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Launched in 1980, CERA is a pioneer in the sanitary ware segment in India. The first sanitary ware company to use natural gas, CERA has been on the forefront of launching a versatile color range and introducing the bath suite concept and a couple of firsts in the industry.

HBJ Capital’s “Business Insight” stock for the month of January 2011

HBJ Capital, India Web: E-Mail: Call: +91 98867 36791

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Table of Contents
 From the Desk of CEO, HBJ Capital – (Page –5 )  Overview : Cera Sanitaryware Ltd. – (Page –7 )  The Indian Sanitaryware Industry – (Page –10 )  Key drivers for growth of the industry – (Page – 15 )  Cera Sanitaryware Ltd. – (Page –16 )  Management & Shareholding Pattern – (Page –19 )  Peer Comparison – (Page –22 )  Financial Analysis – (Page –24 )  Technical Analysis – (Page – 28)  Investment Rationale – (Page –30 )  Risks & Concerns (Page – 32)  Disclaimer (Page – 35 )  Know more about your company – HBJ Capital

From the desk of CEO, HBJ Capital
While making investment look for companies being ignored by everyone else because you may end up finding a hidden gem and once you find one, invest in it and relax. You have done your job and just follow the performance of the company. Wealth creation will happen automatically.

Dear Investors, I am sure that the letter finds you in good spirits, ready to jump into the market to catch gems at the bottom. I hope that almost all of you had taken our advise seriously and are now sitting on good cash. A recap from my earlier letter for our new investors – “The Middle Class is undergoing a dramatic change with focus shifting from fulfilling basic needs to desires and aspirations. I believe that as the reference point of average consumer keeps moving up the income ladder, so does the demand for branded higher performance items, even though at higher values.” Continuing with our focus on India growth story and burgeoning middle class in particular, our team has picked a gem from Indian Sanitary Ware Industry. The business is cash churner since decades and will remain so for coming decades as well. Our focus was to find a management team which knows the business well and which is ethical, investor friendly, and leverages business risk for benefit of the company.

The sanitary ware industry is pegged at 1600cr, with organized sector occupying 60%. The rest is dominated by unorganized market, which enjoys benefit of tax evasion and low quality. This scenario is expected to change and share of organized sector should increase in line with developed countries. In addition to this India has very low penetration of sanitation facilities (~40%), whereas, our neighbors enjoy higher penetration levels. This equation is also expected to reverse, with high farm income and spending in rural areas. Overall, the sanitary ware market is expected to grow 15-20% CAGR for next 5-10 years.

Our selection for “Business Insight” pick of the month is CERA Sanitaryware Ltd.
It is a three decade old company spearheaded by young and dynamic Mr. Vidush Somany. It caters to higher end of the pyramid, and has strategic and logistics tie-up with global brands. The company has recently forayed into faucet market with state-of-the-art plant at its existing location. The company enjoys higher profit margins, is growing faster than peers and still trades at lower PE multiples. So, investors are expected to benefit both from under valuation and growth, once market discovers the stock. Happy Investing! Regards, Kumar Harendra, CEO, HBJ Capital, & #912, 1st "F" Main Road, Girinagar 2nd Phase, BSK 3rd Stage, Bangalore – 85 Call : 098867 36791, 080 6568 1134 or Mail :

