LOHIA SECURITIES LTD. - Hindusthan National Glass ... scope for growth and development. Glass ......

Hindusthan National Glass & Industries Limited

LOHIA SECURITIES LTD.

Prabir Adhikary

[email protected]

HINDUSTHAN NATIONAL GLASS & INDUSTRIES LIMITED

2 Lohia Research is also available on Bloomberg LSEC<go>,Thomson Reuters 033-40026821-24


Dear Patrons...

Despite the uncertainties associated with two consecutive coalition governments, the Indian

economy has undergone rapid and all-encompassing change, clearly indicating the strengths of

Indian democracy. Economic policy changes have eased out Indian enterprise from governmental

control towards globalization of the economy. These measures have borne fruit and the economy

is on a steady progressive path. In spite of petroleum price hikes, inflation is under control and the

national economy is expected to grow by around 8.5-9%. The balance of payments continues to be

favourable and India has comfortable foreign exchange reserves.

The Indian packaging industry size is estimated at USD 16.7 billion. India constitutes 3% of the

global packaging industry, out of which the share of glass packaging is just 7%. The Indian glass

packaging industry is growing at around 7% and is expected to grow at 12-15% over the next 10

years following increased consumption, the corresponding need to package it and the preference

for glass for various reasons. The Indian glass industry has a rich history, from mouth blown and

hand working processes; it has taken to automation in a big way, although traditional

manufacturing processes have not been abandoned. Mouth blown and handcrafted glassware

have a dominant role in decorative and table glassware, products which are exported in large

quantities. The majority of raw materials required by the industry are available locally, providing

excellent scope for growth and development. Glass industry in India is poised to grow rapidly

owing to its extensive use in the numerous sectors. The market is driven by increasing disposable

income and willingness to spend on better living standards due to rising aesthetic sense among

consumers as well as glass being the preferred medium of packaging. Advantages of glass as a

packaging material over aluminum are glass is made from silica, which is easily accessible

whereas aluminum requires bauxite mining at a high environment cost, glass is also 100%

recyclable and can be recycled endlessly with no loss in quality or purity as well as possesses an

excellent shelf life. Advantages of glass as a packaging material over plastic are that modern-day

plastics like PET are recyclable but with a low shelf-life compared to glass and also Plastic can

leach dangerous chemicals into the product (like Bisphenol-A, which is suspected to cause certain

brain and cardiac diseases) and can also lead to content oxidation due to the porous nature of

plastic. Glass requires low energy when using raw materials compared to plastic that requires

about four times as much energy as glass needed. With the increase of FMCG sector as well as

increasing health consciousness among general people, it is expected that glass packaging market

would prosper in the near future. Glass is preferred as packing material in view of its

transparency, chemical inertness, impermeability and ability to maintain the optimum freshness of

its contents.

Regards,

Lohia Research




Particulars Page No.

Company: Hindusthan National Glass & Industries Limited

Contents:

Company Profile 5-7

-- Industry Analysis 8-9

--Investment Rationale 9-11

--Key Risks & Key Strengths 11-12

--Quarterly Performance 13

--Financial Highlights & Projections 13-16

--Peer set Analysis 16

--Future Outlook & Valuation 17

Research Team 18

Disclaimer 18




MARKET DATA

Bloomberg Code (HNGI:IN) Reuters Code (HNGI.NS) Price (Rs.) 211.45 Target Price (Rs.) 360 Time (in months) 1 2 Dividend Yield (%) 0.71% 52 Week High/Low 278.50/(191

.10) Equity Capital(Rs. in Mn)

174.7

Face Value (Rs.) 2 Market Cap (Rs. Mn)

18470

Avg.10 day Vol. (NSE) 9179

INDEX WEIGHTAGE

BSEMIDCAP 0.069%

SHARE-HOLDING PATTERN (%)

Promoters 69.98 DII 0.38 FII 7.29 Others 22.35 (As on Dec, 2010)

RELATIVE PERFORMANCE (%)

Nifty Stock Stock over Nifty

1m 4.20 -16.88 -21.09 3m -7.03 -20.18 -13.15 6m -5.46 -6.50 -1.03 1yr 6.17 -19.89 -26.06

Particulars 2008-09 2009-10 2010-11E 2011-12E 2012-13E Total Revenue (Rs. In Mn) 13110.36 13599.04 15502.91 17673.31 20147.58 % Growth 28.37 3.73 14 14 14 EBDITA (Rs. In Mn) 2359.13 3163.34 3565.67 4064.86 4633.94 EBIT (Rs. In Mn) 1611.68 2302.18 2978.43 3419.19 3925.38 PAT (Rs. In Mn) 1077.48 1551.96 1732.30 1997.29 2309.66 EPS (Rs.) 61.68 17.77 19.83 22.87 26.44 P/E (x) 3.4 11.89 10.66 9.2 7.99 P/BV (x) 0.39 1.77 1.55 1.37 1.20 RoE (%) 11.52 14.88 14.62 14.87 15.13

