Buy Hindustan Sanitaryware & Industries Ltd (HSIL): SBICaps

Hindustan Sanitaryware & Industries Ltd (HSIL) is the largest Sanitaryware manufacturing company in India with organized market share of 40 percent; in addition it is also the second largest manufacturer of container glass with market share of 22 percent. The company also has presence in faucet segment and has acquired faucet division of Havells India ‘Crabtree’ which is rebranded as Benelave. HSIL has also acquired UK based PET bottle manufacturer ‘Garden Polymers’ to supplement its existing container glass division. We recently met the management of HSIL and followings are the key takeaways of the meeting.

Key Takeaways of the meet:

Largest Sanitaryware manufacturer in India:

HSIL is the largest sanitaryware manufacturer in India with organized market share of 40 percent. It offers complete range of products for bathroom. The company has unveiled luxury brand ‘QUEO’ from Barwood products which was acquired in 2010. These premium products command much higher realization and growing faster than mid and low end segment. HSIL plans to garner near 25 percent market share in premium segment over next few years. The company has strong 1550 distributors and above 14000 retailers to support its market penetration.

Hindustan Sanitaryware & Industries Ltd (HSIL) presently has capacity to produce 2.8 million pieces and is on expanding capacity mode to add another 2.2 million pieces. The company has already completed the expansion at Bibinangar plant at Andhra Pradesh for 7 lakh pieces and another 1.5 million to be added at Bahdurgarh, in Haryana and 1.2 million pieces through Greenfield plant at Gujarat.

Aggressive Capex Plan:

The company has chalked out Rs650 crore capex plan which is expected to be completed over next two years, HSIL has already spent Rs425 crore and remaining Rs225 crore to be spend over next 2 years including Rs100 crore for 3 million pieces Greenfield faucet project in Bhiwadi, Rajasthan.

We expect company to generate Rs250 crore additional revenue under faucet segment at its full capacity. The company has also spent Rs275 crore on new plants for container glass division in Andhra Pradesh. HSIL has already raised Rs150 crore through preferential allotments and balance to be funded through combination of internal accrual and debts. The current equity capital represents fully diluted equity.

Second largest in container glass, with strategic presence:

HSIL is the second largest container glass manufacturer in India with organized market share 22 percent. The company presently has two plant located in Andhra Pradesh. The state is also the largest consumer of soft drinks, liquor and beers in India. HSIL has recently added another furnace of 475 TPD at Bhongir plant in Andhra Pradesh to take its total capacity to 1600 TPD from earlier 1125 TPD. The new plant is already operational since April 2012 and we expect full benefit to be accrued during FY13. We expect this new capacity of 475 TPD contribute incremental revenue of Rs225-250 crore at its full capacity.

The strategic acquisitions to create overall positive business synergies:

The company has recently acquired the faucet division of Havell India ‘Crabtree’ and has rebranded it as ‘Benelave’. The present capacity of 3 lakh pieces is expected to

reach 3 million by FY14. The company under container glass segment has acquired PET bottle manufacturer ‘Garden Polymer’ for Rs~90 crore to supplements its existing container glass division. PET bottles are increasingly finding applications in water, pharma, beverages packing etc. In addition HSIL also acquired UK based Barwood Products for Rs~12 crore and recently unveil premium brand ‘QUEO’ in sanitaryware division. All these acquisitions are expected to yield positive business synergies for the respective business verticals.

Home furnishing division to turnaround by 2015:

The company under Home Furnishing division provides specialty home furnishing products and solutions under its brand ‘EVOK’ operated through wholly owned subsidiary ‘Hindware Home Retail Pvt. Ltd’.(HHRRL). This division has reported a turnover of Rs66 crore along with EBITDA and Net Loss of Rs10 and 17 crore respectively due to high fix overheads. The company presently operates 17 stores and plans to add another 7 stores during FY13E and further 5 each in FY14E and FY15E. The company expects home furnishing division to turn around by FY15. HSIL to spend Rs2-2.5 crore per stores which entails total capex of Rs15-18 crore during FY13E.

Forayed into tiles business:

The company has entered into tiles business in July 2010. Its focus would be in mid and high segment. The current industry size is Rs14,000 crore and growing at 10-12 percent due to rapid urbanization especially in tier two and tier three cities.

Attractive industrial outlook:

India is the second largest sanitaryware market by volume in Asia Pacific with an estimated market size at Rs2000 crore of which nearly 60% is organized, where HSIL has 40 percent market share. This industry is growing at 15-16 percent pa. In India only 40 percent of households have access to safe sanitation facilities with 92 percent is fresh demand as compared to developed economies which accounts for 80 percent as replacement demand.

India’s container glass industry is estimated at Rs~4000 crore and growing at 10-12 percent. The freight cost is critical for container glass and HISL is strategically present in Andhra Pradesh. The state is also the largest consumer of soft drinks, liquor and beers etc. in India. The per capita consumption of Beer in India is just 1.5 liters as compared to double digit in most of developing and developed economies. Indian faucet industry is estimated at Rs~3800 crore of which 45 percent is organized and rest is unorganized. Major players are Jaquar, Parry, Marc etc. With its rapid capacity expansion, HSIL is targeting to generate Rs350-400 crore of revenue under faucet segment in next 2-3 years.

Financials & Valuations:

The company has reported robust financial numbers with sales and profit growing at 27 and 34 percent CAGR between 2008A and 2011A. The company has also maintained its consolidated EBITDA margin of 16-17 percent level. The company expects to grow 20-25 percent CAGR on revenue front in next couple years due to recent capacity additions in Glass and Sanitaryware segments. The faucet segment is also expected to contribute an incremental revenue of 250 crore at its full capacity.

The margin is expected to improve due to availability of China Clay near to its sanitaryware plant in Andhra Pradesh. The company imports soda ash and other trading products worth Rs200 crore and in case of rupee appreciation, the margin is further expected to improve. While comparing with Cera Sanitaryware, the company is fairly valued across different valuation parameters. The company also enjoys better operating margin on standalone basis. We have positive view on the stock.