Anand Rathi has recommended buying the stock of Cera Sanitaryware for good returns, while Motilal Oswal sees an upside of nearly 22% in the stocks of Dr Reddy's Labs. Here are some of the reasons to be buying the stock. Investors are also expected to do their own research before investing as markets are volatile.
Cera sees to strong demand outlook
According to Anand Rathi, Sanitaryware and faucets, operating at 112% and 117% capacity, their revenue grew 13% and 11% y/y respectively whereas tile revenue fell 42% y/y (Anjani divestment) leading to 1.7% y/y revenue growth to Rs4.4bn. The retail share in overall revenue was guided to remain at 68-72% and the outsourcing share at 54%. Aided by demand uptick and capacity expansion, revenue was guided at 2x and PAT 2.5x every 3.5 years. We expect revenue to clock a 16% CAGR over FY22-24.
"Cost improvements and price hikes in a high-cost context boosted Cera's operating performance. While its B/S continues to be net cash, its coming sanitaryware and faucet expansions would help it cater to mounting demand. We upgrade our rating to a Buy, with a lower target price of Rs.5,171, at a PE of 30x FY24e," Anand Rathi has said.
Cera: Better operating performance
Costs were kept in check in Q4 despite high input prices, through price hikes, low gas costs (GAIL) as gas was available from isolated wells near the plant, greater shopfloor productivity and process efficiencies to raise raw-material-to-end-product yields. EBITDA grew 30.5% y/y to Rs824m. Further price hike are being finalised (FY22 sanitaryware ~21%, faucets ~26%). Margins are guided to increase at least 50-70bps pa. EBITDA would to clock an 18% CAGR over FY22-24.
According to Anand Rathi, to address mounting demand and already operating at high capacity, Cera is expanding its faucet and sanitaryware capacities. It is to set up greenfield sanitaryware capacity of 100,000 SKUs p.m. and brownfield faucet capacity of 125,000 SKUs p.m. besides a de-bottlenecking exercise of 25,000 SKUs p.m. Asset turnover for the new faucet capacity will be 1.5x-2x, sanitaryware ~1.75x. The B/S continues to be net cash where net D/E was -0.6x in FY22.
Buy Godrej Consumer
Motilal Oswal has set a buy call on the stock of Godrej Consumer. The firm sees a upside of at least 205 on the stock. "Godrej Consumer's 4QFY22 results were largely in line. "While the management indicated a sequential gross margin pressure in 1QFY23, led by palm oil cost inflation, the repeal of the Indonesian palm oil ban from 23rd May'22 is potentially good news for subsequent quarter. The new senior management appointees from Unilever are a welcome move. Significant steps appear to have been taken to reduce complexity and SKUs, with the introduction of LUPs in HI and Hair Color to drive category growth," the firm has said. Owing to better capital allocation in recent years, GCPL has already reached a net cash level (excluding lease liabilities) of INR3.7b at the end of FY22.
Price target of Rs 795 on the stock
According to Motilal Oswal, the highlighted detailed notes from Jan'22 and Jul'21, show that Godrej Consumer's domestic businesses had demonstrated a track record of strong sales growth in the first of the last decade, before losing their way in the second half. Better capital allocation, a moratorium on acquisitions, and improved GAUM performance were already being witnessed before the new CEO joined in Oct'22. Domestic and consolidated sales growth has crossed double-digits in the last two years, far better than the 4.1% sales CAGR between FY16 and FY20.
"With investments by the new CEO focused on boosting growth in the high margin, high RoCE domestic business, its medium-term earnings growth outlook is strong. Valuations at 36.9x FY24E EPS are inexpensive. We maintain our Buy rating with a target price of 975 per share (45x FY24E EPS)," the firm has stated.