*P/E, P/BV computed based on CMP `211.455 as on14th March,2011

Investment Rational

Volume led growth fuelled by continuous expansion

plans

Revenue from container glass tends to increase with

volume through higher realizations

Increasing production efficiency due to switchover to

natural gas from furnace oil

Captive power unit for its manufacturing unit & furnace

restructuring: strategies to bring down power costs

Efficient raw material procurement strategies

Attractive DE ratio

Long term is 0.35

Long Term & Short Term is 0.50

Key Strength

Diversified customer base

Only player having PAN India presence

High Focus on R&D

Key Risks

Threat from alternate packaging materials

Threat from unorganized glass market

Increasing raw material costs

Financial uncertainties overseas

Valuation

Our DCF-based price of Rs. 360 incorporates the expansion

plans in container glass and float glass division which is

assumed to take effect in FY12 and FY13 respectively. DCF

value is based on perpetual growth rate of 6.5% and D/E of

present 0.50. We believe that our assumptions are conservative

and DCF is most appropriate measure to value HNG. At our

target price, the stock offers a potential upside of around ~70%

from the current level; we initiate a ‘buy’ rating on the stock.

14th March, 2011




Company Profile Hindusthan National Glass & Industries Limited (HNG), incorporated in 1946, is the market leader in the

Indian glass industry with market share of 55%. HNG was founded by Mr. C K Somany following the

commissioning of India’s first fully automated glass manufacturing plant at Rishra (near Kolkata). The

company has started its operation under the banner of Hindusthan National Glass Manufacturing Co.

Ltd., which was subsequently renamed as Hindusthan National Glass & Industries Ltd. (HNGIL).

Presently, it is the key player in India’s container glass industry with a pan India presence and its plants

are located at Rishra, Bahadurgarh, Rishikesh, Neemrana, Nashik and Puducherry. The Company is ISO

9001:2000 quality certified and is pursuing ISO 14000/18000/22000 certifications for comprehensive

environmental compliance.

Corporate History- Key Events 1946- HNG was incorporated in Rishra (near Kolkata) on 23rd February 1952- India’s first fully automated glass manufacturing plant with an installed capacity of 30 TPD was

commissioned 2001- Installed capacity was raised to 1100 TPD and was certified with ISO 9001:2000 2002- Production strength was raised to 1800 TPD with the acquisition of Owens Brockway (India)

Ltd. at Rishikesh and Puducherry 2005- Installed capacity was increased to 2150 TPD through acquisition of Larsen & Toubro Plant

(Nashik) 2006- Incorporated HNG Float Glass Ltd. to set up a float glass plant in Halol 2006- Merged with Ace Glass Containers Limited and installed capacity of container glass was

increased to 2435 TPD through debottlenecking 2007- Acquired Neemrana Plant through merger of Haryana Sheet Glass and installed capacity was

increased to 2540 TPD 2009- Ranked 307th among the top 1000 Indian companies on the basis of net sales by Business

Standard as well as rated the best Indian company in the Glass & Ceramics category by Dun & Bradstreet

2010- Singed largest deals in the Indian Glass Industry worth Rs 2.5 billion

Corporate Structure

Hindusthan National Glass & Industries Limited

Glass Equipment (India) Ltd.

(100%)

Quality Minerals Ltd

(100%)

HNG Float Glass Ltd (HNGFL)

An Associate Company (47.5%)

Capital goods & spares

supplier to glass industry

Net revenues: INR 366 Mn

Mineral supplier to glass

industry


Manufacturer of float &

processed glass





Board of Directors

Name Designation

Chandra Kumar Somany Chairman

Sanjay Somany Vice Chairman & Managing Director

Mukul Somany Vice Chairman & Managing Director

Kishore Bhimani Director

Sujit Bhattacharya Director

Ratna Kumar Daga Director

Shree Kumar Bangur Director

Dipankar Chatterjee Director

Indrajit Kumar Saha Director

Venkatasan Sridar Director

Summary of Plants (FY2009-10) Container Glass Division

Plant Location Furnace No Installed Capacity(TPD)

Rishra, West Bengal 3 805

Bahadurgarh, Haryana 3 655

Rishikesh, Uttarakhand 2 425

Puducherry, Union Territory 1 370

Nashik, Maharashtra 1 390

Neemrana, Rajasthan 1 180

Float Glass Division

Plant Location Present Capacity (TPD)