CERA Sanitaryware Ltd Overview


Some key stats..
  CMP = Rs 164.50 (January 28th 2011) 52 week’s high/low = Rs 192/100 – The stock recently made a new 52 week high while it has retraced by more than 12% during the ongoing correction. Peak share price = Rs 192 (15th October ‘10) – The stock scaled a new high just a few months back. The stock deserves as re-rating both owing to the growth rate and historical valuations. Trading volume = 5194 shares (approx) per day – The stock usually trades with low volumes, but has seen a spurt in last two days owing to market correction, hence offering a good chance to accumulate without significant impact cost. EPS ~ 27* (TTM) – Company has recorded an EPS of Rs 31.5 for FY 10 (pre-bonus).  PE ~ 6 On the basis of TTM earnings. The stock is available at historical PE multiples, whereas, its margins, ratios, market share, and balance sheet has grown significantly over last three years. It should therefore be re-rated and trade at higher PE multiples.  Shareholdings : No Of shares [% Share Holding ]  Total FII: ~1.0 lakhs [0.79%]  Total Non-Institution: 57.53 lakhs [45.46%]  Total Bodies Corporate Holding: 7.72 lakhs [6.01%]  Total Promoters: 67.95 lakhs [53.7%]  Total Outstanding Shares : 126.54 lakhs [100 %]       Debt/Equity = 0.42[Sept’10] ROCE = 29.2% [Mar’10] RONW = 24.7%[Mar’10] Current Ratio = 2.12[Sept’10] Delivered Volume per day = 66.63% BSE Code 532443

*calculated on weighted average no. of shares for preceding 12 months

The Indian Sanitary Ware Industry !!!

Sanitary Ware Industry
India is expected to emerge as one of the biggest manufacturing hubs for international sanitary ware brands with the ongoing entry of major international brands since 2007. Indian organized sanitary ware market is estimated at Rs 1000 crore. The organized market is governed by 6 large players, with CERA enjoying 20% market share. The market for sanitary ware in India comprises the institutional and individual segment. While institutional customers buy directly from companies and use material in construction projects like apartments, commercial complexes and shopping malls, the individual segment buys from retail outlets for residential applications. Sanitary ware Industry in India for the last few years has shown very dramatic growth with all major players increasing their production capacities. The Companies have also upgraded their manufacturing processes and improved their product quality by introducing higher value products in the market, which has been accepted and appreciated by the customers. The demand for high value sanitary ware in India is growing very fast. The Companies are trying to meet the demand as the realization per metric ton in is very good which ultimately results in good profitability. In order to educate the Indian customers to go for quality products and also for higher value sanitary wares, companies have adopted a very aggressive advertisement campaign. Companies have also strengthened their dealer network by offering showroom incentives and some of the companies have also gone for their own retail outlets in major towns. The government’s impetus to improve hygiene and sanitation is likely to increase the demand for sanitary ware in India. Moreover the increasing urbanization of India and the consequent requirement for residential and commercial buildings will be a major driver for growth of sanitary ware. Along with this the focus of the central and state governments to provide housing facilities to the poor, is also expected to generate demand.

Sanitary Ware Industry (Contd.)
India’s sanitary ware industry has grown at approximately 10-12% annually over the preceding six-seven years and is expected to grow 15-17% for next ten years annually, today accounting for 8% of the world’s sanitary ware production. However, considering India’s dense population, its sanitation coverage is only around 40% (the comparative penetration levels in neighboring countries are as follows: Pakistan: 50%, Sri Lanka: 65%, Malaysia: 94% and Thailand: 96%), which is considered to be one of the lowest in the world. With increasing awareness towards improving public health, the sanitary ware segment will enjoy high attention. Moreover, a burgeoning middle class, rising per capita income, increasing awareness about health and fitness, changing consumer mindsets, easy availability of home loans, and replacement demand (very low at 7% compared with 80% in developed countries, is expected to pickup with urban growth) will drive the demand for premium sanitary ware products . The concept of making a clean and hygienic toilet is growing rapidly in those rural areas where a toilet did not even exist until a few years ago. We believe that the projected growth rate is bound to accelerate considering the shortage of housing availability and India’s lower sanitation coverage. The government has also identified sanitation as one of the key focus areas to improve public health. Thus, there lies an immense growth opportunity for this segment over the coming years. We also foresee a positive industry evolution from low-end basic products towards middle and high-end premium segments. The reasons are not far to seek - India’s young earners aspire for a better life style, which is akin to that of advanced countries of the world. The emphasis therefore is on globally benchmarked quality and aesthetic parameters. The new-age customer has become more discerning in terms of quality excellence and less sensitive on price factors. Even bathroom furnishing today has become an important part of home decor.

