Bullsbook: Alpha Invesco Research Private Limited

Alpha Invesco Research Private Limited
BULLSbook
Stock Of The Month : Cera Sanitaryware Limited
November
2011
Alpha Invesco Research Pvt Ltd www.bullsbook.com
Editors Desk
Dear Investor,
Here is a brief of what you will come across in this edition of BULLSbook.
First section of this edition briefs on few important ratios to be looked into while
investing.
In the second edition we have included the checklist of Investment Principles by one of
the most followed investors across the world, Charlie Munger. He defines Discipline &
Patience as the key differentiators in Investments. Do read this section, few basic
things give us a lot of insights on Investing.
We are repeating last month’s article again. Market sentiment is extremely negative,
and it is very easy for investors to make costly mistakes. History holds the answer to
what may come in future. Nothing really changes. History repeats itself. This is true in
economy, politics, business, personal life & few other things. Only the equilibrium
changes, rest everything remains the same. This month we have given few references
from the historical data of National Stock Exchange to prepare what may come in the
next few months. Please go through the extended second section.
Third section has the stock of the month. We are recommending Cera Sanitaryware
Limited. Cera is one of the well known names in the bathroom fittings & accessories.
The company is steadily growing over the last few years. And current valuations offer a
good entry point to start accumulating this stock for long term.
All the best.
November 2011
Our Approach
THE KEY RATIOS – THE THREE RATIOS
ROCE : Return On Capital Employed
What Does Return On Capital Employed - ROCE Mean?
It is a ratio that indicates the efficiency and profitability of a company's capital

investments. In short, it indicates how efficiently the company is using its capital.
ROCE should always be higher than the rate at which the company borrows the capital;
otherwise any increase in borrowing will reduce shareholders' earnings.
Calculated as: EBIT (Earnings before Interest & Tax)
Total Assets – Current Liabilities
It is used to prove the value the business gains from its assets and liabilities, a
business which owns big land but has little profit will have a less ROCE to a business
which owns little land but makes the same profit.
Higher ROCE attracts higher PE ratios for individual stocks.
Drawbacks of ROCE
ROCE measures return against the book value of assets in the business. As these are
depreciated, the ROCE will increase even though cash flow has remained the same.
Thus, older businesses with depreciated assets will tend to have higher ROCE than
newer businesses. While cash flow is affected by inflation, the book value of assets is
not. One more thing to remember is, revenues increase with inflation while capital
employed generally does not (since the book value of assets is not affected by
inflation)
Debt To Equity Ratio

Long-term debt divided by shareholders' equity,
showing relationship between long-term funds
provided by creditors with respect to the
Shareholders funds. A high Debt Equity ratio indicates high risk while a lower ratio may
indicates lower risk.
Short-term debt is not included as long as cash is greater then short-term debt. As
equity increases relative to debt, the company becomes a more attractive investment.
Finally, bond debt is preferred to bank debt because bank debt is due on demand.
Companies that repay back debt experience PE expansion compared to companies that
take on debt.
It’s a simple formula; Total Debt ÷ Shareholder Equity
Preferred shares can be considered part of debt or equity. Attributing preferred shares
to one or the other is partially a subjective decision but will also take into account the
specific features of the preferred shares.
While calculating company's financial leverage, the debt usually includes only the Long
Term Debt (LTD). Financial analysts and stock market research will generally not
include other types of liabilities, such as accounts payable, although some will make
adjustments to include or exclude certain items from the formal financial statements.
Companies that increase the debt on the balance sheet get a lower PE ratio whereas
companies that repay back old debt will get better PE ratio by the market.
Current Ratio
It’s a ratio which we get after current assets divided

by current liabilities.
i.e. Current Assets ÷ Current Liabilities
This shows how easily the company could pay its

bills if all its creditors demanded payment at once.
This ratio should be at least 1, because if it's lower than 1 then it means that the
company does not have the liquidity to pay all its creditors straight away. Higher
current ratio indicates greater health of the company’s financial situation to repay back
its debt.
November 2011
BULLSbook Corner
In this section we will keep you updating about latest sector updates, market updates,
interviews & thoughts of investing legends, significant events & much more.
An Investing Principles Checklist – Charlie Munger
Charlie Munger is vice chairman of Berkshire Hathway, company headed by Warren

Buffett. Buffett often describes him as his partner. Like Buffett, Charlie Munger is
known for his discipline & philosophy while investing.
Fundamental philosophy of life & Investments : Preparation. Discipline. Patience.