Halol, Gujarat 600

Client Mix

The company manufactures glass bottles in various sizes ranging from 5 ml to 3200 ml in three colors

i.e. amber, flint and green. The company’s products have a downstream application in the liquor, beer,

beverages, pharmaceuticals, processed food and cosmetic industries. The differentiating factor that

places the company ahead of its competitors is its strong customer profile across all the downstream

verticals. The company’s strong customer profile can be determined from the fact that it accounts for the

top ten players in the respective sectors. In addition to the strong customer profile, the company’s

revenue from various downstream verticals is well diversified thereby making it insulated from

temporary spin in any one sector. HNG has captured a large share of the Indian market and also has an

increasingly satisfied client base in more than 23 countries. HNG has pan India presence with JIT supply

facilities to its customers. The company has a fleet of over 100 trucks which helps it to reduce overall

landed cost to customers.




Expansion Plans

Container Glass Division

Year Project Capacity Addition Capacity

FY2010-11 2825 TPD

Brownfield Project at Nashik

650 TPD

FY2011-12 3475 TPD

Greenfield Project at Naidupetta 650 TPD

FY2012-13 4125 TPD

Greenfield Project in North 650 TPD

FY2013-14 4775 TPD

HNG is rebuilding its existing furnace capacities in its various plants and expecting to raise total furnace capacity by 1200 TPD

FY2013-14 5975 TPD

*denotes expected capacity

Float Glass Division

HNG has 47.5% stake in HNG Float Glass Ltd (HNGFL) which is proposed to be made a subsidiary in near

future

Joint Venture HNG & OMCO International NV (world’s leading glass mould manufactures), jointly (50:50)

setting up mould manufacturing facilities under the name of OMCO HNG Engineering Limited for

designing, manufacturing, marketing and sales of moulds for glass packaging products like

beverages, liquor, food, pharmaceutical and cosmetic use.




Industry Analysis The glass industry comprises four key segments: hollow glass (mostly containers), flat glass, fibers and

special glass. Container glass is the largest, dedicated to the growing demand coming out of the food,

drinks, perfume and

pharmaceutical sectors. The

global glass industry is

estimated to grow from USD

465 billion in 2007 to USD

597 billion in 2014 (Source:

SPG Media). Among the

various segments, the

largest are the food and beer

segments. The Indian

packaging industry size is

estimated at USD 16.7

billion. India constitutes 3%

of the global packaging industry, out of which the share of glass packaging is just 7%. The Indian glass

packaging industry is growing at around 7% and is expected to grow at 12-15% over the next 10 years

following increased consumption. India’s large growing middle-class and organized retail sector are the

primary catalysts of packaging industry growth. The demand for glass containers is driven by a growth

in end-user segments like liquor, beer, pharmaceuticals, food processing and carbonated drinks. The

liquor and beer industries are the biggest users of glass containers (65% share), followed by

pharmaceuticals (11%), food (13%), carbonated drinks (7%), cosmetics and others (4%).

Alcohol & beverage industry: The alcohol and beverage industry, especially IMFL, is expected to

sustain 12% CAGR on account of changing lifestyles and rise in disposable incomes. However per capita

alcohol consumption (in India) is a mere 1.8 litres per adult while in Russia it is around 10 litres per

adult. Growth Drivers

Rising consumption among urban

women. Expected to increase from 10% of all

consumers in the 2005-2015 period to 25%

Rising disposable incomes and

changing lifestyles

Higher penetration of international

brands like SAB Miller and

Diageo, resulting in the introduction of

premium brands.

Pharmaceuticals industry: India's Pharmaceutical Industry is the 3rd largest in the world in volume

terms and14th in value terms. The Indian domestic market is currently ~USD 12.3bn and is growing at

CAGR of 12-15% as against a global average of 4-7%. It is projected to grow to USD 20bn by 2015.

Growth Drivers

Increased health awareness

Expansion of healthcare facilities in the rural and far-flung areas to further boost demand

Increasing penetration of customized insurance plans would drive afford ability of healthcare

services

1.2

1.4

4.8

5.9

10.2

19.5

27.5

27.5

50.3

63.9

89

0 20 40 60 80 100

Indonesia

India

Brazil

China

Japan

Mexico

USA

UK

Spain

France

South Korea

Per Capita Consumption in 2010-11 (Kg.)

