Cera reported another stable quarter. Focus remains on improving premium mix and margins. However, the market remains dull and is likely to continue be so over the next 3-4 quarters and hence, some expansion plans have been pushed back a notch. We continue to like the management and their approach to growth, but macro trends do not support current valuations at almost 28X FY2018E EPS on CMP. Maintain view.
Cera’s revenues for 2QFY17 stood at R2.5 billion, up 11% y-o-y, in line with our estimates. EBITA margins dropped marginally on a sequential basis, but remain high. Net income stood at R251 million, in line with our estimates for the quarter. As per the management, demand environment still remains subdued, especially in southern markets, Cera’s largest.
The management expects high double digit growth to continue in faucets and tiles for FY2017, while sanitaryware could remain in single digits. Focus will continue on improving operating efficiencies and increasing premium product mix in sales.
The tile JV has begun well with margins already in double digits. The management is contemplating plans to increase production of GVT tiles versus 90% of the current production which is soluble salt.
We expect Cera’s profits to grow at a CAGR of 20% over FY2016-19E. Maintain view on the stock valuing it at 22X FY2018E EPS of R93.2/share. We have assumed 11.6% growth in sanitaryware, 39% in faucets and 20% in tiles in FY2017.