Decisiveness.
Risk – All investment evaluations should begin by measuring risk, especially

reputational
Incorporate an appropriate margin of safety
Avoid dealing with people of questionable character
Insist upon proper compensation for risk assumed
Always beware of inflation and interest rate exposures
Avoid big mistakes; shun permanent capital loss
Independence – “Only in fairy tales are emperors told they are naked”
Objectivity and rationality require independence of thought
Remember that just because other people agree or disagree with you doesn’t
make you right or wrong – the only thing that matters is the correctness of your
analysis and judgment
Mimicking the herd invites regression to the mean (merely average
performance)
Preparation – “The only way to win is to work, work, work, work, and hope to have a
few insights”
Develop into a lifelong self-learner through voracious reading; cultivate curiosity
and strive to become a little wiser every day
More important than the will to win is the will to prepare
Develop fluency in mental models from the major academic disciplines
November 2011
If you want to get smart, the question you have to keep asking is “why, why,
why?”
Intellectual humility – Acknowledging what you don’t know is the dawning of wisdom
Stay within a well-defined circle of competence
Identify and reconcile disconfirming evidence
Resist the craving for false precision, false certainties, etc.
Above all, never fool yourself, and remember that you are the easiest person to
fool
“Understanding both the power of compound interest and the difficulty of getting it is
the heart and soul of understanding a lot of things.”
Analytic rigor – Use of the scientific method and effective checklists minimizes errors
and omissions
Determine value apart from price; progress apart from activity; wealth apart
from size
It is better to remember the obvious than to grasp the esoteric
Be a business analyst, not a market, macroeconomic, or security analyst
Consider totality of risk and effect; look always at potential second order and
higher level impacts
Think forwards and backwards – Invert, always invert
Allocation – Proper allocation of capital is an investor’s number one job

Remember that highest and best use is always measured by the next best use
(opportunity cost)
Good ideas are rare – when the odds are greatly in your favor, bet (allocate)
heavily
Don’t “fall in love” with an investment – be situation-dependent and opportunity-
driven
Patience – Resist the natural human bias to act

“Compound interest is the eighth wonder of the world” (Einstein); never
interrupt it unnecessarily
Avoid unnecessary transactional taxes and frictional costs; never take action for
its own sake
November 2011
Be alert for the arrival of luck

Enjoy the process along with the proceeds, because the process is where you
live
Decisiveness – When proper circumstances present themselves, act with decisiveness

and conviction
Be fearful when others are greedy, and greedy when others are fearful
Opportunity doesn’t come often, so seize it when it comes
Opportunity meeting the prepared mind; that’s the game
Change – Live with change and accept unremovable complexity

Recognize and adapt to the true nature of the world around you; don’t expect it
to adapt to you
Continually challenge and willingly amend your “best-loved ideas”
Recognize reality even when you don’t like it – especially when you don’t like it
Focus – Keep things simple and remember what you set out to do
Remember that reputation and integrity are your most valuable assets – and can
be lost in a heartbeat
Guard against the effects of hubris (arrogance) and boredom
Don’t overlook the obvious by drowning in minutiae (the small details)
Be careful to exclude unneeded information or slop: “A small leak can sink a
great ship”
Face your big troubles; don’t sweep them under the rug
November 2011
A Reminder of November 2010 – Let’s go back, let’s look ahead.

In November 2010 when the markets were on a roll and everyone was extremely
bullish, we raised a point of concern to stay away from the market optimism and gave
caution. What we recommended was, not to exit the market but to stay invested only
in quality stocks with solid earnings. And it paid of well to us and all our clients. Most of
the cheap quality mid caps & large caps has fallen severely between 40 to 80% and
dented investors capital in last 12 months. But good quality companies with solid
future prospect are standing still. Off course they have not gone up much, but they
have not eroded the capital of investors.
This article is not to boast, “Look we told you so”. 2-3 stocks recommended by
BULLSbook have gone down significantly in last 12 months, and we were not able to
exit at the peak prices. But lessons have been learnt, and we make sure that we would
do better in times to come.
Go through this article carefully and you will understand why patience pays. Markets
adjust to rational prices over the long term. If they correct, they correct slowly and
give signs of overheating before any correction. And if markets go up, they give a clear
cut sign that they are going to go up in next few months. Just like in November 2010,
markets were giving a clear cut signal that there will be a correction / consolidation of
1-2 years. Now when we are in October 2011, market is giving a solid signal that they
are preparing to go up in next 12 to 24 months. It is not that market will not fall
anymore, but they are somewhere near the bottom. And in any case Sensex/Nifty
cannot remain at lower levels for long time even if it falls another 10-20% from here.
And history proves it. Have a look. And start planning to benefit from the significant
rise in stock prices in months to come.
November 2011
BULLSbook November Edition : 2010