Source: IBEF

Scope of growth

49 56 57

190214

236

0

100

200

300

2007-08 2008-09 2009-10

Cas

es in

Mill

ion

s

HNG Supply Liquor Industry Volumes

Source: Company Data




Food processing industry: The retail food sector of India is expected to double from USD 70 bn in

2008 to USD 150 bn by 2025 (Source:

McKinsey) on account of a growing health

consciousness resulting in the increased

use of glass packaging. In India, 10-12% of

all food and beverages are packed in glass

containers as against 40-50% in developed

economies (Source: CRISIL).

Growth Drivers

Increasing health consciousness

with shift from traditional unpackaged

formats to packaged, branded products

Increase in penetration of glass

containers – currently10- 12% of all food

and beverages are packed in glass

containers in India as compared to 40-50%

in developed markets

Investment Rationale

Volume led growth fuelled by continuous expansion plans: HNG is the market leader in Indian

container glass business and it is strengthening its position further through continuous expansion plans.

At present its container

glass making capacity is

2825 TPD which is

expected to grow to

5975 TPD by FY2014-

15 through various

Greenfield and

Brownfield expansions

in India. The company

is producing 15 million

bottles per day ranging

from 5 ml to 3200 ml

which is expected to increase with new technologies company is bringing in. South India is the next big

market after north India in terms of container glass demand, which is growing at a rate of 18-20%. In

order to meet demand from South India and free up some of its east India capacity, HNG is setting up a

650 TPD Greenfield unit at Naidupeta in Andhra Pradesh. This would help the company to enhance its

market share in the liquor segment.

Revenue from container glass tends to increase with volume through higher realizations:

HNG is serving food, soft drinks, beer, liquor, pharmaceutical, toiletries, vials as well as household

industries through its container glass. It is earning most of its revenue from the liquor segment, though

its realization from liquor segment has come down by 1% respect to FY2008-09 but overall realization

from the entire segment has increased in respect to FY2008-09. From 15th February, 2011 HNG has

0 2840

1300650

650550 0

0

1000

2000

3000

4000

5000

6000

7000

2007-08 2008-09 2009-10 2010-11 2011-12E 2012-13E 2013-14E 2014-15E

TPD

Capacity Additions (TPD) Installed Capacity (TPD)

Source: Company Data & Lohia Estimate

9

39

149

315

674

760

0 200 400 600 800

India

China

Russia

Brazil

Mexico

USA

Per capita consumption (bottles per adult per annum)





made 10% increase in glass price per ton, so with increasing volume and increasing realization, it is

expected that company’s revenue will increase in near future. HNG has net revenue of Rs. 13599.04 Mn

in FY2009-10 which is expected to grow at a CAGR rate of 14% in next three years. PAT was Rs.1551.96

Mn in FY2009-10 which is expected to maintain a growth rate of 11% annually in coming years. ROE of

the company is expected to maintain ~15% YOY in coming 2-3 years.

Increasing production efficiency due to switchover to natural gas from furnace oil: Fuel is very

essential for the glass industry as it requires high furnace temperature all the time for years. So rising

fuel prices affects badly on the companies operating expenditure as well as its margins. HNG has

surprised industry observers by enhancing its fuel efficiency. HNG is replacing furnace oil with natural

gas in all of its plants across country in a phased manner. This replacement is already done at its

Bahadurgarh and Neemrana plants and very soon replacement will be started in other plants as well.

Power & fuel costs are increasing on an average rate of 39% from FY2007-08 to FY2009-10 whereas

from FY2008-09 to FY2009-10 these costs have increased just 2% due to the switchover from furnace

oil to natural gas. HNGI uses a high proportion of cullet (40%), which helps to save power and fuel costs

– a 10% increase in cullet proportion in the batch results in a 2.5% decline in energy cost. Besides, HNGI

has higher speed of draw and moulding machines, and the turnaround time in its batch process plants is

lower. HNG has been successful in increasing its draw efficiency from 70% to 85% in the last three

years. It has gradually increased its packing efficiency to 87% in FY2009-10.

Place Capacity

(TPD) Fuel Status (2010-11)

Bahadurgarh 655 Natural gas

Neemrana 180 Natural gas

Nashik 390 Furnace Oil (Switchover to natural gas is likely by September 2011)

Rishra 805 Furnace Oil (Switchover to natural gas is likely by 2012)

Rishikesh 425 Furnace Oil (Switchover to natural gas is likely by July 2012)

Puducherry 370 Furnace Oil (Switchover to natural gas is likely by 2012)

10212.97 13110.36 13599.04 15502.91 17673.31 20147.58

18.71%

11.52%

14.88% 14.62% 14.87% 15.13%

15.70%

8.22% 11.41%

11.17% 11.30% 11.46%

0.00%

5.00%

10.00%

15.00%

20.00%

0.00

5000.00

10000.00

15000.00

20000.00

25000.00

2007-2008 2008-2009 2009-2010 2010-2011E 2011-2012E 2012-2013ENet Revenue ROE PAT Margin

Source: Company Data & Lohia Estimate


4 Year CAGR 14%




Efficient Raw material Procurement Strategies: Raw material consumption cost and power & fuel cost

are the two major cost components with raw material cost accounting for about 45% of cost of

production in the last three years. HNG’s key raw materials comprises of silica, limestone, dolomite,

feldspar, soda ash and cullet. Silica and soda ash accounted for 60-65% of the total raw material cost.