Sanitary Ware Industry (Contd.)

The cost of producing sanitary ware in India is substantially low as compared to the advance countries, because the labor cost and the basic raw materials for manufacturing quality sanitary wares is available at very cheap rate and in abundance. Because of our low cost of production, Indian sanitary wares are very competitive in the neighboring countries and hence export from India is also growing everyday. The organized sectors produce fully vitrified sanitary wares, using latest technology and best of Ceramic Raw Materials available in India. The unorganized sectors have adopted local Indian technology to manufacture the basic sanitary ware products. Since the availability of raw material is in abundance and also very cheap in the state of Gujarat & Rajasthan, various companies have established their factory in these areas. They are producing the basic sanitary ware under various brands. Unorganized sector's percentage of production capacity and also their sales in the local domestic market are higher than that of the organized sectors' sales. Unorganized sanitary ware manufacturer comes under small sectors and hence enjoy the benefit of Nil Excise Duty and Sales Tax and hence they sell their products in the domestic market approximately 70% cheaper than the organized sector products.

Fitness Equipment & Services Industry Growth Drivers
We are encouraged by the 10.5% growth in India’s per capita income. It increased to Rs. 44,345 in 2009-10 from Rs. 40,141 in 2008-09. The growth is indicative of the increased spending power of the consumer that will shift the demand to higher value products, and in some cases generate demand for the company’s product offerings. The new generation is updated and knowledgeable about the latest designs and offerings in the international market. With a rising trend of younger professionals that start earning early in life, the levels of aspirations have increased. There has been a gradual shift in the living standards. The result is that the premium range of sanitary ware and related bathroom products are treated as lifestyle products, leading to a pride of ownership. This attitude augurs well for CERA. India’s housing shortage of 26.53 mn homes is expected to increase further. The government has the objective of ‘housing for all’ through Public-Private Partnerships (PPP) and joint ventures as well as through exemptions in Floor Space Index (FSI). This will enhance housing demand. With a substantial increase in FDI inflow into the real estate sector, there will be a new growth wave in the construction of new homes, driving the demand for the entire range of building products The sanitary ware market in India has grown rapidly during the last 5-6 years, with key players doubling their production capacities. India has emerged as a major bath and sanitary ware market in the Asia-Pacific region. The demand is beginning to come from replacement market as well (Developed markets have 80% of demand from replacement market in comparison with just 3% in India)

High earnings

Attitudinal shift

Increase in housing demand

Key Drivers for growth of the industry
What Could be the Growth Drivers? Let’s understand them
 Indians per capita income has more than doubled in last 10 years. And as income levels increase every year there are more and more new customers entering consumption, resulting in significant market expansion.  Estimated population of 1.1 billion growing at 1.7% p.a., and adding population equivalent of Australia every year.  Changing shape of income distribution, resulting in demand increase for high performance items, even at higher values.  Increasing use of branded, high value products to signal success.  Affordability growth > Income growth.

CERA Sanitaryware Ltd.

Basic Details..

Launched in 1980, CERA is a pioneer in the sanitary ware segment in India. The first sanitary ware company to use natural gas, CERA has been on the forefront of launching a versatile color range and introducing the bath suite concept. Based in Kadi, Gujarat, CERA Sanitaryware Ltd. uses International technology, which has ensured CERA’s superior quality. Established with an initial capacity of 3,600 MTPA, the plant has undergone several periodical up-gradations and modernizations to 24,000 MTPA. The company has recently (Sep'10) commenced production of faucet ware, at existing plant, with a capacity of 2500 pieces per day, which would be doubled to 5000 pieces per day in future, having started with marketing of faucets earlier during the year. Products  Sanitary Ware – including sensors  Taps  Shower Range – including steam shower rooms, pressure pumps  Kitchen Sinks  Mirrors  Novellini – Equipped panels, Complete cubicles, Hydro massage bathtubs, Shower enclosure  Personal Care – Hand dryer, Hair dryer, Perfume dispenser, Soap dispenser