HISOTRY CAN REPEAT ITSELF : BEWARE, BE AWARE, BE ALERT !
Markets are on a high ! The excitement is increasing. The frenzy may come back over
the next few months. We circulated the above article to our Investors & Subscribers in
the Month of May 2010. The sheer purpose was to alert our readers, to make them
stay away from punter stocks with no fundamentals & to prepare their mindset for
unusual swings in market movements. The purpose is unsolved yet. We are repeating
the same article again, with few content additions.
Staying fully invested in expensive markets is the most dangerous thing to do with
your money. Since NSE started, every time when Nifty’s Price/Earnings ratio has gone
above 22, the average returns of Nifty became negative over the next three years.
Nifty PE 3 Year Returns
Less Than 14 152%

14-16 112%
16-18 79%
18-20 51%
20-22 21%
22-24 -15%
24-26 -32%
26-28 -36%
28-30 -40%
You can see current P/E multiple of Nifty at NSE’s

website. To have a look, visit -
http://www.nseindia.com/content/indices/ind_pepbyield.htm. At this moment, Nifty’s

current PE Ratio is 24.39.
Why we are giving a caution now? The reason is simple. People don’t tend to think
logically in bull markets. And they will not listen to our advice when the markets are in
a bubble stage. Here we are trying to mentally prepare our readers to stay away from
the crowd as and when the markets are in euphoria. Every bull market produces large
profits for investors which gives them an extremely high level of confidence (or
overconfidence!) Investors believe that almost anything & everything will allow them to
November 2011
continue experiencing profitable decisions. Plenty of “experts” will tell you to buy
stocks and to remain invested, even if the markets are in a bubble stage. And the
argument is, “this time it’s different.” Growth prospects may change, but one thing
that never changes is; “it is not profitable to invest whenever the markets are
historically expensive.” But when the markets are on run, people will continue to invest
in junk stocks based on various rumours, landbank stories, value unlocking and what
not. As legendary investor Warren Buffett quotes, “What we learn from history, is that
people don’t learn from history.”
At BULLSbook, we continuously monitor the

markets. But we never try to time them.
Whenever we have tried to time the markets
or stock prices, we have gone horribly &
terribly wrong ! And we have learnt our lessons. Even in the recent past, we tried to
time few stocks by waiting for them to fall at our desired levels. The stocks never came
to our buying levels & they went up. Some stocks doubled, some tripled, and some of
them even went up by more than 500%! This reminds us of a famous Warren Buffett
principle, ‘You may not always get the cheapest price for the stock, but you may get
the stock at fair price. The point is to not to buy it when it’s expensive’. And vice versa
while selling or exiting the stock.
However, if we observe that the markets are overheating & investors should exit/partly
exit their long term investments we shall update the strategy for the same in our
newsletter. Here again, we will not attempt to time the market but to position our
subscribers & readers in such a manner that even if the things go wrong in Indian
Stock Markets; all of us are unhurt. For time being, enjoy the bulls ride & remain
invested in only in Quality Stocks !
November 2011
Now let’s come back to October 2011.
BULLSbook October Edition : 2011

HISOTRY CAN REPEAT ITSELF : BEWARE, BE AWARE, BE ALERT !
Already Invested In Quality Stocks & Holding Them ? – You have done the right
thing….
Not Invested Yet But Planning To ? - Opportunity is knocking, where are you ?
Nifty PE 3 Year Returns
Less Than 14 152%

14-16 112%
16-18 79%
18-20 51%
20-22 21%
22-24 -15%
24-26 -32%
26-28 -36%
28-30 -40%
You can see current P/E multiple of Nifty at NSE’s website. To have a look, visit -
http://www.nseindia.com/content/indices/ind_pepbyield.htm. At this moment, Nifty’s
current PE Ratio is below 18.
So what next ? Are the markets going up from tomorrow ? Is it that the
market will not fall at all and will not go below the recent low of 4700 ?
The answer is, “Who knows ? Even god doesn’t know that ?”. So why scratch our heads
in predicting what we cannot. Let’s not time the market.
But then what to do now ? We think it’s time to remain sensible, practical and continue
to invest or remain in quality stocks with high growth prospects. And it will pay
handsome returns over the next few months. If the markets fall more, then it will be
another opportunity to accumulate stocks. If it does not fall significantly and
consolidates around current levels, we are getting decent levels and fair valuations to
buy stocks. So in any case your strategy should be keep on investing in regular
intervals when the market gives opportunity.
November 2011
And if you are already fully invested,

make sure you have all good stocks in
your portfolio & stick to them. Even if all
so called experts are predicting bearish
market & expect a “Big Fall” which never
comes. Analysts usually get bearish
towards the end of the bear markets. So
be aware & beware !
If you have bought any of the

