Detailed Rationale

CRISIL Ratings has upgraded its rating on the long-term bank facilities of Cera Sanitaryware Limited (Cera) to ‘CRISIL AA/Stable’ from ‘CRISIL AA-/Positive’ and reaffirmed its rating on the short-term facilities and commercial paper programme at ‘CRISIL A1+’.

 

The upgrade reflects the strengthened business risk profile with sustained healthy revenue growth and operating profitability following strong demand in both the sanitaryware and faucetware segments. The company is also expected to sustain its healthy financial risk profile, supported by high cash generation.

 

Revenue grew 25% in fiscal 2023 to Rs 1,804 crore, driven by a rise in the share of manufactured goods in both the sanitaryware and faucetware segments despite largely flattish prices. Demand for sanitaryware, faucetware and ceramic tiles remains healthy with pick-up in real estate and construction activity. Furthermore, increasing penetration of organised players, capacity expansion plans of Cera, and new product development, especially in the premium segments, should help sustain revenue growth of 12-15% over the medium term.

 

Operating profitability also remained strong in fiscal 2023 at 16.4% despite all-year, industry-wide high input costs; margin is expected to remain at 16-17% over the medium term, supported by a lean fixed cost structure, premiumisation of product portfolio and efficiency improvements being undertaken across the board. Production units continue to operate at well over 100% capacity utilisation in both the key segments.

 

Financial risk profile remains strong, driven by networth of Rs 1,183 crore as on March 31, 2023, and small debt. While the company has planned a capital expenditure (capex) of Rs 269 crore to expand its sanitaryware and faucetware capacities, this is expected to be funded completely through internal accrual and surplus liquidity. Gearing was robust at 0.02 time, while debt to Ebitda (earnings before interest, taxes, depreciation, and amortisation) and interest coverage ratios were strong at 0.09 time and 51 times, respectively, in fiscal 2023. Financial risk profile is expected to remain stable on the back of steady operating performance and prudent capex funding.

 

The ratings reflect the established position of Cera in the domestic sanitaryware industry, backed by a diversified revenue profile with presence across various markets pan-India. The company has diversified into allied building products such as faucetware, 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 on books, and robust liquidity. These strengths are partially offset by 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 them. The company divested its stake in Anjani Tiles in fiscal 2022, following which this entity is no longer consolidated.

 

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: 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 49% of turnover in fiscal 2023.

 

Over the past six years, Cera has been leveraging its strong market position in the domestic sanitaryware industry by venturing into related business segments such as faucetware, tiles and wellness and allied products, thus becoming a complete bathroom solutions provider. Successful diversification into related businesses has helped lower dependence on just sanitaryware, besides improving the efficiency of the distribution network.

 

Intense competition and volatile demand from the real estate sector had led to sluggish revenue growth for Cera’s sanitaryware business in the past. However, with improving demand prospects, revenue from sanitaryware is likely to see healthy growth over the medium term. Sanitaryware, faucetware, tiles and other products accounted for 49%, 35%, 11% and 5%, respectively, of the turnover in fiscal 2023. Also, the company has presence in domestic markets across India, which provides adequate geographical diversity.

 

• Healthy financial risk profile: Networth was large at Rs 1,183 crore and gearing strong at 0.02 time, as on March 31, 2023. Debt protection metrics are expected to remain robust over the medium term in the absence of large, debt-funded capex and healthy operating performance. Expected annual cash accrual of more than Rs 250 crore over the medium term will comfortably fund capex plans in fiscals 2024 and 2025 and incremental working capital requirement. Hence, reliance on debt is expected to be low, resulting in steady 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 positioning of Cera among brand-conscious customers. Though the company is taking steps to enhance its retail reach and product offerings, 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, faucetware and tiles segments are linked to macroeconomic scenario and the real estate industry in particular, thereby exposing it to inherent demand cyclicality. Around 30% of revenue comes from project sales while the remaining comes from retail.

Liquidity: Strong

Liquidity is supported by expected cash accrual of over Rs 200 crore per annum over the medium term. Liquid surplus was Rs 687 crore as on March 31, 2023. Bank limit of Rs 55 crore was utilised 23% on average (excluding commercial paper) over the 12 months through April 2023. Internal accrual and cash and equivalent will be sufficient to meet debt obligation, capex and investment requirement in subsidiaries and 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. It is expected to sustain healthy operating performance while maintaining strong financial risk profile.

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 metrics backed by prudent working capital management and capital spend
• Maintaining healthy liquidity

 

Downward factors:

• Sluggish business performance impacting cash generation
• Large, debt-funded capex or acquisition, or significant stretch in working capital cycle moderating debt metrics (debt/Ebitda of 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 around 90% of its power requirement. The promoters (led by Mr Somany) held 54.48% stake as on August 17, 2021.

 

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 square metre 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, to manufacture plastic and products related to its business, such as seat covers, fittings and cisterns.

Any other information: Not applicable