Cera reported 18% growth sequentially, better than our estimates as it was able to recover some pent-up demand from a weak Q1. Management commentary on demand revival continues to remain cautious and they believe FY2018 will remain a year of consolidation; they continue to hold back expansion plans. Post Q2, Cera launched a new brand to cater to institutional demand in affordable housing. Stock remains fairly valued. Results review: restocking drives revenue beat — Cera’s Q2FY18 performance was better than our estimates, especially given that it’s a seasonally slow quarter, and was led by restocking at dealers for miss-out in Q1FY18. Working capital deteriorated a bit, to support the dealers in the transition phase (GST implementation), as per the management. Around 56% of the revenue mix was from sanitaryware and its allied products, 22% from faucets and the rest from tiles and wellnessprojects. 50% of the revenue was from manufactured products for sanitaryware and faucets.
Highlights from conference call — As per the management, real estate demand is still to improve and will continue to affect their institutional business/and that of the industry. Cera believes RERA is likely to reduce launches. Improvement in launches across industry might take 12-18 months (an additional 12-18 months for demand revival of building materials used for MEP). Focus of players until then has to lean more towards the retail business. Valuation and view: we believe stock is fairly valued — We continue to like the management, their steps to grow revenue streams. But the business is affected by a weak macro. Volume growth from increase in retail spread is priced in, we believe. We maintain our estimates and target multiple of 25X for Cera. We roll-over our target price to Sep19e to Rs 2,940/share.
—Kotak institutional equities