BULLSbook stock or are planning to buy
more. No worries, keep on
buying/holding them. Yes and do check their latest status on our website
www.bullsbook.com before & after investing on regular intervals. After all its not about
our subscription fees, but about your hard earned money.
Happy Investing ! And Happy Diwali 2011 ! Let’s hope that by next Diwali, all our
subscribers, readers & everyone associated to BULLSbook sees a significant jump in
our wealth ☺
November 2011
Stock Of The Month

CERA Sanitaryware Limited
BSE : 532443 BSE Group :B
NSE : CERA ISIN : INE739E01017
Market Cap : 222 Cr Face Value :5
Dividend : 50% PE Ratio : 7.4
CMP : 172 52 Week H/L : 245/126
BULLSbook Target : 350
Holding Period : 24 Months
BUYING STRATEGY
We recommend accumulating CERA at current price of 172 & on all declines to 140-150
range if any. It’s a low liquidity stock, so acquisition strategy should be slow & steady
over a period of time. The company is growing steadily over the past few years, and
with increasing standard of living & awareness; the overall demand for bathroom
accessories is expected to continue to grow. Being a well known name in the industry,
CERA is poised to benefit from its innovative product line.
November 2011
ABOUT THE COMPANY
Started in 1980, Cera Sanitaryware Ltd (CERA) is

one of the early movers in sanitaryware segment
which was largely an unorganized sector then. The
company was known as Madhusudan Industries Ltd
till 2002. As a part of restructuring, the
sanitaryware division was demerged and was
named Cera Sanitaryware Ltd.
Cera is the third largest sanitary ware company in India (in the organized segment)
and has a market share of around 20%. The company is engaged in the manufacturing
of ceramic wash basins, wash basin pedestals, bidets, water closet pans, flushing
cisterns, urinals and all sorts of sanitaryware & bathroom fittings.
CERA is the first sanitaryware company to use natural gas as a fuel. It has also been
on the forefront of launching a versatile colour range and introducing the bath suite
concept along with 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 4 litres of water is another notable
innovation by CERA.
Based in Kadi, Gujarat the plant was established with an

initial capacity of 3,600 MTPA. The plant has undergone
several periodical up gradations and modernizations to
reach a capacity of 24,000 MTPA. The company is
undergoing an expansion in its sanitaryware production
capacity from 2.2 million pieces to 2.7 million pieces
(~31,000 MT). The company is also considering adding a
fireclay plant to produce large washbasins that cannot be
produced using ordinary raw materials. This would make
CERA’s plant at Kadi the single largest sanitaryware plant at one location in India. This
is expected to give a huge cost benefit as compared to having multiple locations.
CERA has been marketing faucets for the past few years and recently forayed into the
manufacturing of faucets at a plant built adjacent to its sanitaryware plant at Kadi with
November 2011
an initial capacity of 2500 pieces per day with the intention to increase the same to
7500-10000 pcs per day in next 3-5 years time span.
A large part of CERA’s revenue comes from

outsourced goods. Besides marketing faucets, the
company markets imported products like shower
cubicles, shower panels and steam cubicles in
addition to sanitaryware. The company also has a
strategic marketing alliance with European wellness
leader, Novellini Spa of Italy to import and sell their
shower products consisting of steam cubicles, massage bathtubs, equipped panels,
shower cubicles etc. in India. Novellini is responsible for the marketing of its products
while CERA is responsible for logistics and sales operations. This arrangement has not
worked out well and hence this activity is being scaled down.
BOARD OF DIRECTORS
Sr. Name Designation

No
1 Vikram Somany Chairman & Managing
Director
2 Sajan Kumar Pasari Director
3 K N Maiti Director
4 Shree Narayan Mohata Director
5 Vidush Somany Executive Director
6 Ashok Chhajed Director
7 Govindbhai P Patel Director
8 Mahendra Kumar Bhandari Director (Technical)
9 Narendra N Patel Company Secretary
FINISHED PRODUCT
Product Name Unit Value Qty % Sales

