December 4, 2018 HSIL Ltd. …leveraging customers with new solutions CMP INR 205 Target INR: 303 Result Update - BUY SKP Securities Ltd www.skpsecurities.com Page 1 of 7 Company Background HSIL Ltd (HSIL), promoted by Mr R. K. Somany and Mr Sandeep Somany, is India‟s largest player in sanitaryware with ~40% organised market share and second largest player in glass containers (~17%). It also manufacturers PET bottles and faucets and has recently entered into CPVC/UPVC household pipes and caps & closure to leverage its customers and channels. It also has presence in home furnishings. With a dominant position in its mainline business of sanitaryware, where gaining incremental market share will be a challenge, HSIL is taking strategic diversification initiatives. Investment Rationale Topline to grow at a CAGR of ~13% over FY18-20E During Q2FY19, HSIL net sales went up by ~17.2% y-o-y at Rs 6,226.5 mn backed by robust growth in Consumer Product Division (CPD) and Building Products Division (BPD), which reported growth of 40.1% and 15.8% respectively. Packaging Products Division (PPD) witnessed a moderate growth of 11.1%. UPVC and CPVC pipes segment contributed Rs 700 mn during H1FY19. Glass plant at Bhongir was shut down for maintenance for refurbishment of furnace and re-building of generator, which has affected production and sales volumes. The plant has been commissioned successfully during the quarter. Management is expecting normalcy to be attained by H2FY19 onwards and is anticipating healthy growth going forward. Furthermore, HSIL is a market leader in „Kitchen Hobs and Chimneys‟ which contributed significantly in CPD. Volumes were also affected by truckers‟ strike in the month of July 2018. Unorganized sector in sanitaryware and faucets accounts for ~40% and ~55% respectively. Therefore, a strong brand equity and distribution network, changing consumer preferences towards good quality and branded lifestyle products, increasing disposable income creates a significant potential for HSIL to increase its market share going forward. GoI‟s new initiatives on housing and sanitation will give a fillip to demand of sanitaryware. Thus, we expect HSIL to grow at a CAGR of ~13% during FY18-FY20E with ~17% and 2% CAGR growth in BPD (including consumer business) and PPD, respectively. Operating Margins expected to improve with better operating leverage: EBITDA margins during Q2FY19 declined by ~530 bps y-o-y to 8.3%, mainly on account of forex loss of Rs 122 mn due to Rupee depreciation, charged at EBIDTA level. Furthermore, raw material and fuel prices also went up due to higher international crude oil prices, impacting margins. PPD witnessed losses at EBIT level, though BPD margins were maintained at 13.3%. To mitigate the impact of higher gas prices, the Company undertook price hike in PPD (glassware), during the quarter. Depending upon the market conditions, HSIL may further take price hike in PPD during Q3FY19 which is expected to improve margins in the segment. CPD has become profitable for the first time, during the quarter, at EBIT levels. In FY19E, with the expected revival in construction industry and gradual recovery in packaging business with the price hike round the corner, we expect improvement in overall EBIDTA margins to ~11.5%. During Q2FY19, the PAT margin declined by 360 bps to 0.8%, on the back of higher depreciation and interest cost. Going forward, we expect PAT margin to improve to ~4.1% by end FY20E. Listing of Somany Home Innovation Ltd (SHIL) may take 4-5 months: HSIL Board had already approved a Scheme of Demerger wherein branding, marketing, sales, distribution, trading services etc. of building products, consumer products and retail business will be transferred to two new resulting entities SHIL and Brilloca Ltd, respectively. The Company has received in-principle approvals from its lenders. Shareholders and creditors meeting were held on Sept 29, 2018. NCLT is expected to give order by January 2019. The Company will approach stock exchanges for listing of „Somany Homes‟ once the order is received, which will take another 45-60 days. Additional capex planned for caps & closure business: HSIL has ventured into CPVC & UPVC pipes in BPD and security caps & closures for protection of products from counterfeiting in packaging product segment, at an investment of Rs 2.45 bn, funded through debt and equity in the ratio of 2:1. Commercial production of caps has started and is