Investment Advisory Service

Monday, 1 September 2014

Notes from the AGM- Cera Sanitaryware Limited

Cera Sanitaryware Limited held its AGM on August 22, 2014 at its registered office cum factory at Kadi (Dist. Mehsana) , around 60 kms from Ahemdabad.

I decided to combine the AGM visit with a vacation in Gujarat. The trip included a visit to Sun Temple@ Modhera [an architectural masterpiece]; the place where the first ray of sunlight falls on the days of the equinoxes [March 21st and September 23rd every year]. It happens because the Tropic of Cancer passes exactly through the site of the temple.

The AGM started with the usual warm up session of a few shareholders sulking and grumbling about the payment of a low dividend. Does the low dividend matter since the management has been conservative with the capital and has been competent in deploying the capital at good rates of return ? Does the low dividend matter since the market has rewarded the shareholders with a considerable valuation jump in the equity of the company? 

Cera has been able to historically deploy capital in the business at 35% [pre tax ROCE] and 40% [pre tax ROE]. The company is growing at its top line at 30% and has a long run way to cover. It needs capital to grow and any dividend pay out is actually a loss making proposition since 17% of dividend goes to the Government as distribution tax. As long as the management is able to enhance the competitive advantage of the company and is able to deploy capital at healthy rates of return, low dividend or no dividend shouldn't bother the shareholders.

The following is the jist of the opening remarks of the management and replies in response to shareholder queries.
  1. The company plans to increase its sanitaryware capacity to 3.2 mn pieces at the current location at Kadi.
  2. Plans are in the pipeline for a new greenfield capacity expansion in sanitaryware. No location has been finalized till now. It depends on the ease of land acquisition, gas linkages etc. Once finalized, the plant will take around 15 months to be commercialized.
  3. In the faucetware business, the company has been able to streamline the manufacturing and distribution process. The division has turned profitable and the EBITDA margins are around 10%. The capacity will be enhanced from 2500 pieces per day to 7500 pieces per day in a phased manner.
  4. The management finds that the real estate sector is still going through a tough time with a lot of builders sitting on a good amount of unsold inventory and massive debt. Builders are facing a cash crunch and hence Cera is cautious about supplying its material to the builders unless it is very sure of the payments.
  5. In order to lower its dependency on the builders, Cera is aggressively scaling up its distribution network and enhancing brand promotion exercises to get more share of the retail sales.
  6. Cera currently sources around 60% of its gas requirement from ONGC /GAIL [@Rs 12 per cubic meter] and 40% of its requirement from Sabarmati Gas [@ Rs 45 per cubic meter].         
Hike in gas price was a big risk to my Cera's investment thesis. After knowing that the company already sources 40% of its gas requirements at imported LNG market rates and that it has been able to pass on the high gas price to the customers, I don't find hike in ONGC/ GAIL gas price as a serious threat to the future earnings of Cera.         


ZeeNut said...

In the case of Cera, where the valuation has not suffered on account of lower dividend payout your point is valid, however it often takes a decent dividend payout to convince the market that a management is shareholder friendly. Companies which have an unfriendly attitude towards dividend payouts (do not pay / pay only a token dividend) many a times get a low valuation too. In such cases, shareholders should indeed raise this issue.

Anonymous said...

Hi Ankur,

Thanks for the AGM update. I have two question & would appreciate your reply to these-

1) Cera Stock has run quite well & is looking costly on trailing PE. How do you view Cera at current price?

2) Is there any value to attend AGMs of companies which conduct quarterly concalls? From concalls we can know what management is thinking, so AGMs won't give much info. No?(Asking in general; & not related to Cera)


Ankur Jain said...

Hi ZeeNut,

Shareholders should be more concerned about issues of capital mis-allocations, if any. In my view, shareholders have lost more wealth by shoddy capital allocation decisions than by poor dividend payouts.

Poor dividend payout is a relative term. If the management is ethical and competent to deploy capital at healthy rates of return, than even a "poor dividend" will leave shareholders richer over long periods of time. If the management is corrupt in its thinking and actions than even though it might provide a generous dividend handout once in a while, it will for sure leave shareholders poorer than before.


Ankur Jain said...

Hi Nitin,

Thanks for your questions. Question 1 is a perplexing question. It's quite easy to determine whether an investment is a buy but extremely difficult to figure out if it's a sell. I read up on the Chapter "When to Sell" from Philip Fischer's book to take some cues.

First, the business is excellent. The competitive advantage of Cera is better than the year before. The business is growing nicely and the tailwinds are strong. The balance sheet remains conservative and the management remains focused on the business. The management has shown extreme poise in facing the adversity of the demise of their son. On the valuations, I believe that the company is selling close to its conservatively calculated intrinsic value. It's a superior business selling at a fair price, not an expensive price.

On attending AGMs, it's difficult to agree or deny if there is any value in attending AGMs of companies, whether they conduct quarterly concals or not. Some AGMs have been a complete waste of time for me while some others turned out to be goldmine for gaining understanding about the business/ management. It's complete serendipity.



Vivek Gautam said...

Thanks for posting
how severe is the slowdown in RE n how can cos lije Cera Astral escape from it?
Which other stocks u hv in your PF??