Initiating Coverage on HSIL - SPA Securities

HSIL holds a dominant position in the domestic sanitaryware market with organized market share of 40% (capacity of 3.5 mn pcs) and is the second largest player in the container glass segment (capacity of 1600 tpd) with a share of ~22% (70% market share in Southern India - the biggest market for container glass). The company operates through two divisions namely Building Products (sanitaryware, bathroom & kitchen solutions) and Container Glass segment, each contributing 43% and 49% to revenues respectively.

Dominant position with strong brand recall

Leadership position in both its business segments coupled with largest distribution network and strong brand recall ensures buoyant prospects for HSIL and provides significant competitive edge. Increasing consumption across building products and container glass segments will result in ~20.0% & ~15.0% CAGR in their respective demand over the next few years, thereby aiding HSIL to clock a consolidated revenue growth of 18.9% in FY14.

Capacity expansion to bear fruits

HSIL is expanding its capacities across product segments. It has increased its sanitary ware capacity from 2.8 mn pcs to 3.8 mn pcs and is further increasing it to 5 mn pcs by FY15. It is also expanding its faucet capacity by 6x to 3 mn in 2 phases by FY14 (to became the 2nd largest player). HSIL has also commissioned an additional container glass unit of 475 tpd in Q1FY13. Timely capacity expansion across the product segments will aid HSIL to cater to increased demand and maintain its market share.

Strong pricing power & Product mix change - to aid margins

Strong pricing power (increased prices in BPS & CG segment by 13.5% & 7% respectively in CY12) coupled with change in product mix towards higher value-added segments and increase in share of revenues from high margin product segments from ~52% currently to ~60% will provide stability to overall margins (premium products enjoy a margin of ~23% vs ~18% margin enjoyed by mid segment). We expect the consolidated margin to stabilize ~17% in FY14.

Increasing contribution from faucets to improve return ratios

6x increase in faucet's capacity by FY14 will lead to reduction in the share of low margin outsourced product (margin for own manufactured product is ~22% vs ~18% for outsourced products) and improve the overall RoE of HSIL due to high asset turnover nature of business.

Acquisitions, Sell of surplus land, Divestment - Rerating

HSIL's continued penchant for inorganic growth opportunities will aid the company to broaden its product offerings. Further valuations would get a fillip as and when HSIL is able to sell its 83 acres of surplus land on Bombay - Hyderabad highway (currently valued at ~INR 1bn). Also any decision on the part of management to demerge/divest its low margin CG business will lead to rerating of the company.

Financial outlook

We expect HSIL to clock consolidated topline & bottomline CAGR of 17.7% & 15.4% respectively over FY12-14E. HSIL is poised for substantial growth post FY14 as its expanded faucet capacity comes on stream and new green-field sanitary ware plant commences operations.

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. Given the tremendous housing shortage in India (shortage of 1.81 crore houses), ultra low levels of sanitation facilities (one of the lowest in the world at ~40%), increasing urbanization (29% to 37% by 2025), and rise in discretionary spending (from ~52% in 2005 to ~70% by 2025) leading to increasing consumption of packaged goods, both its businesses are on strong footing.

Currently the stock is trading at a P/E multiple of 6.0x FY14E earnings, 4.7x EV/EBIDTA & 0.7x FY14E BV. We recommend a "BUY" on the stock with a price target of INR 168, assuming a P/E multiple of 9x FY14E earnings.

Source : Equity Bulls

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