Hindustan Sanitaryware Industries - Traction in sanitaryware industry to be key driver - Angel Broking

Hindustan Sanitaryware Industries Ltd (HSIL) is the largest manufacturer of sanitaryware (40% market share) and the second largest manufacturer (22% market share) of glass containers in India. With increased awareness for improving sanitation coverage coupled with current low penetration and changing lifestyles of people, the sanitaryware industry is poised to witness steady traction. HSIL, with its recently expanded capacity in sanitaryware and strong brand recall is well placed to benefit from the robust growth expected in the industry. Moreover, no further expansion in the low-RoCE glassware division is likely to improve the return ratios going forward. We initiate coverage on HSIL and recommend Buy with a target price of Rs. 117 valuing the business on SOTP basis for FY2015E.

Investment rationale

Extended capacity to compliment rising demand: Due to increasing awareness about improving sanitation, low penetration and changing lifestyles of people, the sanitaryware industry is witnessing traction. HSIL's greenfield project will expand its sanitaryware capacity by 1.2mp (million pieces) and faucetware capacity by 2.5mp by FY2015E, which in turn will help the company to cater to the rising demand in the market.

Leading position with positive brand recall to provide edge: HSIL holds a leading position in the sanitaryware industry (organized segment) with ~40% market share. Well-known brands like QUEO Hindware Art, Hindware Italian, Hindware, Raasi, and Benevalve, enable HSIL to cater to varied segments of the market.

Glassware division - unlikely to be a drag going forward: The company's glassware division which has constituted ~60% of the capital employed has generated RoCE in the range of 6-10% historically. On the other hand, the sanitaryware division has a track record of RoCE above 18%. Going ahead, we expect no further investments in the low-RoCE glassware division which will aid in improving the overall return ratios.

Outlook and valuation: We expect HSIL to register a CAGR of 15.8% in its top-line over FY2013-15E to Rs. 2,363 on the back of robust growth in the sanitaryware industry coupled with stable growth in the glass industry. The EBITDA and net profit are expected to post a CAGR of 16.3% and 14.8% respectively over FY2013-15E. Valuing the business on SOTP basis, assigning the glassware division a target EV/invested capital of 0.5x and assigning the sanitaryware division a target PE of 7x, we arrive at an estimated market capitalization of Rs. 770cr in FY2015E which provides 34.2% upside from the current levels. Hence, we initiate coverage on HSIL and recommend Buy with a target price of Rs. 117 valuing the business on SOTP basis for FY2015E.

Source : Equity Bulls

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