The Company imported a large part of its soda ash need from Kenya, presently imported soda ash costs

Rs. 11,500 per ton whereas domestic costs is Rs. 14,00 per ton, and thus company reducing major

portion of its soda ash requirement costs. The Company also has tied up with distilleries and bottlers for

cullet procurement, by entering into long-term contracts for seamless supply. The company has entered

into tie-ups with major soda ash vendors like Magadi (East Africa), Tata Chemicals, Gujarat Heavy

Chemicals and Nirma leading to stable supplies.

Attractive DE ratio: Total debt comprising secured and unsecured loans has increased 11.51% from

FY2008-09 to FY2009-10. HNG is maintaining attractive debt-equity ratio from FY2007-08 (below 1)

and in FY2009-10 its DE ratio was as follows:

0.50 for the long term & short term

0.35 for the short term

Key Risks Risk in exports:

Companies export provides it the twin advantage of growth, profitability and business de-risking. Due to

the economic condition overseas, companies export has got affected. The cost of freight and breakage

possibility is also throwing challenges in this area. The Company’s export performance was modest in

2009-10, with the international markets passing through a difficult phase and not having adequate

incremental volume to offer. Revenues from international markets were 5.64% in 2009-10 as against

9.71% in 2008-09. The Company marketed products in Asia, Europe, North America and Africa. Going

ahead, the Company intends to increase its exposure in the non-SAARC nations including opening a

depot in some locations.

Threat from alternate packaging materials: The container glass industry is facing threat from alternate forms of packaging like flexible packaging

laminates and plastic containers in applications like milk packaging, intravenous fluids, blister packs for

tablets and capsules. Besides, bottled soft drinks are increasingly being sold in aluminum cans and PET

bottles. The Indian Plastic Industry has been growing at a phenomenal rate of 15% over the years and

with its potential harnessed, it is all set to reach the 12.5 MMT consumption mark, making India the

739.511032.48

2146.722359.13

3163.34

1115.56 1351.032718.76 3684.10

3755.85

17.89%19.90% 21.02%

17.99% 23.26%

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

0.00

1000.00

2000.00

3000.00

4000.00

2005-06 2006-07 2007-2008 2008-2009 2009-2010

Break on rising power & fuel costs

EBITDA Power & Fuel Costs EBITDA Margin

Source:Company Dara




third largest consumer of plastics by 2010, after US and China. PET packaging has high potential in

segments like pharmaceuticals, beverages, confectionery, liquor and personal care. However, Container

glass enjoys its own importance in the packaging industry, despite the rapid development of packaging

alternatives for an important reason that established environment friendliness reflected in its

biodegradability and recyclability. Besides, the growing awareness on account of benign and hygienic

packaging demand will drive the demand for container glass over plastic alternatives.

Increasing raw material costs: Raw material for container glass and float glass are sand silica, soda ash, cullet, dolomite, limestone,

feldspar etc. APP or average procurement price is increasing which affecting its margins. Also inability to

procure adequate raw materials at the right price may affect company’s competitiveness. From FY2006-

07 to FY2009-10, raw material costs has increased at an average rate of 42% YOY which was quite high

and putting pressure on the margins. The company has entered into secure raw material supply

contracts with suppliers leading to uninterrupted delivery and trying to maintain an average critical raw

material inventory of 20-25 days to ensure continuous supply which helped it to save some of the costs.

Key Strengths Turnaround expertise:

Over the last eight years, HNG turned around sick units acquired from Owens Brockway at Puducherry &

Rishikesh, the Nashik unit (acquired from Larsen & Toubro) and the Neemrana unit (acquired from

Haryana Sheet Glass). HNG continuously focus on the same approach – acquisition, debottlenecking and

rehabilitation – leading to value unleashing in the shortest possible time.

