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At a time when the sanitaryware industry and its leading competitors are growing at a little less than 20 per cent compounded annual rate (CAGR), Gujarat-based Cera Sanitaryware is racing ahead with 30-plus per cent growth.
Annual revenue has nearly quadrupled in the past five years, to Rs 488 crore in FY13. Net profit grew to Rs 46 crore in 2012-13 from Rs 10 crore in 2007-08.
The management attributes its success to financial conservatism.
"Other companies were aggressive and ended up in huge debt and went down. We were a little cautious and didn't over-leverage our balance sheet in a bid to grow faster," says Vikram Somany, chairman and managing director.
The debt-to-equity ratio was only 0.34 in FY13 and interest payment consumed less than 10 per cent of operating profit. "Our long-term debt is negligible and didn't over-expand during the boom," said Somany.
Since FY09, Cera's gross block - investment in plant and machinery - has grown at a CAGR of 13.2 per cent, much slower than that in revenues and earnings. During the period, net sales expanded at a CAGR of 31 per cent and cash profit at 30 per cent.
This enabled the company to improve its balance sheet ratios.
In the past five years, Cera's return on capital employed (RoCE) has expanded by 900 basis points (bps), to 31 per cent in 2012-13; return on equity grew to 29 per cent in FY13 from 19 per cent in FY08. The corresponding ratios for HSIL (Hindware), the industry leader, shrunk during the period, according to data by Capitaline.
Cera's debt-light approach has been noted by others.
"The reason they were able to achieve a higher growth than the industry is because they didn't leverage much. Also, as Cera is a smaller player, their percentage growth was higher than the industry average," says Abhishek Somany, joint managing director of Somany Ceramics, which has Rs 30 crore annual revenue in sanitaryware of a total Rs 1,100 crore.
Analysts say Cera also benefited from a strong emphasis on marketing and brand promotion.
"The company has dramatically increased its brand visibility and is one of the most advertised in the category now. Their ad spend has doubled in two years, even as its key competitor, HSIL (Hindware), has scaled down its ad spend during the period," says a senior analyst at Angel Broking, who has a 'buy' rating on the stock.
The company has brought filmstar Dia Mirza as brand ambassador. Cera has also tied-up with makers of the Heroine film, wherein the character played by Kareena Kapoor was shown launching a Cera Bath Studio in the movie.
All this has helped Cera to outperform its competitors. "In the past two years, Cera's market share in sanitaryware is up by 400 bps to 24 per cent.
It is now the second largest in the industry, ahead of Parryware Roca," says the analyst at Angel Broking.
In a report last month, CRISIL Research assigned a fundamental grade of 4/5 (pronounced four on five) to Cera, indicating the fundamentals were 'superior' in relation to those of other listed equity securities.
Faucetware entry
It expects Cera to sustain its growth momentum, driven by the growing brand awareness. The agency expects the sanitaryware market to grow at 17-18 per cent annually over the next three to four years.
The grade also takes into account Cera's entry into the faucetware business, which presents larger growth opportunities than sanitaryware.
CRISIL says the grade is constrained by the loss-making faucetware business and low visibility on the long-term succession plan. Although Cera is run by a professional and experienced management team, visibility on the long-term succession plan is low.
Renovation bet
The other strategy that helped the company beat the slowdown blues was to go after the renovation market. According to Somany, sales to the renovation market now account for 18 per cent of Cera revenues against just three per cent eight years earlier.
"In the next two years, we plan to make it a quarter of our revenues. This will cushion the blow from slowdown in the new building segment that is facing the brunt of economic slowdown," he says.
Somany now wants the company to graduate from being just a sanitaryware maker to one offering entire bathroom solutions.
"We want a larger share of the customer spending on bathrooms and accessories. This warrants a move towards becoming a lifestyle brand, from being a mass mass segment player in sanitaryware," he adds.
Meantime, the company continues to expand its sales and distribution network. Three years earlier, Cera had 5,500 dealers across India; this number has crossed 9,000. The next few years are likely to be a bit challenging for Cera, given the economic slowdown and fading consumer sentiment.
"The sanitaryware market is slowing as builders defer new projects and consumers are postponing renovations. This will make it tough for Cera to maintain its high growth streak," says Angel Broking. Besides, the company faces tough competition in its new faucet business from both incumbents and price warriors in the unorganised sector.
