HSIL - Visit Note - SPA Securities

HSIL is engaged in the manufacturing and distribution of sanitary ware and glass containers in India. It enjoys leadership position in the domestic sanitary ware market with a share of ~40% (capacity of 3.5 mn pcs) in the organised segment and second largest position in the container glass segment (capacity of 1600 tpd) with a share of ~22%. HSIL operates through two divisions, Building Products and Container Glass each contributing ~50% to revenues. It has established an extensive distribution network of 2000 dealers, 15000+ retailers and 21 depots as at FY12 end. We met the management of HSIL to get a sense of its business potential and strategy going ahead.

Building product segment (BPS) to drive growth

HSIL expects Indian sanitary ware market (INR 20 bn) to grow at a CAGR of more than 20% led by surging housing demand, increasing urbanization and improving standard of living. HSIL being the largest player in the segment expects BPS segment to mirror the industry growth. It has already increased its sanitary ware capacity by 25% to 3.5 mn pcs and is further increasing it by 1.2 mn by FY15 in order to capture the increasing demand.

Majority of capex over

Majority of capex plans of HSIL are on the verge of completion. It has incurred a capex of more than INR 10 bn over FY09-12 to increase its capacity across both the divisions and has further earmarked INR 2.5 bn over the next two years for the same purpose. HSIL has increased its sanitary ware capacity from 2.8 mn pcs to 3.5 mn pcs in FY12 and is further planning to set up a Greenfield plant of 1.2 mn in Gujarat by FY15 (land acquired). Further it is increasing its faucet capacity by 6x to 3 mn in 2 phases by FY14. Moreover it has also commissioned additional 475 tpd unit of container glass in Q1FY13.

Container segment - Facing headwinds

HSIL has a dominant presence in southern region (market share 62%) which provides locational advantage to the company as AP is the largest consumer of beer, liquor and soft drinks. Currently this segment is facing headwinds mainly due to the surge in soda ash prices (mainly imported and accounts for ~18% of glass manufacturing cost), and surge in power cost. H2 tends to remain strong in this segment (~60% turnover in H2) and HSIL expects growth of ~12% p.a over the next two years driven by sustainable growth in its user industries. It is also converting one of its container glass manufacturing facilities to foray into high margin coloured glasses which will be commissioned in Jan 13.

Surging P&F cost - Cause of concern

HSIL has witnessed significant surge in its power cost due to hike in diesel prices and power cuts in AP. HSIL uses diesel to generate power to run its plants. Due to the recent hike in the diesel price and 40% power cut (12 days/month) in the Andhra Pradesh plants, the cost of power has increased from ~INR 9/unit to INR 12/unit. HSIL is buying power from exchange grid in AP at over INR 10/unit, which is significantly higher than other states mainly due to lower gas output from the KG-D6 basin, on which most of the gas-fired power plants in AP are dependent.

Strong pricing power providing stability to margins

HSIL has resorted to price hikes to pass on increased cost burden to consumers in CY12. It has successfully increased prices of building products by 13.5% in three tranches (4.5% in Feb 12, 4% in June 12 and 5% in Nov 12). It has taken price increase of ~7% in Jan 12 and further affected ~8% price increase in the beverage segment (contributing ~20% to total segment sales) in Oct 12.

Inventory days to improve

HSIL has witnessed sharp increase in its inventory days from 72 days in FY12 to ~110 days in H1FY13 due to lower volume offtake from some of its key customers. While volumes are expected to improve in H2FY13, it is also looking to reduce its glass production by 10% and liquidate the inventories. It expects inventory days to improve to 85 days in FY13.

Outlook & Valuation

Dominant position in fast growing segments, timely capacity expansion, vast distribution network and strong brand recall ensures strong growth outlook for the company. Both the topline and bottomline has registered a healthy CAGR of 33% each over FY09-12 and HSIL expects to grow the same at a CAGR of 15% and 13% respectively over FY12-14E. Currently the stock trades at a P/E of 8.7x its TTM EPS of INR 14.7 & P/BV of 0.8x its BV of INR 159.3

Source : Equity Bulls

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