Turnover
Sanitaryware MT 255 24691 100
November 2011
INDUSTRY OVERVIEW
Sanitaryware industry in India is around
1600 crores Rs. in terms of size, including
organized & unorganized players and
importers mainly from China. Several
international companies, who earlier
marketed their products through local
importers, have set up their own
manufacturing facilities. Besides this, there
are brands that still continue to market their
products in India through imports. Chinese
imports pose a significant threat to the local
players.
The organized market size is around 1000 cr. Unorganized and import markets stand
somewhere around Rs. 500 cr and Rs. 100 cr respectively. The organized market
caters largely to the middle and higher end of the market while the unorganized
segment mainly caters to the export and lower end of the market. The unorganized
sector, largely based in Gujarat, poses threat to some extent for the organized players.
There are close to 300 plants in the area with collective production capacity of 0.6 mn
tonnes per annum. The organized market is larger in terms of value but in terms of
volume, the unorganized market has the larger share. The import market is largely
directed toward the super-premium segment with China posing as the largest threat.
Some of the brands largely imported are Roca, Duravits, Toto, American Standard and
Kohler.
India’s sanitaryware industry has been growing at approximately 12-15% annually

over the last 6-7 years, accounting for 8% of the world’s sanitaryware production
today. However, the sanitation coverage in the country is only around 40%, which is
considered to be one of the lowest in the world, thus increasing the risk of health
hazard and epidemics. The comparable penetration levels in some of the neighboring
cou tries are: Pakistan – 50%, Sri Lanka – 65%, Malaysia – 94% and Thailand – 96%.
With increasing awareness towards improving public health, the Indian sanitaryware
segment is expected to diminish the gap between itself and other nations. The
November 2011
sanitaryware segment is expected to continue growing at 12-15% annually due to

robust demand from the real estate sector.
Real estate has a direct impact on Cera’s topline since it

derives a significant amount of its revenue from the
industry. Demand from residential and commercial
segments appears robust. India’s housing shortage of 49
million homes has been increasing every year and is
expected to increase even further going forward. However,
the government has set forth an objective of ‘housing for all’ through Public-Private
Partnerships (PPP) and joint ventures as well as through exemptions in Floor Space
Index (FSI). 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. Further replacement demand also remains strong
as home owners seek to upgrade their WCs and Bathrooms at regular intervals having
seen the latest trends in hotels, malls and on visits abroad.
STRENGHTS, OPPORTUNITIES & THREATS

Being one of the early movers into the organized sector, CERA enjoys a good brand
recall & has a good brand presence in the segment. Also, over the years it has
developed a network of more than 500 dealers and nearly 4500 retailers across the
country. This enables the company to grow the business in the times to come.
Housing and Institutional sectors are the major growth engines. At present, housing
demand is rapidly rising and with increasing purchasing power, people have started
taking interest in premium sanitaryware products. A rising middle class, rising per
capita income, increasing awareness about health and fitness and changing consumer
mindsets will drive the demand for premium sanitaryware products. India’s young
earners aspire for a better lifestyle and they look for global quality. Quality has started
taking precedence over price resulting in greater demand for premium sanitaryware
products because even bathroom furnishing has now become an important part of
home décor.
Sanitaryware demand comes from new projects as well as from the replacement
market. Close to 93% of the demand in India is 93% new demand while only 7% arises
November 2011
from replacement demand. In most developed economies, new demand accounts for
only 20% of the total demand while replacement demand accounts for 80% of the
demand. As the proportion changes in India towards the global one, we could see
higher and higher demand from replacement markets.
Cera is also undergoing capacity expansion of its existing plant

from 2.2 million pieces to 2.7 million pieces for a cost of Rs. 50-
60 cr. This expanded capacity is expected to operate by
September 2012 and is expected to add Rs. 50 cr in sales. The
company is considering adding a fireclay plant to produce large
washbasins that cannot be produced using ordinary raw
materials. Cera is also testing pressure-casting systems, a
technology highly prevalent in Europe. If found feasible and implemented, this system
could save 35% production time, thereby increasing capacity by at least 20%.
The company currently outsources a significant portion of its manufacturing and can
always increase the outsourced orders in case of shortage of owned capacities.
Risk/Threat Factors
The Indian sanitaryware industry displays stiff competition. Cheap imports from China
are a concern for domestic players as well.
A significant slowdown in real estate sector can affect the demand of sanitaryware
products. Since most of the demand comes from new homes segment.
Cera imports products from China to sell in Indian markets. Rupee fluctuation affects
its cost of imports. A significant deterioration in the rupee, will increase its imported
goods. It still needs to be seen how the company tackles with the current depreciation
of rupee.
November 2011
SHAREHOLDING PATTERN
shareholding
Promoters 55%
Public 45%
Public Shareholding Pattern :
FII’s & Mutual 2.47%

