Stock Update: Hindustan Sanitaryware (HSIL)

Following up with Cera Sanitaryware review last week, I did a quick review of the other sanitaryware company in my portfolio.

For FY12:

Consolidated net revenues increased 27.38%

PAT grew 26.04%

EPS grew 15.2%

Building Products Division:

• Net revenues increased 23.70%
• Added 510 dealers and penetrated into 125 new towns
• Added new brand QUEO targeting the luxury and super premium segment of the market

Installed Capacity:-

• Sanitaryware – 3.5 million pieces annually. Completion of expansion at Bahadurgarh by October 2012 and greenfield project in Gujarat to achieve consolidated capacities of 5 million pieces
• Faucets – 0.5 million pieces annually. Completion of phase I and II expansions of faucets at
• Bhiwadi by Q2 FY 2013-14 and Q4 FY 2013-14 to achieve consolidated capacities of 3 million pieces.

Container Glass Division

• Net revenues increased 30.62%
• Completed capacity expansion, increasing total capacity from 1,125 tpd (1,643 million units) to 1,600 tpd (2,300 million units)
• Container Division comprises of 55% revenue for the company. 22% market share in container glass segment in India.

Over 60% of India’s population does not have proper sanitation facilities. The Steering Committee of the Planning Commission has proposed an allocation of over `44,000 crore towards providing sanitation facilities in the 12th Five year Plan.

The company acquired Garden Polymers during the year and extended their product offerings to PET bottles, caps and closures, offering one more packaging solution besides glass bottle. Garden Polymers was the fourth largest manufacturer of PET bottles in India and HSIL spent 87cr for the acquisition.

Father-son duo (CMD and Jt MD) take a salary 7cr and 6.5cr! Whereas, the business division heads are paid 1.5 cr each! Does not speak very well of the promoter-management.

Business reconstruction reserve in the B/S of 225 cr has been done based on a scheme approved by the Calcutta High Court to revalue a portion of the company’s freehold land. It is not permitted as per GAAP. This looks to have been done primarily to maintain the debt-equity ratio in respectable numbers.

Recommendation:

With an EPS of 16.7 and an expected 12-15% growth rate for the next 3-5 years, FY13 EPS is likely to be around 18-19. At approximately 8x PE (with a lower margin glass business, it will be cheaper than a pure-play like Cera), the likely price can reach 150-170 by end of FY13. At a CMP of 110, it can be a good medium term buy. 

However, I would not make HSIL a core portfolio choice, given its low margin and high capital requirements. Cera is a better bet in this space, but at lower valuations.