CERA has been continuously upgrading its product range by launching new designs. Recently, a new collection was displayed at the Acetech Exhibition in Mumbai and Delhi, where people from trade, architecture, interior designing, plumbing and construction industry, apart from end users visited and appreciated the new products. It also launched innovative designs and water-saving products. The twin-flush model launched in India by CERA for the first time, reduces the water needs of households considerably. WCs designed to flush in just 4lt of water is another notable innovation by CERA. Having shown a growth rate of more than 25% since last 3 years, CERA Sanitaryware Ltd. today is the fastest growing sanitary ware company in India. For its contribution towards the industrial growth, CERA's ED 'Mr. Vidhush Somany' received “The Nirman Ratna Award” in September 2010. To achieve growth in the rapidly changing retail market in the country, CERA has launched its one of a kind CERA Bath Studios in Ahmedabad, Bangalore, Chandigarh, Kolkata, Cochin and Hyderabad, Mumbai. With the opening of the CERA Bath Studios, the discerning consumers, architects and interior designers can have full view of the CERA’s premium ranges of WC’s, Wash Basins, Shower Panels, Shower Cubicles, Bath Tubs, Shower Temples, Whirlpools, CP fittings etc. CERA Bath Studios will complement its existing network of 600 dealers and 5000 retailers. Several Bathrooms are displayed live, so that the customers can get a feel of CERA’s vast range of products. The company has a special tie up with Novellini SpA of Italy for logistic and sales operations of their wellness products. The company has earmarked 15-20 crore for ad budget while they spent around 9 crore during FY 10.

Management & Shareholding Pattern

KEY Executives 1. 2. 3. 4. Mr. Vikram Somany Mr. Vidush Somany Mr. M.K. Bhandari Mr. Atul Sanghvi Chairman-MD Executive Director President (Works) Sr. VP (Marketing & Sales)

Mr. Vidush Somany, Executive Director of CERA Sanitaryware Limited, was awarded Nirman Ratna 2010 by Gujarat Institute of Civil Engineers & Architects in the building material and manufacturing category. Nirman Ratna awards were instituted by GICEA and AIM to felicitate enlightened professionals, who have made notable contributions in the construction business. Mr. Vidush Somany took the reins of CERA Sanitaryware Limited in the year 2004 immediately after his graduation in Business Administration from Franklin & Marshall College, USA. He perfectly complements the vision of his father, Mr. Vikram Somany, who set up the sanitaryware manufacturing facility of CERA in the year 1980 in Kadi near Mehsana and made it one of the most successful bathroom solutions company in the following years. Mr. Vidush Somany, who is just 29, has charted an aggressive growth plan for CERA for the coming years, to take the turnover to Rs.5000 million from the current Rs.2000 million.

Share Holding Pattern..

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As per the Shareholding Disclosures, the Promoter’s of the company have sizable stake at 53.7% The stock is still not on radar of Institutional investors, as are other competitors in the industry. The company is one of the under researched ones, and has thus not attracted much attention of smart money. Companies like Kajaria Ceramics, HSIL Ltd have huge institutional ownership, while there’s no single institution in case of CERA. This is one of the primary reason for the stock being undervalued even though it’s the best performing.

Peer Comparison

Peers Comparison
Company (TTM performance) Sales/Turnover (crore) Revenue growth %(over FY10) Profit (crore) NPM% MCAP (crore) PE 9M Dec’10 Profit (crore) 9M Dec’10 NPM% PE (on Projected FY 11)
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CERA 225.89 18.04 25.51 11.29 211 6.20 19.32 11.53 6.14

HSIL(data for Sept’10) 910.67 11.46 68.33 7.50 841 12.27 41.50 (E) 6.25 15.27

Kajaria Ceramics 886.5 20.39 55 6.20 511 9.29 42.23 6.288 9.14

Somany Ceramics 656.71 20.49 22.76 3.46 137 6.04 15.48 3.25 6.68

There is just one listed competitor in the business – HSIL, others are into ceramic tiles and their margins are different from Sanitary Ware industry. But we have provided a comparison because their growth is driven by similar factors. HSIL, its biggest competitor and having a large market share – 40%, trades at very high multiples although its return ratios and growth rate is inferior to CERA. CERA has been growing with a tight control on debt, whereas, its competitors have taken huge debt for the same. The company deserves PE re-rating by at least 100% Estimates for growth are conservative, and in line with growth of macro factors. But individual companies to perform differently – we have identified CERA as an outperformer.