receiving good response from the customers. Keeping in view the expected robust demand for caps and closures due to improvement in liquor market, the Company has further planned additional capex of Rs 600 mn, which will enhance the capacity to ~1 bn pieces, by the end of March 2019, from the existing 275 mn pieces. The segment contributed Rs 50 mn revenue during the quarter. The Company has declared commercial production of CPVC-UPVC pipes segment from August 9, 2018. Management is expecting additional revenue of Rs 150-200 mn/month from the segment and expected to cross Rs 4 bn mark in next three years. Marketing agreement with Formenti E Giovenzana (Formenti), Italy: HSIL has entered into an agreement with Italy based Formenti for sales and distribution of „Kitchen and Furniture‟ functional hardware fitting products through its authorised dealers, sub- dealers and franchisees. The products will be manufactured by Formenti in India. Hardware fittings business is synergistic with the building products market space having good future potential for branded players in these product categories. Valuation Given HSIL‟s strong brand equity & distribution network, changing consumer preferences towards premium & lifestyle products along with diverse product basket and a turnaround in its glass containers business augurs well for HSIL. We have valued the stock on SOTP basis and recommend „Buy‟ on the stock with a target price of Rs 303 (upside of ~48%) in 15 months. Key Share Data Face Value (INR) 2.0 Equity Capital (INR Mn) 144.6 Market Cap (INR mn) 14820.8 52 Week High/Low (INR) 540/201 Avg. Daily Volume (BSE) 9,290 BSE Code 500187 NSE Code HSIL Reuters Code HSNT.NS Bloomberg Code HSI:IN Shareholding Pattern (Sept 30, 2018) 48% 24% 6% 22% Promoters DII FII Public & Others Particulars FY17 FY18 FY19E FY20E Net Sales 20,781.7 22,527.8 25,942.9 28,818.6 Growth (%) 1.1% 8.4% 15.2% 11.1% EBITDA 2,867.1 2,718.2 2,672.1 3,314.1 PAT 1,002.9 741.0 653.0 1,178.2 Growth (%) 12.6% -26.1% -11.9% 80.4% EPS (INR) 13.9 10.2 9.0 16.3 BVPS (INR) 200.1 205.7 210.0 221.4 Key Financials (INR Million) Particulars FY17 FY18 FY19E FY20E P/E (x) 14.8 20.0 22.7 12.6 P/BVPS (x) 1.0 1.0 1.0 0.9 Mcap/Sales (x) 0.7 0.7 0.6 0.5 EV/EBITDA (x) 7.6 8.8 9.1 7.2 ROCE (%) 7.7% 6.0% 5.0% 7.5% ROE (%) 6.9% 5.0% 4.3% 7.4% EBITDA Mar (%) 13.8% 12.1% 10.3% 11.5% PAT Mar (%) 4.8% 3.3% 2.5% 4.1% Debt - Equity (x) 0.6 0.8 0.8 0.7 Source: Company, SKP Research Key Financials Ratios Price Performance HSIL vs S&P BSE 500 -70% -60% -50% -40% -30% -20% -10% 0% 10% 20% Dec-17 Dec-17 Jan-18 Mar-18 Mar-18 Apr-18 May-18 Jun-18 Jul-18 Aug-18 Sep-18 Oct-18 Nov-18 HSIL BSE 500 Analyst: Vineet Agrawal Tel No: +91-22-49226006 e-mail: [email protected]
Transcript
December 4, 2018
HSIL Ltd.
…leveraging customers with new solutions
CMP INR 205 Target INR: 303 Result Update - BUY
SKP Securities Ltd www.skpsecurities.com Page 1 of 7
Company Background HSIL Ltd (HSIL), promoted by Mr R. K. Somany and Mr Sandeep Somany, is India‟s largest player in sanitaryware with ~40% organised market share and second largest player in glass containers (~17%). It also manufacturers PET bottles and faucets and has recently entered into CPVC/UPVC household pipes and caps & closure to leverage its customers and channels. It also has presence in home furnishings. With a dominant position in its mainline business of sanitaryware, where gaining incremental market share will be a challenge, HSIL is taking strategic diversification initiatives. Investment Rationale Topline to grow at a CAGR of ~13% over FY18-20E During Q2FY19, HSIL net sales went up by ~17.2% y-o-y at Rs 6,226.5 mn backed by robust
growth in Consumer Product Division (CPD) and Building Products Division (BPD), which reported growth of 40.1% and 15.8% respectively. Packaging Products Division (PPD) witnessed a moderate growth of 11.1%. UPVC and CPVC pipes segment contributed Rs 700 mn during H1FY19. Glass plant at Bhongir was shut down for maintenance for refurbishment of furnace and re-building of generator, which has affected production and sales volumes. The plant has been commissioned successfully during the quarter. Management is expecting normalcy to be attained by H2FY19 onwards and is anticipating healthy growth going forward. Furthermore, HSIL is a market leader in „Kitchen Hobs and Chimneys‟ which contributed significantly in CPD. Volumes were also affected by truckers‟ strike in the month of July 2018.
