Keep A Lookout For HSIL. Daljeet Kohli Has Put A Buy On It

Daljeet Kohli has a spectacular track record so far. His most successful stock pick is Ajanta Pharma, which became a 10-bagger in just 3 years. Other consistent winners like Alembic Pharma, GPPL, JB Chemicals etc tell you that you need to keep his stocks picks in your radar all the time. Even his model portfolio is posting solid returns.

HSIL appears to be headed the same way as its illustrious peer Cera Sanitaryware. In the last three months, HSIL has given a return of 121%. The last one month’s return itself is 48%.

There are two reasons for the sudden exuberance amongst investors. The first is that sanitation is seen to be a priority sector for the NAMO government after Narendra Modi coined the slogan “Pehle Sauchhalya Phir Devalaya” (first toilets and then temples). If you recollect, Basant Maheshwari has relied on this theme to recommend Cera as a NAMO stock to have in your portfolio.

This slogan appears to be turning to reality if you go by the following news report:

“Narendra Modi plans multi-million dollar sanitation project to clean up 1,000 Indian towns

The project envisages providing sanitation and sewerage facilities to over 36 million households in the country in the first phase. Modi had asked his team of over 100 qualified professionals to find out the financial implications of providing urban infrastructure like drinking water, gutter, solid waste management, storm water drainage, roads, transport and street light in 500 cities first, as phase one of the project.”

The obvious beneficiaries of this mega-spending campaign will be companies like Cera, Kajaria, Somany and HSIL.

(Aside: An incidental beneficiary of the rural prosperity will be Repco Home Finance & Gruh Finance, as pointed out by Basant Maheshwari)

The second reason for the exuberance is that HSIL is being seen as a turnaround story. While its’ sanitary ware business was always doing well, the glass division was dragging the ROEs down. Now, that the glass division is coming around, HSIL’s return ratios are expected to change dramatically.

This aspect has been confirmed by RB Kabra, President, HSIL. In his first interview, Mr. Kabra confirmed that the losses from the glass division would be reduced substantially by the end of FY 14 and that the division would show a growth of 12%. With regard to the building products division, he said it would show a growth of about 18% +. In his second interview, Mr. Kabra indicated that the building products division and glass division would grow at 25% and 10-15% respectively in FY 15. He also indicated that there was huge scope for expansion in the sanitary ware business.

The research report by Daljeet Kohli and Prerna Jhunjhunwala becomes very significant now. Lets’ take a quick look:

“HSIL Ltd is India’s largest sanitary ware player and second largest container glass player. We expect revenue CAGR of 18.7% over FY14E-FY16E driven by building products segment and better capacity utilisation of container glass segment. The company is focusing on bringing the container glass segment in black which had been suffering from losses in the last few quarters. We expect that these efforts of cost optimization are likely to bear fruits from FY15E. Adjusted EPS is likely to grow at 73.5% CAGR over FY14E-FY16E driven by lower power and fuel cost, premiumisation in building products and completion of major capex. We had recommended BUY on 16 April, 2014 in our Model Portfolio with a target of Rs 180 which was achieved on 5 May, 2014. We now initiate detailed coverage on HSIL Ltd with BUY rating and target price of Rs 278.

At CMP of Rs 215, the stock is trading at P/E of 15x and 10x its FY15E and FY16E earnings estimates of Rs 14.3 and Rs 21.6 per share. Taking into consideration the expected improvement in the financial performance of the company, increasing share of building products in profitability and the turnaround in the container glass segment, we value the company using SOTP method to arrive at a fair value of Rs 275 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. 281 per share. Taking an average of both the methods, we arrive at a target price of Rs 278 per share. We initiate detailed coverage on the stock with BUY rating.”

Click here to download the HSIL research report

Speaking for myself, I see great merit in the analysis by Daljeet & Prerna. There is no doubting that HSIL has strong brands & business model. Applying Basant Maheshwari’s logic, HSIL will also be a beneficiary of the rapid urbanization that one is seeing with new malls, housing complexes etc comping up in Tier II cities. I already have Cera (and Kajaria Ceramics) in my portfolio. There is no reason why HSIL should not join them.