Growth trajectory to continue; profitability improvement visible; Upgrade stock to BUY :: IndiaNivesh

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Growth trajectory to continue; profitability improvement
visible; Upgrade stock to BUY rating with target price of Rs 485
HSIL Ltd has corrected ~17% over its peak price of Rs 424 post Q2FY15 results. We
met the senior management of the company to assess the current operations and
future growth prospects. Following are the key takeaways of the meeting:
Building Products Segment:
 The building products segment is likely to grow 16-18% in FY15E. This is likely
to be driven by volume growth of 5-7% while remaining is likely to come from
price hikes. The muted performance of Q2FY15 in building products is not
likely to re-occur as the sales in distribution channels have begun at normal
pace. The management stated that the key drivers for its building products
performance include its huge capacity, capability to maintain its market share
and its pricing strategies.
 The company has decided to exit tiles business, which was done on trading
basis. This is likely to impact the growth on marginal basis as it contributed
~5% to total building products sales. With growth in rest of the products likely
to start improving, this loss may be set off over a period of time.
 As per the management, HSIL Ltd is the second largest player in the faucets
segment which is lead by Jaguar. It aims to bridge the wide gap from the
segment leader by increasing capacity. Once the utilisation levels of current
faucets plant improves, the company may expand its capacity. Current plant
has excess land which can increase the faucets plant capacity upto 5 mn pcs
per annum. The capacity expansion of faucets business is likely to happen on
a gradual basis after taking into consideration the demand-supply scenario
and consistently high utilisation levels of current capacity. The erstwhile plant
of faucets with capacity of 0.5 mn pcs per annum has been closed and entire
production has been transferred to the new plant. The land of the old plant is
available and can be put to use for any future growth opportunity.
 Introduction of Goods and Services Tax is not likely to yield major benefits to
the company in terms of tax outgo or operational efficiencies. However, it
would increase the cost of unorganised players and would provide an indirect
benefit to the company in terms of competition, which is likely to be positive
for its medium and low-end brands like Raasi. Medium and low-end products
contribute ~48% of building products segment.