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History and Business Model
HSIL Limited was established in 1960. This was the first Company in India to
manufacture Vitreous China Sanitaryware. HSIL is the market leader of India’s
sanitaryware industry with a significant market share of over 40% of the organised
market. The Hindware brand markets bathroom ceramics, faucets & bath
accessories and is available across the length and breadth of the country
supported by over 1,550 direct dealers and 14,000 sub dealers which is the largest
in the country. Hindware has expanded its product portfolio to include ceramic tiles
recently. HSIL is also the market leader in container glass in South India and
enjoys 70% market share in that geography and the second largest market player
nationally. This division’s caters to soft drink, alcoholic beverages, food processing,
chemical and pharmaceuticals sectors. The company has five manufacturing
facilities in India across Andhra Pradesh (3), Haryana (1) & Rajasthan (1).
Financials
Revenues and profits have grown at a robust rate of 22.6% and 28.7% over FY07-
11 period. The margins have expanded significantly from 14.2% in FY07 to 18% in
FY11. We expect the margins to expand further to ~21% with entry into high value
sanitary and specialty bottles segment. We also expect the RoCE and RoNW to
improve from the current levels.
Growth Drivers
• Strong brand equity: Demand in the Indian sanitary industry is expected to
grow at 15-16% and HSIL is expected to record faster growth. Its strong brand
recall and introduction of new products have continuously helped HSIL to
sustain its leadership position and increase revenue.
• Capex to drive growth: To meet growing demand across divisions, HSIL is
planning to invest Rs 650 crores over FY2011-14E to expand capacities in
Sanitaryware (Rs 200 crore), faucets (Rs 100 crore) and container glass
division (Rs 350 crore). HSIL has successfully raised Rs 150 crore via QIP in
October 2010. Sanitaryware capacity will increase to five million pieces p.a
from the current 2.8 million and the container glass division will increase
capacity to 2.5 billion pieces from 1.8 billion pieces p.a.
• Robust industry scenario: HSIL’s Sanitaryware business would benefit from
growth in the housing sector while growing disposable income in India will
boost demand in industries such as alcohol, beverages, pharma and food
packaging, which will benefit the container glass segment.
• Realisation to improve: It’s expanding product range and reach coupled with
capacity expansion is expected to boost volume growth. Realisation will
improve significantly from changing product mix towards premium range.
• Synergistic acquisition of Garden Polymers: HSIL acquired 100% stake in
Garden polymers (engaged in manufacturing of PET bottles). It has synergies
with HSIL’s Container glass division, which has the same set of customers.
HSIL will be able to offer a wider range of packaging solutions to these
customers post acquisition and aims to grow this subsidiary by over 40%
every year for the next 4-5 years. Garden Polymers’ capacity will be expanded
beyond PET to be able to manufacture PE, PP, HDPE and packaging.
Valuations:
Going forward, the management expects a growth of 30% for building products and
30-32% for glass containers in FY12. The growth will be driven by newer capacity
coming on stream, rise in the share of higher realisation products, increase in
market share, and better product mix. At the CMP of Rs 184, the stock quotes at
P/E of 10x its FY12E earnings and P/BV of 1.8x which is low for a player with
strong brand and leadership position.
Technicals
HSIL is in a secular bull run since 2008 when it has made a low of Rs 20. Very
recently in August it has touched to its life time high of Rs 240. Such a secular run
has not shown any weakness in chart and one can look for any dips in buying this
scrip. Taking help of Fibonacci, around 38% levels of entire move comes at Rs
160, which would be an acceptable entry point for this scrip. We expect this scrip to
continue to post higher highs later.
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