Flush with success

When people talk of 26/11 and the devastation to Mumbai involved in the terrorist attack, it’s perhaps not surprising that no one really mentions what it took to renovate the hotels afterward — the parts are lost in the magnitude of the sum. For one company, though, it’s a matter of great pride — and something worth repeating — that it was involved in the rebuilding of not just one but both properties. “Both the hotels had been our customers for many years and they wanted us to instal our sanitaryware again in their respective back offices,” narrates Atul Sanghvi, executive director, Cera. It wasn’t a huge contract, just a few lakh rupees perhaps, but that didn’t matter. “The fact that they turned to us at such a time was a vote of confidence for our brand.”

It isn’t only five-star hotels that are demonstrating their trust in Cera. The company is currently the third-largest sanitaryware player, after HSIL and Parryware Roca, with an enviable market share of 24% in the ₹3,000-crore organised market for sanitary fittings. Over the past five years, it has clocked a revenue CAGR of 30% to around ₹600 crore and equally impressive growth in profits at 27% CAGR to around ₹47 crore. More importantly, it has managed to grow with healthy return ratios. “We want to maintain the momentum,” says founder chairman and MD, Vikram Somany, who set up the company in 1980.

How has Cera managed such a stellar performance? For starters, it follows an asset-light model. Then, it’s more than just a sanitaryware player — the company prefers to call itself a complete bathroom solutions provider. While sanitaryware accounts for 74% of its income, faucets and tiles bring in 15% and 7%, respectively. The balance is contributed by the lifestyle business, in other words, premium bathroom products comprising bathtubs, jacuzzis, steam cubicles, shower partitions, shower panels and allied sanitaryware products. Over the years, Cera has carved a niche for itself in the mid-market space where competitive pressure is limited to the top three players. The management is now focusing on further consolidating its position through brand-building measures and increasing the distribution reach. 

Going premium

Mid-day at Cera’s manufacturing facility in Kadi, an hour’s drive from Ahmedabad, and the sweltering heat is not making life easy. Mounds of china clay and ball clay are stacked as workers diligently go about their job of transforming that into what will eventually be very attractive sanitaryware for bathrooms across India. This is Cera’s only manufacturing facility in India; it employs 3,250 people, has a production capacity of 2.7 million tonne per annum (mtpa) and utilisation levels are rarely below 100%. Cera plans to increase capacity to 3 mtpa by the end of the current fiscal and to 3.2 mtpa by FY16. “While we have steadily increased capacity, we have also adopted a very conservative approach to this. We need to be sure that there is indeed a market before putting in the money,” says SC Kothari, chief executive officer. 

The right mix

Cera is currently looking at creating a balanced product portfolio in order to spur growth

Currently, the factory also manufactures 2,500 pieces of faucets per day, which Kothari thinks can go up to 10,000 pieces by December. The foray into brass faucets is new — the company launched its first set of products only last year and the going hasn’t been easy. “There were teething problems and it was a while before we got it right on quality,” says Somany. But, at ₹6,000 crore, the market is double that of sanitaryware and too big for Cera to ignore. The division was in the red till Q1FY14 and broke even in the following quarter. And though sanitaryware will continue to be the mainstay of the company, faucets already account for 18% of revenue. “Faucetware is a new business and we are looking to garner at least 3% of the market this year,” says Sanghvi. 

Analysts, too, are optimistic about Cera making its mark in the new foray. “Over the next few years, we expect faucetware to grow as it has a larger addressable market than sanitaryware,” points out Mohit Modi, director, Crisil Research.

In March 2013, Cera also ventured into the tiles market, which, too, isn’t an easy business, Somany admits. “It is a hugely commoditised market where designs change very quickly,” he points out. For now, the tiles are imported and sold under the Cera brand name in India. “In time, we will look at having joint ventures to manufacture tiles. That is some time away, though.”

The entry into faucetware and tiles is part of Cera’s effort to position itself as a bathroom solutions provider and establish itself more firmly in the premium segment. “By offering a suite of products, we want to become a one-stop shop for the customer,” explains Somany. All these years, Cera’s positioning in the mass and mid-market segments has worked well, but now it wants to make inroads into the high-margin premium segment, where players such as Kohler, Duravit, HSIL and Roca have already established themselves. “The global players cater to the premium segment, while the unorganised players are at the low-end mass market,” points out Kamlesh Kotak, head of equity research at Asian Markets Securities. Around 60% of the organised sanitaryware market comes from this mass segment, where Cera, HSIL, Parryware and Classica are dominant players. Another 30% is from the lower and upper-mid segment where Cera competes with American Standard, among others. 

For now, Cera sells its premium products, including imported shower panels, bathroom cubicles, bathtubs and jacuzzis, under the parent brand. And about 4% of its revenue comes from this segment. Going forward, says Somany, the firm will use Cera, a name derived from the word ceramic, only for the mass and upper-mid segments. Actor Sonam Kapoor has already been Cera’s brand ambassador to give the company a premium image. “We will be ready with a new brand by the end of this year. This will be necessary to reach out to a new audience,” he thinks. For that, the company has set up Style Studios — 10,000 sq ft stores, largely targeted at architects, interior designers and developers, where the entire product range is displayed. The idea is to reach out to premium customers through these influencers and create brand recall. 11 Style Studios have already been opened in six cities, with plans to open a couple more in smaller centres such as Chandigarh.  