Funds/UTI/Financial
/Financial
Institutions/Banks/Insurance
Companies
Corporate Bodies 5.72%
Individual Shareholders up to 1 18.27%

Lac Rs share capital
Individual Shareholders more 14.93%
than Rs 1 lac share capital
Others ( NRI’s, Clearing 3.60%
Members)
Total 45.00%
Promoters hold majority stake in the company.

company Their shareholding has gone down
slightly from 58% to 55% over the last few years. There is no pledging of shares by
the promoters so far.
Company declared bonus in the ratio of 1:1 in September 2010.

BALANCESHEET
in Cr. Mar Mar Mar Mar Mar

2007 2008 2009 2010 2011
SOURCES OF FUNDS :
Share Capital 3.04 3.09 3.11 3.14 6.33

Reserves & Surplus 44.12 55.31 67.51 85.37 105.23
Total Shareholders Funds 47.16 58.4 70.62 88.51 111.56
Secured Loans 24.42 31.62 33.67 25.64 37.65
Unsecured Loans 5.12 7.47 1.89 1.57 0.24
Total Debt 29.54 39.09 35.56 27.21 37.89
Total Liabilities 76.7 97.49 106.18 115.72 149.45
APPLICATION OF FUNDS :
Gross Block 63.33 94.2 98.78 98.82 113.11

Less: Accum. Depreciation 13.88 18.65 24.46 30.22 34.77
Net Block 49.45 75.55 74.32 68.6 78.34
Capital Work in Progress 10.01 0.89 0.21 2.16 6.11
Investments 0 0 0 0 7.77
Current Assets, Loans & Advances
Inventories 20.34 26.6 26.85 36.36 50.03
Sundry Debtors 22.37 25.7 30.69 33.14 38.79
Cash and Bank Balance 10.69 10.73 21.64 34.05 36.47
Loans and Advances 9.52 8.59 10.09 16.95 21.29
Less: Current Liab. & Prov.
Current Liabilities 38.41 44.21 46.85 58.62 66.66
Provisions 7.4 6.47 10.86 16.98 22.73
Net Current Assets 17.11 20.94 31.56 44.9 57.19
Miscellaneous Expenses not w/o 0.13 0.11 0.09 0.06 0.04
Total Assets 76.7 97.49 106.18 115.72 149.45
Contingent Liabilities 3 4.47 3.38 1.97 3.77
Company is funding its growth mainly from internal accruels, and is going very steady
on debt. The debt has remained at the same level in last 5 years, at the same time the
sales have gone up by nearly 130%. Inventories have grown in line with the sales.
Sundry Debtor cycle is generally of 6 months, so no significant issues on that front.
Overall the balance sheet looks neat & clean and very healthy. Which enables the
company to take calculated risks for future growth.
November 2011
PROFIT & LOSS ACCOUNT

in Cr. Mar Mar Mar Mar Mar
2007 2008 2009 2010 2011
INCOME :
Sales Turnover 116.71 139.36 170.55 200.28 255.55
Other Income 0.92 2.37 1.9 2.47 5.07
Stock Adjustments 2.97 4.56 0.9 7.68 10.42
Total Income 120.6 146.29 173.35 210.43 271.04
EXPENDITURE :
Raw Materials 42.86 51.41 60 74.36 96.86
Excise Duty 10.23 12.21 10.82 8.96 12.6
Power & Fuel Cost 4.42 5.8 4.98 6.33 12.3
Other Manufacturing Expenses 7.18 9.33 9.46 12.47 14.82
Employee Cost 14.41 19.19 22.03 22.88 27.7
Selling and Administration Expenses 14.92 18.13 26.01 37.82 44
Miscellaneous Expenses 6.77 6.57 10.24 9.09 11.99
Profit before Interest, Depreciation & 19.81 23.65 29.81 38.52 50.77
Tax
Interest & Financial Charges 2.28 3.17 3.97 2.53 2.72
Profit before Depreciation & Tax 17.53 20.48 25.84 35.99 48.05
Depreciation 3.54 4.94 5.93 6.1 6.53
Profit Before Tax 13.99 15.54 19.91 29.89 41.52
Tax 4.92 5.49 6.8 10.28 14.98
Profit After Tax 9.07 10.05 13.11 19.61 26.54
P & L Balance brought forward 4 5 6 8 9
Appropriations 8.07 9.05 11.11 18.61 24.54
P & L Bal. carried down 5 6 8 9 11
Equity Dividend 0.67 0.93 1.24 1.57 3.16
Corporate Dividend Tax 0.11 0.16 0.21 0.27 0.51
Equity Dividend (%) 22 30 40 50 50
Earning Per Share (Rs.) 14.74 16 20.74 30.8 20.56
Book Value 77.57 94.5 113.54 140.94 88.12
Extraordinary Items -0.03 -0.02 -1.1 -0.22 -0.9
From the P&L account we can observe;

