with projects reaching completion over the next 2-3 years, revenue in the sanitaryware segment is likely to see healthy growth over the medium term. Sanitaryware, faucetware, tiles and other products accounted for 47%, 36%, 10% and 7%, respectively, of the company’s turnover in fiscal 2024. 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 1,358 crore and gearing low at 0.02 time as on March 31, 2024. Debt protection metrics are expected to remain strong, in the absence of large, debt-funded capex and healthy operating performance. Cash accrual is expected at ~Rs 180-230 crore per annum and will comfortably fund the capex plans in fiscals 2025 and 2026 and incremental working capital requirement. Hence, reliance on debt is expected to be low, sustaining strong debt metrics over the medium term.

 

Weaknesses:

• 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: 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 33% of its 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 over Rs 200 crore per annum over the medium term. Liquid surplus was Rs 814 crore as on March 31, 2024. Bank lines of Rs 55 crore were utilised at 18% on average (including commercial paper issued) over the 12 months through May 2024. Cash accrual and cash and equivalent will be sufficient to meet debt obligation, capex and investment requirement in JVs.

Outlook: Stable

Cera will continue to benefit from its established market position in the domestic sanitaryware segment and diversified revenue profile over the medium term. Cera is expected to sustain its healthy operating performance, while maintaining healthy financial risk profile over the medium term.

Rating Sensitivity factors

Upward factors:

• Sustained healthy double-digit revenue growth, supported by better segmental diversity, and maintenance of operating profitability above 16-18%, benefitting cash generation
• Sustenance of strong financial risk profile and debt protection 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 faucetware and outsources wellness products and tiles. The sanitaryware and faucetware plants are in Kadi, Gujarat. The company has green energy power plants with installed capacity of 10.325 megawatt, which meet substantial amount of its power requirement. The promoters (led by Mr Somany) held 54.48% stake as on March 31, 2024.

 

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.

 

Race Polymer Arts LLP

In May 2018, Cera set up Race Polymer Arts LLP, a JV (51% equity stake with investment of Rs 5.10 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	2024	2023
Revenue	Rs.Crore	1,871	1,804
Profit After Tax (PAT)	Rs.Crore	241	211
PAT Margin	%	12.9	11.7
Adjusted debt/adjusted networth	Times	0.02	0.02
Interest coverage	Times	50.4	51.7

^CRISIL Ratings adjusted

Any other information: Not Applicable