Unorganized sector in sanitaryware and faucets accounts for ~40% and ~55% respectively. Therefore, a strong brand equity and distribution network, changing consumer preferences towards good quality and branded lifestyle products, increasing disposable income creates a significant potential for HSIL to increase its market share going forward. GoI‟s new initiatives on housing and sanitation will give a fillip to demand of sanitaryware. Thus, we expect HSIL to grow at a CAGR of ~13% during FY18-FY20E with ~17% and 2% CAGR growth in BPD (including consumer business) and PPD, respectively.
Operating Margins expected to improve with better operating leverage: EBITDA margins during Q2FY19 declined by ~530 bps y-o-y to 8.3%, mainly on account of forex
loss of Rs 122 mn due to Rupee depreciation, charged at EBIDTA level. Furthermore, raw material and fuel prices also went up due to higher international crude oil prices, impacting margins. PPD witnessed losses at EBIT level, though BPD margins were maintained at 13.3%. To mitigate the impact of higher gas prices, the Company undertook price hike in PPD (glassware), during the quarter. Depending upon the market conditions, HSIL may further take price hike in PPD during Q3FY19 which is expected to improve margins in the segment. CPD has become profitable for the first time, during the quarter, at EBIT levels.
In FY19E, with the expected revival in construction industry and gradual recovery in packaging business with the price hike round the corner, we expect improvement in overall EBIDTA margins to ~11.5%. During Q2FY19, the PAT margin declined by 360 bps to 0.8%, on the back of higher depreciation and interest cost. Going forward, we expect PAT margin to improve to ~4.1% by end FY20E.
Listing of Somany Home Innovation Ltd (SHIL) may take 4-5 months: HSIL Board had already approved a Scheme of Demerger wherein branding, marketing, sales,
distribution, trading services etc. of building products, consumer products and retail business will be transferred to two new resulting entities SHIL and Brilloca Ltd, respectively. The Company has received in-principle approvals from its lenders. Shareholders and creditors meeting were held on Sept 29, 2018. NCLT is expected to give order by January 2019. The Company will approach stock exchanges for listing of „Somany Homes‟ once the order is received, which will take another 45-60 days.
Additional capex planned for caps & closure business: HSIL has ventured into CPVC & UPVC pipes in BPD and security caps & closures for protection
of products from counterfeiting in packaging product segment, at an investment of Rs 2.45 bn, funded through debt and equity in the ratio of 2:1. Commercial production of caps has started and is receiving good response from the customers. Keeping in view the expected robust demand for caps and closures due to improvement in liquor market, the Company has further planned additional capex of Rs 600 mn, which will enhance the capacity to ~1 bn pieces, by the end of March 2019, from the existing 275 mn pieces. The segment contributed Rs 50 mn revenue during the quarter.
The Company has declared commercial production of CPVC-UPVC pipes segment from August 9, 2018. Management is expecting additional revenue of Rs 150-200 mn/month from the segment and expected to cross Rs 4 bn mark in next three years.
Marketing agreement with Formenti E Giovenzana (Formenti), Italy: HSIL has entered into an agreement with Italy based Formenti for sales and distribution of
„Kitchen and Furniture‟ functional hardware fitting products through its authorised dealers, sub-dealers and franchisees. The products will be manufactured by Formenti in India. Hardware fittings business is synergistic with the building products market space having good future potential for branded players in these product categories.
