There is no doubt that sanitary ware stocks are the rage of the season. Cera Sanitary Ware (which, incidentally, is among stock wizard Dolly Khanna’s favourite stocks) is leading the way with a 79% gain in just 3 months (175% gain YOY).
Earlier, Daljeet Kohli & Prerna Jhunjhunwala picked HSIL as a worthy contender for Cera Sanitaryware. In their first report, they have explained why HSIL has a good chance of becoming an out-performer stock.
If you see my article on their report, you will find that I have supported Daljeet & Prerna’s analysis by referring to news reports about NAMO’s thrust for sanitation and also the interviews by RB Kabra, President of HSIL, on the company’s future plans.
Now, Daljeet & Prerna has issued a revised research report (pdf) in which they have analyzed HSIL’s Q4FY14 results threadbare. The best part is that the due have predicted a target of Rs. 330 for the stock.
Let’s take a quick look at their analysis:
“Estimate revision
Taking into consideration the improved performance of FY14 and management guidance, we revise our estimates upwards. Over FY14-16E, we expect building products segment to grow at a CAGR of 25.8% and packaging products segment to grow at 15.1%. We expect sales to grow at a CAGR of 20.7% over FY14-FY16E to reach Rs 26442 mn in FY16E. We expect EBITDA margin to reach 15.4% by FY16E on account of increased efficiencies and reduced power and fuel cost. Net profit is likely to grow at CAGR of 122.6% over FY14-FY16E.
….
Valuation
At CMP of Rs 212, the stock trades at P/E of 12.9x and 8.3x its FY15E and FY16E EPS of Rs 16.4 and Rs 25.5 respectively. This is relatively cheaper to its nearest peers (ceramic players), which are trading at an average PE multiple of 18x of FY16E earnings. Taking into consideration the expected improvement in the financial performance of the company, we continue to value the company on SOTP method.
We value container glass business at an EV/EBITDA of 3x its FY16E EBITDA and building products at EV/EBITDA of 7x its FY16E EBITDA to arrive at a fair value of Rs 329 per share. We also consider PE valuation to value the stock at 13x its FY16E earnings (its average 1-yr forward PE multiple of last 2 years i.e. the period when the scenario of the company worsened) to arrive at fair value of Rs. 332 per share.
Taking an average of both the methods, we arrive at a target price of Rs 330 per share. We maintain our BUY rating on the stock with an upward revised price target of Rs 330.”
Speaking for myself, I already have a chunk of Cera Sanitary Ware in my portfolio. I have also started nibbling into HSIL because the analysis by Daljeet & Prerna is quite convincing. I don’t want to miss out on profiting from Namonomics.
Unless the management allocates capital more efficiently than now, investors will always discount HSIL vis-a-vis Cera significantly. While Building products division turns in a 20% OPM, the glass division returns ~ 1% , and is half overall revenues of the company !
HSIL hit 262 in today’s trade. Trend still up.