Diversified customer base: HNG has diversified, growing and loyal clientele – United Spirits, Pernod Ricard, Diageo, Radico, SAB

Miller, Pfizer, Cipla, GlaxoSmithKline, Hindusthan Unilever, Dabur, Heinz, Nestle and Coca-Cola, among

others – generate substantial repeat business. HNG’s current sales mix is highly skewed in favor of

alcoholic beverages like IMFL and beer, which together account for 65% of its sales volumes. Soft drinks

and food contribute another 20%. Food and beverages thus account for about 85% of its volumes. The

pharmaceuticals segment accounts for 13% of its sales volumes, and personal care accounts for the

balance 3%. HNGI has consciously increasing the proportion of higher realization soft drink bottles, as

the industry has come back to a high growth trajectory of 15-20%. As HNG is increasing its presence in

different business modules so it helps the company to hedge the risk that occurs due to uncertainties in

the economy as well as in the demand supply scenario.

Only player with pan India presence: HNGI is the only player in the container glass industry with a pan India presence. It has manufacturing

facilities in the North (Bahadurgarh, Neemrana and Rishikesh), the West (Nashik), the East (Rishra), and

the South (Puducherry). Its competitors are largely regional plays – HSIL has capacities in Andhra

Pradesh while Haldyn Glass and Piramal have their units in Gujarat. HNGI is the only container glass

manufacturer in East India. Its well spread units work to its advantage, as glass containers are usually

transported only within a 500km radius. Its pan India presence enables HNGI to cater to user industries

across geographies.

Synergy:

There is a synergy between the two businesses (float and container glass). Nearly 60% of the

manufacturing process is common.




Quarterly Performance Particulars (Rs. in Mn) 3QFY11 3QFY10 Y-o-Y(%) 2QFY11 Q-o-Q(%)

Net Sales & Other Operating Income 4022.4 3677.4 9.38% 3706.4 8.53%

Total Expenditure 3274.3 2961.6 10.56% 2998.5 9.20%

PBIDT (Excl OI) 748.1 715.8 4.51% 707.9 5.68%

Other Income 20.2 18.9 6.88% 7.1 184.51%

Operating Profit 768.3 734.7 4.57% 715 7.45%

Interest 128.1 125.5 2.07% 120.4 6.40%

PBDT 640.2 609.2 5.09% 594.6 7.67%

Depreciation 246.4 233.4 5.57% 251.2 -1.91%

PBT 393.8 375.8 4.79% 343.4 14.68%

Tax 80 45.2 76.99% 70 14.29%

PAT 313.8 330.6 -5.08% 273.4 14.78%

Equity Capital 174.7 174.7 0.00% 174.7 0.00%

Face Value 2 2 0.00% 2 0.00%

EPS 3.5 3.7 -5.08% 3.1 14.78%

Income Statement

Particulars (Rs. In Mn) FY08-09 FY09-10 FY10-11E FY11-12E FY12-13E

Total Revenue 13110.36 13599.04 15502.91 17673.31 20147.58 % Growth 28.84% 4.63% 12.97% 14.05% 14.10%

Expenditures Staff Costs 659.03 826.10 819.18 935.44 1087.13

% of Net Sales 5.03% 6.07% 5.28% 5.29% 5.40%

Other Manufacturing Costs 9511.52 9649.36 10868.20 12366.39 14050.76

% of Net Sales 72.55% 70.96% 70.10% 69.97% 69.74%

Miscellaneous Expenses 797.69 305.74 500.52 599.61 728.45 % of Net Sales 6.08% 2.25% 3.23% 3.39% 3.62%

Total Expenditures 10968.24 10781.20 12187.90 13901.44 15866.34

% of Net Sales 83.66% 79.28% 78.62% 78.66% 78.75%

EBITDA 2359.13 3163.34 3565.67 4064.86 4633.94

EBITDA Margin % 17.99% 23.26% 23.00% 23.00% 23.00%

Depreciation 747.45 861.16 587.23 645.67 708.56

EBIT 1611.68 2302.18 2978.43 3419.19 3925.38

Financial Charges 434.49 471.72 503.72 565.92 625.87 PBT 1177.19 1830.46 2474.71 2853.27 3299.51

Tax 99.71 278.50 742.41 855.98 989.85

PAT 1077.48 1551.96 1732.30 1997.29 2309.66

Shares In Issue 17.47 87.34 87.34 87.34 87.34

EPS 61.68 17.77 19.83 22.87 26.44 Dividend paid 87.34 131.01 146.23 168.60 194.97