Financial Analysis

Income Statement – 9M Performance
 The company has been growing continuously since Dec’01 – 9M performance has been on uptrend since then. There’s not a single year during which they have witnessed a de-growth.  The company sailed through global recession, profitably. .  It has never given up profit margins for top line growth – speaking volumes about their focused approach and business acumen.  Financing cost as percentage of EBITDA has been minuscule for last ten years.

Balance Sheet
 Company has not diluted equity over last ten years. Current cash balance is in excess of total indebtness of the company, and sufficient to fund expansion activities of the company. Working Capital has grown far lower than revenue growth – reflecting on excellent management of capital, translating into huge savings. The B/S strength supports aggressive and sustainable growth. We do not expect any equity dilution for the envisaged growth, hence shareholders will benefit immensely over next 3-5 years. 

Cash Flow Statement

As can be observed above, the company has been consistently generating good cash flows from operations. Rather, during the last two years, the cash flow from operations have been in excess of the net earnings of the company. The same reflected the above par efficiency of the management and also points to the fact that Management has not been using very aggressive accounting practices unlike other companies. The positive cash flows from operations have been helping the company fund most of it’s expansion plan without leveraging it’s balance sheet while the other industry player’s have been piling on debt.

Technical Analysis

Technical Trends [Last 6 months]

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The technical on the charts suggest a bullish story in the intermediate time frame. The Short term moving average (20-EMA) is trading near the Medium term moving average (50-EMA) at the 160 levels. The moving average crossover is in itself a strong signal towards presence of intrinsic buying interest at current levels. The Long term moving average (200-EMA) is trading near the 158 mark, which would be acting as a strong support for the counter in case of a possible correction. The counter is momentum driven & in case of an upside which looks eminent on the charts, could ignite a bullish phase for the intermediate time frame.

Investment Rationale

Investment Rationale..
 The sector is expected to grow 15-20% CAGR, but some of the brands are expected to outperform – we have identified CERA as one of them, which is expected to grow at 25-30% CAGR over next 3-5 years. Given that the management has been conservative, the recent bullishness shown by them in both expansion of capacity and promotion of brand exhibits their confidence in growth of the sector as a whole. All the required factors for growth are available - The company has commenced capacity expansion from 2 million pieces per annum to 2.7 million pieces per annum – commissioned faucet manufacturing plant – tie up with global brands – sight on global markets for its products – balance sheet liquidity enabling access to low cost funds. The correction in market will make available equity at cheaper price for informed investors – please note that it is already at discount to fair value.

Risks and Concerns..

Inflation and Interest rate hike may slowdown the growth in Industry, this may delay the revenue targets. Competitors in industry may not pass down inflation affect to consumers, thereby, affecting margins of the company. Any unexpected environmental regulation or government policy may affect the industry as a whole.

News @ HBJ Capital

Dear Members of HBJ Family, As a part of one page update on your company – HBJ Capital, we would like to inform you that a strategic meeting were conducted on Jan 22-23rd 2011 to discuss the Q3 FY11 performance & to review our future plans. Your company has show more than 100% growth during last 1 year & has physical presence in Bangalore, Chennai, Hyderabad & New Delhi. We have checked out a plan for almost 300% growth rate in FY12 with more focus on Institutional business & commencement of HBJ Capital Ventures LLP, an asset management company. We would like to say thank you for being the integral part of this emerging story. -------- Kumar Harendra

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