The company is growing at a steady rate of 15 to 18% during 2007 to 2010. In the last
one year i.e financial year 2011, the sales have picked up by nearly 25%. Meanwhile
all costs including raw material cost, employee cost are growing at less than sales
growth, which is a good sign. Company is able to increase its operating profit margins
consistently by controlling the cost & at the same time managing the growth. Interest
cost has remained steady over the last 5 years.
November 2011
Half Yearly Performance for Financial Year 2011-2012;

in Cr. Sep-10 Sep-11
Net Sales Turnover 107.64 137.93

Other Income 1.74 3.26
Total Income 109.38 141.19
Total Expenses 87.03 114.1
EBITDA 22.35 27.09
Depreciation 3.04 3.77
EBIT 19.31 23.32
Interest 1.22 1.54
PBT 18.09 21.78
Tax 6.01 7.23
Net Profit 12.08 14.55
Equity 6.33 6.33
Basic EPS 9.59 11.5
Face Value 5 5
Net sales have gone up by 25% in the first six months of this financial year. At the
same time expenses are up by 31%. The company has posted net profit of 14.55
crores compared to 12.08 crores during the same period last year. Generally second
half of the year is higher than first half since construction activity is slow during the
monsoon and goes up in Sept to March. Costs have gone up during first six months, we
need to see the trend very closely here. As of now the overall cost situation looks
under control.
November 2011
RATIOS
in Cr. Mar-07 Mar-08 Mar-09 Mar-10 Mar-11
Debt-Equity Ratio (x) 0.66 0.65 0.58 0.39 0.33

Long Term Debt-Equity Ratio (x) 0.44 0.45 0.4 0.28 0.17
Current Ratio (x) 1.08 1.14 1.22 1.38 1.37
Fixed Assets (x) 2.04 1.77 1.77 2.03 2.41
Inventory (x) 6.22 5.94 6.38 6.34 5.92
Debtors (x) 6.49 5.8 6.05 6.28 7.11
Interest Cover Ratio (x) 7.14 5.9 6.02 12.81 16.26
Operating Profit Margin (%) 16.97 16.97 17.48 19.23 19.87
Profit Before Interest And Tax Margin 13.94 13.43 14 16.19 17.31
(%)
Gross Profit Margin (%) 15.02 14.7 15.15 17.97 18.8
Cash Profit Margin (%) 10.8 10.76 11.16 12.84 12.94
Ajdusted Net Profit Margin (%) 7.77 7.21 7.69 9.79 10.39
Return On Capital Employed (%) 26.07 21.51 23.47 29.24 33.38
Return On Net Worth (%) 24.05 19.04 20.32 24.65 26.53
Debt to equity ratio is completely under control. As discussed earlier, the company has
been very modest on debt oriented growth and it has mainly been funded by internal
accruals.
Interest cover ratio is improving rapidly, showing solid strength. Operating profit
margins are going up steadily. Same is the case with net profit margins. We expect
profit margins to stabilize around current levels.
We expect 20% growth per annum in sales for the next 3 years. Even if we consider
conservative estimates, CERA should post a sales turnover / net sales of 300 crores in
financial year 2011-12, 360 crores in 2012-13 & around 430 crores in 2013-14.
Company’s OPM (operating profit margin) is most likely to stabilize around 18%. Net
profit margins are expected to remain the same at around 9 to 10%. By this logic,
CERA will post a net profit of around 30 crores in 2011-12 & around 35 crores in 2012-
13 & around 42 crores in 2013-14. It shall post earnings per share of 23 rupees in
2011-12, 28 rs in 2012-13 & 32 to 33 in 2013-14.
November 2011
WHY INVEST IN THIS COMPANY
Being one of the early movers in the branded sanitaryware, CERA has earned a good
brand name itself. With a consistent market share of around 20%, CERA is poised for a
healthy growth along with the overall sector which is looking bright in the years ahead.
Constant innovation & introduction of new designs has been a key to CERA’s growth so
far.
CERA is now focusing on its retail network expansion. It is giving full efforts to smaller
towns where there is huge untapped potential. And with its existing network of around
500 dealers & 4500 retailers, the company will benefit in the times to come.
The company has very negligible debt on its balance sheet. Company has managed a
consistent growth without taking too much debt. This management looks promising to
deliver further growth. With new capacity to operate in September 2011, we expect
revenues to accelerate.
The stock is trading at attractive valuations & the downside looks limited from the
current levels even in the times of volatility ahead. The stock is not exposed to major
mutual funds or FII holdings. As & when big investors enter the stock upon realizing
the potential, it will accelerate the stock price upwards.
Financial Year Stock EPS PE Stock Price