Valuation Given HSIL‟s strong brand equity & distribution network, changing consumer preferences towards premium & lifestyle products along with diverse product basket and a turnaround in its glass containers business augurs well for HSIL. We have valued the stock on SOTP basis and recommend „Buy‟ on the stock with a target price of Rs 303 (upside of ~48%) in 15 months.
SKP Securities Ltd www.skpsecurities.com Page 3 of 7
Chart 1: Operating Revenues Chart 2: Value wise Revenue Contribution
Chart 3: EBIDTA & EBIDTA Margins Chart 4: PAT & PAT Margin
Chart 5: ROE & ROCE Chart 6: Debt & D/E
Source: SKP Research Desk
62
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FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19E FY20E
Building Products Packaging Products Home Décor - EVOK Brand Other Operating Income
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.1 33
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FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19E FY20E
PA
T M
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n (
%)
EBID
TA (
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mn
)
9.7%
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6.5% 6.5%6.9%
5.0%4.3%
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FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19E FY20E
ROE (%)
ROCE (%)
42% 42%47% 46% 48% 52% 54% 59% 62%
49% 47%47% 48% 44%
43% 41% 37% 34%
8% 11% 6% 6% 5%4% 4% 4% 4%
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20%
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40%
50%
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FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19E FY20E
Other Operating Income Home Décor - EVOK Brand Packaging Products Building Products
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9.8
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.9
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FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19E FY20E
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0.8 0.9 0.9
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FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19E FY20E
D/E (x)
Interest Coverage (x)
HSIL Ltd.
SKP Securities Ltd www.skpsecurities.com Page 4 of 7
KEY CONCERNS
1. Competition from unorganised players: Indian sanitaryware industry has significant presence of small unorganized players, although mostly in non-premium products. Though, Indian consumers are gravitating towards the organized segment, offering branded/premium products, any increase in intensity of competition from unorganized segment may be detrimental for the company. GST/E-Way bill will remove the cascading effect of interstate transfers; will create a level playing field for organised players and will result in a huge shift from the unorganised market to the organised market.
Indian container glass industry has a sizeable unorganized segment representing large opportunities in
terms of volume, which acts as a potential threat for the major organised players. More so as packaging regulations are not very stringent in India. There is always a real threat of consuming industries gravitating towards unorganised segment to bring down their costs, which can reduce pricing power of organized players, at least in some product segments.
2. Threat from substitutesin packaging: Over the last few years, container glass industry has been facing competition from segments like PET bottles, metal cans, Tetra Packs etc. owing to factors like weight, fragility, cost etc. However, the threat is limited for HSIL due to several advantages of glass over plastic. Glass is 100% recyclable with an excellent shelf life. Besides, the growing awareness on account of hygienic packaging demand will drive the demand for container glass over plastic alternatives. In any case, HSIL is already present in PET bottles.
3. Extended slowdown in real estate sector may dampen business sentiments: HSIL‟s building product segment is highly dependent on real estate sector, any extension of slowdown to Tier – I and Tier – II cities may dampen the business prospects of HSIL.
4. Risk of Diversifications going wrong:Although strategic, HSIL‟s diversification initiatives in faucets,
pipes, caps & closures, etc. will remain a risk unless the company finds success.
VALUATION
Government‟s Initiative of “Housing for All” and “Swachh Bharat Abhiyan” is likely to give a fillip to demand for low end sanitaryware products, thereby allowing organised players to have a larger pie of the premium products segment. As HSIL accelerates up the chain through premiumisation coupled with strong brand equity & distribution network, changing consumer preferences along with a gradual turnaround in demand of container glass augurs well for HSIL.
We have valued the stock on SOTP basis and recommend „Buy‟ on the stock with a target price of Rs 303 (upside of ~48%) in 15 months.
One Year forward looking EV/EBIDTA band One Year forward looking P/E band
SKP Securities Ltd www.skpsecurities.com Page 6 of 7
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26-Feb-18 NEUTRAL 432 -- -- --Source: BSE, SKP Research
21-Jun-18 ACCUMULATE 332 386 16% 18
19-Sep-18 BUY 297 382 29% 15
04-Dec-18 BUY 205 303 48% 15
Source: SKP Research
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HSIL Ltd.
SKP Securities Ltd www.skpsecurities.com Page 7 of 7
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