Building Products - Q3FY15E Results Preview :: IndiaNivesh

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Building products sector has been in focus after the government continued its thrust
on improving the sanitation levels across the country. It intends to cover every
household by total sanitation by 2019 and aims at attaining 100% ‘Open Defecation
Free India’ by 2019. The launch of Swachh Bharat Mission is an important step in
the same direction. All these measures are likely to improve the demand for building
products sector which includes sanitaryware, tiles and plumbing products, among
others.
We expect our Building Products universe to report net sales growth of 28.4% yoy.
This is largely driven by growth in tiles businesses which is on account of low base
in Q3FY14. In Q3FY14, tiles companies in Morbi were on strike to oppose the Gujarat
High Court order which prohibited use of coal gassifiers forcing companies to shift
to natural gas. EBITDA is likely to grow by 41.8% yoy with margin expansion of 147
bps yoy. This is on account of turnaround in packaging products segment of HSIL
Ltd and overall turnaround of HIL Ltd. Improvement in profitability of Somany
Ceramics due to base effect (as all joint ventures of the company are located at
Morbi) is also aiding EBITDA performance. EBITDA performance is likely to percolate
to the bottom-line as there is no major capex in either of the companies. Hence,
PAT is likely to grow by 73.1% yoy with margin expansion of 254 bps yoy arising
from economies of scale and operating leverage.
Universe
Particulars (Rs Mn) Q3FY15E Q2FY15 Q3FY14 QoQ (%) YoY(%)
Net Sales 16337 15529 12721 5.2 28.4
EDITDA 2010 1823 1417 10.3 41.8
PAT 793 836 458 -5.1 73.1
EBITDA 12.3 11.7 11.1 197 147
PAT 4.9 5.4 3.6 -98 257
Margin (%) Bps Chg
Source: Company, IndiaNivesh Research
Outlook
We maintain our positive stance on growth prospects of the sector due to following
reasons: 1. Government thrust on improving sanitation and its cleanliness drive
spreading pan-India, 2. Favourable demographic profile of the country, 3. 15% CAGR
of the sector with organised sector growing at a faster pace of more than 20%, and
4. Capex light strategy of tile companies. HSIL and HIL are our top picks in the
sector. We like HSIL due to its leadership position in sanitaryware products segment,
improving profitability of packaging products segment and attractive valuations.
We prefer HIL Ltd due to improving scenario of asbestos products, diversification
into non-asbestos (green building) products to reduce dependence on imported
chrysotile, expected improvement in financial performance and attractive valuations.

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