2011 CERA 23 6 to 8 140 to 180
2012 CERA 28 7 to 10 200 to 280
2013 CERA 32 10 to 12 300 to 370
November 2011
Notes :
DISCLAIMER:- The views/opinions expressed in this report are personal opinions. Calculations and estimates are based
on certain assumptions. It should be noted that the information contained herein is from publicly available data or other
sources believed to be reliable. The user assumes the entire risk of any use made of this information.
November 2011

Bullsbook: Alpha Invesco Research Private Limited

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THE KEY RATIOS – THE THREE RATIOS

ROCE : Return On Capital Employed

What Does Return On Capital Employed - ROCE Mean?

It is a ratio that indicates the efficiency and profitability of a company's capital

Calculated as: EBIT (Earnings before Interest & Tax)

Total Assets – Current Liabilities

Higher ROCE attracts higher PE ratios for individual stocks.

Debt To Equity Ratio

It’s a simple formula; Total Debt ÷ Shareholder Equity

It’s a ratio which we get after current assets divided

i.e. Current Assets ÷ Current Liabilities

This shows how easily the company could pay its

An Investing Principles Checklist – Charlie Munger

Charlie Munger is vice chairman of Berkshire Hathway, company headed by Warren

Fundamental philosophy of life & Investments : Preparation. Discipline. Patience.

Risk – All investment evaluations should begin by measuring risk, especially

Allocation – Proper allocation of capital is an investor’s number one job

Patience – Resist the natural human bias to act

Be alert for the arrival of luck

Decisiveness – When proper circumstances present themselves, act with decisiveness

Change – Live with change and accept unremovable complexity

A Reminder of November 2010 – Let’s go back, let’s look ahead.

BULLSbook November Edition : 2010

Nifty PE 3 Year Returns

Less Than 14 152%

You can see current P/E multiple of Nifty at NSE’s

http://www.nseindia.com/content/indices/ind_pepbyield.htm. At this moment, Nifty’s

At BULLSbook, we continuously monitor the

Now let’s come back to October 2011.

BULLSbook October Edition : 2011

Nifty PE 3 Year Returns

Less Than 14 152%

And if you are already fully invested,

If you have bought any of the

Stock Of The Month

BSE : 532443 BSE Group :B

NSE : CERA ISIN : INE739E01017

Market Cap : 222 Cr Face Value :5

Dividend : 50% PE Ratio : 7.4

CMP : 172 52 Week H/L : 245/126

BULLSbook Target : 350

Holding Period : 24 Months

ABOUT THE COMPANY

Started in 1980, Cera Sanitaryware Ltd (CERA) is

Based in Kadi, Gujarat the plant was established with an

A large part of CERA’s revenue comes from

Sr. Name Designation

Product Name Unit Value Qty % Sales

India’s sanitaryware industry has been growing at approximately 12-15% annually

sanitaryware segment is expected to continue growing at 12-15% annually due to

Real estate has a direct impact on Cera’s topline since it

STRENGHTS, OPPORTUNITIES & THREATS

Cera is also undergoing capacity expansion of its existing plant

Public Shareholding Pattern :

FII’s & Mutual 2.47%

Individual Shareholders up to 1 18.27%

Promoters hold majority stake in the company.

Company declared bonus in the ratio of 1:1 in September 2010.

in Cr. Mar Mar Mar Mar Mar

Share Capital 3.04 3.09 3.11 3.14 6.33