Protectively Profitable - Hyderabad Industries

From a roof manufacturing company, Hyderabad Industries (HIL), a part of the C K Birla Group, has evolved into a multi-product, green building products organisation. HIL, with a market share of about 20 per cent is a market leader (capacity – 8,54,500 tonnes) in the roofing industry (asbestos cement fibre sheet) with an experience of over six decades. Large capacity, brand superiority of ‘Charminar’ and strong distribution network places HIL in this leadership position. HIL has also been able to capitalise on the strong thrust of the government on rural housing.

Further, despite earning 83 per cent of its revenue from the fibre cement sheet business the company has gradually diversified from a one-product company into other areas such as autoclaved aerated concrete (AAC) blocks which is a good substitute for normal clay bricks, thermal insulation products and other products. This can be considered as a well-planned move on the company’s part as it helps to de-risk its business model.

There are several growth triggers that may impact the stock going forward and these include the increased volume of roofing sheets due to the full benefit acquired from its Vijaywada plant (90,000 MT) and the Wada plant (labour issues resolved). There will be an increase in volume and sale of AAC blocks due to its 2.2 lakh CuM of capacity going into commercial production by the end of May 2010. AAC provides cost efficiency for the builders. Being expensive than normal clay bricks or concrete blocks may play a deterrent role but the savings as a whole for the entire structure of the building makes it worth the investment. The company also expects to see a change in its revenue mix by going forward towards greener products and reducing its dependence on the fibre cement sheet business. The share of revenue from AAC has increased considerably in FY10.

In FY10 the company posted a topline of Rs 707 crore vs. Rs 620 crore in FY09, translating into a growth of 14 per cent. The operating profit also has shot up with an impressive figure of Rs 155 crore in FY10 vs. Rs 90 crore in FY09, growing by 70 per cent. The net profit gained 103 per cent in FY10 and now stands at Rs 89.72 crore vs. Rs 44 crore for FY09. However, going forward in FY11, the margins could get a bit impacted and may stabilise in the 20 per cent range as the focus on volume growth/capacity utilisation in the case of AAC blocks and an increase in raw material costs could impact the margins.

Depreciation is expected to increase sharply in FY11 on account of the capex of Rs 80 crore carried out by the company in FY10. In FY11, HIL plans to incur a capex of about Rs 100 crore, which will be funded partly by debt and the rest from internal accruals. At its current market price (CMP) of Rs 700 the stock trades at a P/E of 4.90x for FY11E on an EPS of Rs 143. The company has a dividend yield of 2 per cent. The stock looks set to trade at better valuation as compared to its peers like Visaka Industries and Everest Industries. One can consider the stock with a price target of Rs 817 with a one year time horizon.