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CERA SANITARYWARE LTD.

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: www.hbjcapital.com
E-Mail: info@hbjcapital.com
Call: +91 98867 36791
Best Buying Price…

2 Phase Buying Strategies Suggested [Always buy in SIP ways]

1st Phase : Buy at the current price range Rs 160-170 [40% of investment]

2nd Phase : Add if the price falls down to Rs 130-140 [60% of investment]

>>>Expect at least 4-5 times returns in next 3 years time frame!!!

 HBJ Cap is growing
faster than ever.
HBJ Capital can be your
50x in 3years
investment.
Ask how?
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.
Contd..
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, www.hbjcapital.com & www.multibaggerpennystocks.com
#912, 1st "F" Main Road, Girinagar 2nd Phase, BSK 3rd Stage, Bangalore – 85
Call : 098867 36791, 080 6568 1134 or Mail : Info@hbjcapital.com
CERA Sanitaryware Ltd
Overview
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
Growth&Drivers
Services Industry
High earnings
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.

Attitudinal shift
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.

Increase in housing demand

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)
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
Contd.
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
Management..
KEY Executives

1. Mr. Vikram Somany Chairman-MD

2. Mr. Vidush Somany Executive Director
3. Mr. M.K. Bhandari President (Works)
4. Mr. Atul Sanghvi 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..

 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) CERA HSIL(data for Sept’10)
Kajaria
Ceramics
Somany Ceramics

Sales/Turnover (crore) 225.89 910.67 886.5 656.71

Revenue growth %(over 18.04 11.46 20.39 20.49
FY10)
Profit (crore) 25.51 68.33 55 22.76
NPM% 11.29 7.50 6.20 3.46
MCAP (crore) 211 841 511 137
PE 6.20 12.27 9.29 6.04
9M Dec’10 Profit (crore) 19.32 41.50 (E) 42.23 15.48
9M Dec’10 NPM% 11.53 6.25 6.288 3.25
PE (on Projected FY 11) 6.14 15.27 9.14 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]

 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
Visit : www.hbjcapital.in

HBJ Capital™ Services Pvt. Ltd.

#912, 1st ‘F’ Main, Girinagar II Phase,
BSK 3rd Stage, Bangalore - 85
Contact: +91 80 65681133/34, Mob : +91 98867 36791
Bangalore |Chennai |New Delhi | Hyderabad
Disclaimer..
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furnished to you solely for your information and must not be
reproduced or redistributed to any other person. Persons into
whose possession this document may come are required to observe
these restrictions. This material is for the personal information of
the authorized recipient only.

The recommendation made herein does not constitute an offer to

I don’t
sell or solicitation to buy any of the securities mentioned. No want 2
representation can be made that recommendation contained herein read this!!
will be profitable or that they will not result in loss. Information
obtained is deemed to be reliable but do not guarantee its accuracy
and completeness. Readers using the information contained herein
are solely responsible for their action.

HBJ Capital, or its representative will not be liable for the

recipient’s investment decision based on this report. HBJ Capital,
officers, directors, employees or its affiliates may or may not hold
positions in the companies /stocks mentioned herein.