06 January 2015

BUY HSIL::: IndiaNivesh, Jan 2014 picks

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HSIL Ltd, formerly known as Hindustan Sanitaryware & Industries Ltd, is the largest
player in the Indian sanitary ware market with 40% market share of the organised
segment. It widened its product basket with a range of bathroom and kitchen
appliances products, leveraging the power of the ‘Hindware’ brand. It is currently
the second largest container glass player in the country.
Investment Rationale
Conducive demand environment to maintain industry growth
India is the second largest sanitary ware market by volume in Asia Pacific region.
Growing thrust of government to improve the sanitation levels in the country and
the launch of ‘Swachh Bharat’ Mission is likely to be the one of the key catalyst for
sanitary ware industry. Apart from this, premium segment is likely to grow at higher
rate due to favourable demographics including young and rising population, rapid
urbanisation, increasing disposable household income and changing consumer
preference for better sanitation facilities in houses. In our opinion, all these factors
are likely to continue fuelling the growth rate of the organised sector. As per the
industry, sanitary ware industry is likely to grow at 15% per annum with premium
segment likely to grow at a higher rate of 20% over the next 3-4 years. HSIL is present
in both the segment with premium segment contributing ~52% of its building
products revenue in FY14.
HSIL likely to maintain its leadership position in sanitaryware products
HSIL is the largest player in sanitary ware industry with market share of 40% of the
organised sanitary ware sector. It has a capacity of 3.8 mn pieces of sanitary ware
products which is likely to increase by 0.1 mn pcs per annum by FY16E. It is also
considering to expand its capacity by a further 1.2 mn pcs per annum through a
Greenfield plant in Gujarat. HSIL also manufactures faucets with capacity of 3 mn
pieces per annum and is currently the second largest player in the industry. The
company has excess land at its current faucets plant to take the capacity to 5 mn
pcs per annum. The company may consider further expanding its faucets capacity
once the utilisation levels at current plant reach optimum levels. This would enable
the company to maintain its leadership position, in the scenario of rising competition
from domestic and international players.
Building Products segment likely to grow at 20.7% CAGR over FY14-
FY16E; concerns over growth to fade away
Building products segment includes sanitaryware products, wellness products,
faucets and kitchen appliances. Building products segment, contributing 47.2% to
total sales in FY14, has been growing at a CAGR of 22.4% over FY09-FY14. In our
opinion, favourable demand environment and additional capacities in faucets and
sanitaryware plants should enable the company to maintain its growth rate going
forward. Also, the concerns of reducing sales to distributors have faded away as the
company has resumed normal sales. We expect building products segment to grow
at a CAGR of 20.7% over FY14-FY16E to reach Rs 12571 mn in FY16E. Due to high
base of historical growth, expected growth rate appears to be low.
The company derives 52% of its building products revenue from premium and super
premium segments. This thrust on premium products is likely to result in EBIT margin
of the building products to increase by 75 bps over FY14-FY16E to reach 21.5% in
FY16E from 20.7% in FY14. Consequently, building products EBIT is likely to grow at
a CAGR of 22.5% over FY14-FY16E to reach Rs 2745 mn in FY16E from Rs 1828 mn in
FY14.

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