Gaining traction

The expanded portfolio catering to all market segments has definitely played to Cera’s benefit. But what has been critical to its growth is its asset-light model. In FY14, turnover from manufacturing for sanitaryware accounted for 60% of revenue while the rest came from outsourcing, including imports. In faucets, outsourcing accounted for 45% of FY14 segment revenue and the entire premium segment revenue came through outsourcing. “We have taken a strategic decision to have just one manufacturing facility with the idea of rationalising overheads and controlling costs,” says Somany. 

The foreign hand

High level of imports has impacted margins owing to a volatile currency

Currently, Cera manufactures 60% of its sanitaryware and 55% of its faucets at Kadi and outsources the rest. Bharat Mody, the company’s strategic advisor, adds that the aim is to strike the right balance between contract manufacturing and doing it themselves. “But we are also looking at the option of joint ventures at other locations for the sanitaryware business.” That’s something Crisil’s Modi feels will become imperative in the future. “Though the outsourcing strategy works given the inherent strength of an opex model, we believe that as the company grows, it would have to increase its in-house manufacturing.”

More importantly, Cera also needs to expand if it is to leverage the increasing shift in sanitaryware from unorganised to organised. With customers increasingly becoming finicky about quality and sold on the fact that sanitaryware should last, pricing is not always the most important point of debate. That probably explains why wellness as a segment is itself a ₹500 crore market and growing by at least 20% each year. Cera is catering to this segment through imports from China, Turkey and other places — the products are branded Cera and priced at a discount to premium brands. The strategy is simple: reach out to users who want lifestyle products yet can’t afford most of what is available in the market. 

Asian Markets’ Kotak thinks it will be necessary for Cera to plan its expansion in its core sanitaryware business to sustain high growth beyond FY15. “This is not the case with tiles and bathroom solutions since they are outsourced. In faucets, the company’s plan to increase capacity will be enough to serve the market for the next three to four years,” he says.

Finding growth to justify those expansions won’t be difficult. “Growth will continue even on a larger base,” says Mody. “It will come from a composite product basket, higher production capacity and strengthening our distribution.” The company has over 1,000 distributors who reach out to about 10,000 retailers. Cera’s biggest market, despite its Gujarat plant, is south India at 40% of sales. West India comes next with 25%, followed by the north at 23%. “There is clearly a bigger opportunity in the north and east,” points out Mody. 

Expanding reach and establishing itself in tougher markets is an imperative. Competition is going to only intensify in future. “Global brands that have entered India are looking to expand their footprint. On a more positive side, unorganised players are getting marginalised due to cost pressures, lack of brand equity and inability to scale up,” explains Kotak.

Modi of Crisil Research agrees. “We feel the company faces competition in the mid-market segment but Cera’s focus on improving the brand, planned expansion of its distribution network and introduction of premium models are expected to strengthen its position.” 

By a wide margin

Rival HSIL’s return ratios pale in comparison with that of Cera

In the coming years, Cera is expected to further increase its penetration in the south and under-penetrated northeast through aggressive marketing and distribution efforts. It helps, of course, that the company doesn’t have a cost problem. Natural gas accounts for 65% of the total power and fuel costs and, according to Sanghvi, the price is frozen till December 2015. Nearly 65% of Cera’s capacity at Kadi is reliant on gas supplies under the administered pricing mechanism, while rivals HSIL and Parryware bank heavily on regassified LNG/LPG gas to meet their fuel requirements, which is far more expensive compared with APM gas. The net result: Cera has managed to enjoy return on equity in excess of 20% compared with leader HSIL (9%). “Cera’s balance sheet strength will help it in executing its strategies seamlessly,” points out Modi.

Growth blues

Still, as Cera looks to step on the gas, it will have to fight some niggling issues. For instance, Ebitda margins have slumped from 18.8% in FY11 to 13.7% in FY14. The reason: one-third of its revenues constitute imports, which means the company is exposed to currency volatility. However, the management is now hedging its entire import cover and, moreover, with recent price hikes and a more stable rupee, margins are expected to normalise at around 14-15%. “Going forward, a gradual change in product mix towards high-end products and expected improvement in the profitability of faucet ware products should help on the margins front,” says Crisil’s Modi.

But if the contribution from the tiles segment, which has muted margins of 5%, grows, it could further temper margins. The management is cognisant of the downside of operating in the tiles business but believes the segment cannot be left out if it is to position itself as a complete bathroom solutions provider. Besides, Mody feels, the business should be looked at from return on equity perspective and not only on Ebitda margin basis.

For now, Cera’s management is looking at maintaining a CAGR of 30-35%, though Somany admits that sustaining this kind of growth on a larger base will be difficult, even if opportunities are plentiful. Analysts, too, seem to agree. “The high growth rate of 30-35% witnessed over the past three years will subside with a higher base. We expect a 20-22% growth in topline with 12-13% Ebitda margins as sustainable,” says Kotak. 

But the Street is not reading too much into the challenges, given that the stock has doubled since CY13 to its current levels of ₹877. Will investors’ expectations end up being misplaced? Somany believes otherwise. “We have done very well on every parameter, be it growth or shareholder returns. In fact, we believe the best is yet to come for Cera.” If that indeed is the case, then the show has just begun.