Hindware Home Innovation is a buy for target price of Rs 637 (34% upside): Nuvama

Sanitaryware and pipes shine; consumer appliance falls short

• Revenue fell 2% YoY, but grew 10% QoQ, to INR700cr (est. INR714cr) in Q2FY24, on lower-than expected revenue from the consumer appliance segment.

• Revenue from building products, which include faucets, sanitary ware, and pipes, grew 4% YoY and 15% QoQ to INR597cr (est. INR590cr).

• Revenue from pipes and fittings (P&F) rose 2% YoY and 29% QoQ to INR201cr (est. INR200cr). Realisation fell 16% while volume rose 22% YoY.

• The P&F segment reported a historically high EBITDA margin of 10.8% in Q2FY24 versus 6.8%/2.8% in Q1FY24/Q2FY23.

• Revenue from sanitaryware grew 5% YoY to INR396cr (2% above our estimate). EBITDA margin expanded by 344bp YoY due to greater contribution from premium and super premium products. Margin exceeded 16% for the second quarter in a row.

• Revenue from consumer products fell 23% YoY to INR96cr (est. INR 111cr) on subdued demand.

• Overall EBITDA rose 29% YoY to INR72cr, with EBITDA margin expanding by 248bp to 10.3%. The impact of a lower EBITDA margin in consumer appliance was offset by a major improvement in the sanitary ware and pipe segments.

• PAT grew 21% YoY to INR19.7cr (est. INR27cr). The miss was due to higher interest cost and a lowerthan-expected revenue.

• Net debt stood at INR863cr in Q2FY24 versus INR798cr QoQ.

Sanitary ware growth slows on weak demand, but margin stays elevated

The bath ware division (consist of mainly sanitary ware and faucets as the tile business is small) contributes the lion’s share of revenue (56.6% in Q2FY24 versus 53% YoY). Segmental revenue grew 5% YoY due to muted demand in the mid and entry category as consumer sentiment was impacted by rising inflation and higher interest rates. The management expects the growth momentum to accelerate due to the festive season. Despite a muted H1, it has maintained its FY24 bath ware revenue growth guidance of 1.25–1.5x that of the industry. In Q2FY24, EBITDA margin expanded by 344bp YoY to 16.1% due to operating leverage on the back of an improved product mix. It aims to maintain an EBITDA margin of more than 16% for FY24, with a 50–100bp improvement in FY25. We expect the bath ware segment to clock 13% (earlier 16%) revenue CAGR over FY23–25, with an EBITDA margin of 16.5% (earlier 16%) by FY25 due to an improved product mix, higher realisation, and in-house production.

P&F space sees healthy volume growth and historically high margin

Despite the 22% YoY volume growth, revenue grew 2% to INR201cr (inline) due to a decline in realisation (down ~16%) on lower PVC prices. As per the management, seasonal demand for CPVC/agri pipes is strong in the fourth/first quarter of a fiscal. Home plumbing saw some slowdown in Q2FY24, which resulted in a higher PVC contribution. It expects CPVC contribution to rise in H2FY24, translating into a better realisation and margin. In Q2FY24, EBITDA margin expanded by 800bp YoY to 10.8% due to a favourable base and a better sales mix. In the pipes business, the management expects an EBITDA margin of 10–12% in FY24. HINDWARE is investing INR180cr in a greenfield plant in Roorkee (Uttarakhand). This capex to be funded via internal accruals and borrowings. The initial manufacturing capacity will be 12,500mt, with the facility expected to turn operational in Q3FY25. At an incremental capex of INR50–60cr, these capacities can be increased by 2.5–3x. As it is operating at an industry-high operating levels (85% utilisation), it is adding one more machine at its Hyderabad plant, with a capacity of 5,000–7,000mt, which will be operational in December. With this addition, its overall capacity will rise to 58,000mtpa. It is planning to add one more line in Q4FY24 with a similar capacity.

Muted demand hits consumer appliance segment

Revenue fell 23% YoY and 8% QoQ to INR96cr due to a sharp decline in air cooler revenue on account of unseasonal rains. Except air cooler, other products in the consumer appliance segment reported a better performance. The management expects some recovery in H2FY24. We expect 10% (earlier: 15%) revenue CAGR in this segment over FY23–25 to reach INR605cr by FY25, with an EBITDA margin of 5%, due to increasing scale, an improved product mix, a stronger focus on brand building, and product innovation.

Valuation and view

From being a manufacturer of just one product, HINDWARE has grown significantly to gain market leadership in sanitary ware and is a major faucet ware player. We are optimistic about its medium to longterm growth prospects given its: i) strong positioning in bath ware, ii) greater presence in pipes and fittings and consumer appliances, iii) comprehensive product portfolio, iv) strong brand recall, and v) wide and expanding distribution reach. With a constant focus on product innovation, a timely ramp up in pipe capacity, and a positive demand outlook, it is expected to deliver strong overall growth. However, due to lower-than-expected numbers in H1FY24, we trim our FY24/FY25 PAT estimate by 17%/14%. We maintain ‘BUY’ with a revised TP of INR637 (earlier: INR672).