Dividend payout ratio 0.08 0.08 0.08 0.08 0.08

Net profit transferred to Reserves 990.14 1420.95 1586.06 1828.68 2114.69

Source: Mint

Source: Mint & Lohia Estimate




Balance Sheet

Particulars (Rs. In Mn) FY08-09 FY09-10 FY10-11E FY11-12E FY12-13E

Asset

Gross Asset 13789.94 16614.92 19099.69 22243.83 24367.95

Accumulated Depriciation 4725.11 5452.08 6803.94 7807.11 8306.10

Capital WIP 820.34 274.68 750.00 868.51 904.45

Net Fixed Asset 9,885.17 11,437.52 13,045.75 15,305.23 16,966.31

Investments & Deposits 1,045.85 1,470.69 1,585.00 1,500.00 1600.00

Total Current Assets 6,479.06 6,603.48 8,026.85 8,387.56 9,798.27

Current Liabilities & Provisions 2,567.15 2,729.78 2,972.77 3,361.24 3,880.45

Net Current Asset 3,911.91 3,873.70 5,054.08 5,026.32 5,917.82

Capital Deployed 14,842.93 16,781.91 19,684.83 21,831.54 24,484.13

Liability

Total Debt 5,073.45 5,657.24 6,987.46 7,560.43 8,411.86

Deferred Tax Liabilities 417.67 696.96 848.70 836.38 808.84

Total Borrowings 5,491.12 6,354.20 7,836.16 7,607.10 8,390.99

Share Capital 174.68 174.68 174.68 174.68 174.68

Reserve and Surplus 9,177.13 10,253.04 11,673.99 13,260.05 15,088.74

Total Stock Holder's Equity 9,351.81 10,427.72 11,848.67 13,434.73 15,263.42

Capital Employed 14,842.93 16,781.91 19,684.83 21,831.54 24,484.13

Cash Flow Statement

Particulars FY08-09 FY09-10 FY10-11E FY11-12E FY12-13E

Cash Flow from Operating Activities

PAT 1077.48 1551.96 1732.30 1997.29 2309.66

Depreciation 747.45 861.16 587.23 645.67 708.56

Interest Expense 434.49 471.72 503.72 565.92 625.87

Direct taxes paid 99.71 278.50 742.41 855.98 989.85

Operating Profit Before WC Changes 2359.13 3163.34 3565.67 4064.86 4633.94

Changes in Current Assets (ex. cash) (1713.10) (191.43) (1400.57) (349.48) (1395.79)

Changes in Current Liabilities 682.65 162.63 242.99 388.46 519.22

Changes In WC (1030.45) (28.80) (1157.58) 38.98 (876.58)

Cash Generated From Operations 1328.68 3134.54 2408.09 4103.84 3757.37

Direct Taxes Paid (99.71) (278.50) (742.41) (855.98) (989.85)

Change in Deffered Tax Liabilities (236.92) (279.29) (151.74) 12.32 27.53

Net Cash Generated From Operations

1465.89 3135.33 1817.42 3235.54 2739.98





Cash Flow from Investing Activities

Capital Expenditure (CAPEX) (1584.59) (2279.32) (2960.09) (3262.64) (2160.07)

Investments 100.00 (424.84) (114.31) 85.00 (100.00)

Net Cash Used In Investing Activities (1484.59) (2704.16) (3074.40) (3177.64) (2260.07)

Cash Flow from Financing Activities

Change in Debt 886.39 583.79 1330.22 572.97 851.42

Change in Equity 64.25 0.00 0.00 0.00 0.00

Dividends Paid (87.34) (131.01) (146.23) (168.60) (194.97)

Interest Paid (434.49) (471.72) (503.72) (565.92) (625.87)

Others (399.76) (479.23) 599.51 114.88 (495.58)

Net Cash used in Financing Activities (35.19) (498.17) 1279.78 (46.68) (464.99)

Cash and cash equivalents At the beginning

167.9 114.0 47.0 69.8 81.0

Net Increase in Cash and Cash Equivalents

(53.89) (67.00) 22.79 11.22 14.92

Cash and cash equivalents At the end 114.01 47.00 69.78 81.01 95.94

Financial Ratios

Financial Ratios FY08-09 FY09-10 FY10-11E FY11-12E FY12-13E

Profitability Ratios

Return on Equity (ROE) 11.52% 14.88% 14.62% 14.87% 15.13%

Return on Capital Employed (ROCE) 10.86% 13.72% 15.13% 15.66% 16.03%

Liquidity Ratios

Current Ratio 2.52 2.42 2.70 2.50 2.53

Acid Test Ratio 1.68 1.65 1.76 1.61 1.66

Debt-Equity Ratio 0.50 0.50 0.59 0.56 0.55






Peer Set Analysis Container Glass

Companies *TTM Price

*Market Cap #

*EV # *PAT

# EBIDTA

# EPS

(Rs.) P/E

P/BV

EV/ EBIDT

A D/E

HNG 238 20787 26397 1144 2870 13.1 18.1 2 9.2 0.50

Piramal Glass 108 8686 14375 493 1775 6.1 17.6 1.9 8.1 2.43

Haldyn Glass 11.96 642.85 999 153 322 2.8 4.2 1.1 3.1 1.11

Hindusthan Sanitaryware

116 6383.48 11113 859 1998 15.6 7.4 1.1 5.5 1.30

Average of Container glass industry 11.8 1.55 6.4 1.35

* TTM trailing twelve months average prices; # figures in Rs. Millions

Comparison with Nifty

Future Plans & Outlook

The Company is optimistic of prospects for the following reasons:

Creation of a greenfield unit in Naidupeta (650 TPD) by March 2012 and enhanced capacity in

Nashik (650 TPD) that are expected to grow volumes by 30% in 2011-12

A growing focus on NNPB technology delivering higher margins, lowering transportation costs

Lower resource consumption (energy and water) through Servoshear and Graphoidalshear

spray system technologies

Higher productivity through sophisticated furnace control mechanisms

Replacing furnace oil with natural gas in the Bahadurgarh and Neemrana units

The installation of a captive 1.2 MW power plant based on waste heat recovery in Rishra

0

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33

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97

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7

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5

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24

1

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9

Volume HNG SNP CNX Nifty





Valuation

DCF VALUATION (Rs. In Mn) FY11E FY12E FY13E

EBITDA 3565.67 4064.86 4633.94

Depreciation 587.23 645.67 708.56

Less: Cash Tax 742.41 855.98 989.85

NOPLAT 2823.26 3208.88 3644.09

Capex (2960.09) (3262.64) (2160.07)

Changes in WC (1157.58) 38.98 (876.58)

Free Cash Flows (1118.95) 190.31 854.34

PV of Estimated FC Flows (1072.43) 167.55 690.94

It is assumed Free Cash flow beyond FY13 grows at 6.5%

Horizontal Value 47785.70

PV of Estimated Perpetuity Flows (Terminal Value) 3864613

Total Present Value (EV) 38432.2

Book Value of Debt 6987.5

Fundamental Value of Equity 31444.7

No of Outstanding Shares 87.34

Fundamental Value per share (Rs.) 360.03

Our DCF-based price of Rs. 360.00 incorporates the expansion plans in container glass and float glass

division which is assumed to take effect in FY12 and FY13 respectively. DCF value is based on perpetual

growth rate of 6.5% and D/E of present 0.50x. We believe that our assumptions are conservative and

DCF is most appropriate measure to value HNG. At our target price, the stock offers a potential upside of

around ~70% from the current level; we initiate a ‘buy’ rating on the stock.




For Suggestions, clarifications & your valuable feedback write back to us at:

Lohia Securities Ltd, 4 Brabourne Road, 5th Floor Kolkata-700001 Board :( 91-33) 40026600,

E-mail: [email protected]

For Institutional Sales

Lohia Securities Ltd, 1602-B, Lady rattan Tower, 72 Dainik Shivner Marg Gandhinagar, worli,

Mumbai- 400018 Board: (91-22) 2492 4449, E-mail: [email protected]

Institutional Team:

Our Fundamental Research Team

Name E-Mail Id Contact No.

Basanti Gourisaria [email protected] +91 33 40026822

Rajkumar Mondal [email protected] +91 33 40026734

Gitika Bhansali [email protected] +91 33 40026821

Krishna K Agarwal [email protected] +91 33 40026631

Prakash N Sharma [email protected] +91 33 40026631

Prabir Adhikary [email protected] +91 33 40026734

Sonu Shah [email protected] +91 33 40026732

Sailesh Sarda [email protected] +91 33 40026732

Our Technical Research Team


Aditya Agarwal [email protected] +91 33 40026783

Our Derivative & Statistical Research Team


Anand Lath [email protected] +91 33 40026685

Institutional Sales


Ashok Kamat [email protected] +91 22 24901310

Deepak Parekh [email protected] +91 33 40026737

DISCLAIMER: The information and opinions contained herein have been compiled or arrived at, based upon information obtained

from reliable sources. Such information has not been independently verified and no guarantee, representation of warranty, express

or implied, is made as to its accuracy, completeness or correctness. All such information and opinions are subject to change without

notice. LSL, its directors, analysts or employees do not take any responsibility, financial or otherwise, of the losses or the damages

sustained due to the investments made or any action taken on basis of this report. LSL and its directors, associates, employees may

or may not have any positions in any of the stocks dealt in the report. This report is only for PRIVATE CIRCULATION.

Investment Rating:

Buy > 15% Hold (5% - 15%) Sell < 5%

mailto:[email protected]

mailto:[email protected]

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