HSIL Q3 Net Down By 6 Per Cent – An Opportunity To Buy

HSIL, a leading sanitaryware company, announced its quarterly results yesterday. The company has reported 6 per cent decline in its net profit in the December quarter. However, investors should not be panic over this as the impact has been largely due to rupee depreciation. One may instead take note of the hefty 40 per cent rise in its net profit for the first nine months in this fiscal. 

HSIL has continued with its upward mobility in sales which has increased by 21.88 per cent in the third quarter and by 33.01 per cent for the nine-month period ended December 2011. During the quarter sales growth was seen in both the categories i.e. the building products division and the container glass division which witnessed sales growing by 18.48 per cent and 24.51 per cent respectively. For the nine-month period its container glass division has shown a higher growth rate (43 per cent) than its building products division (20 per cent).
                                                                

The company’s EBITDA margins have declined by 340 basis points in the quarter. This was mainly due to increased input costs. Its goods and raw material expenses contributed about 40 per cent to the total costs while power and fuel expenses contributed about 22-23 per cent. These costs moved sharply by 29 and 31 per cent respectively due to rupee depreciation. The fuel cost includes use of gas and coal which is required mainly to melt glass and some portion of it is imported. 

The rupee has appreciated this year and is now trading in the range of Rs 49 - 50 per Dollar, which will bring the company’s margins to a normal 20-21 per cent level going ahead. Besides, the company has also announced that it will pass on the increased raw material prices to its consumers from the month of February 2012, which will add further spark in its net profit. 

In FY12 the company expects 30 per cent growth in its total revenues. Even though this quarter has taken a beating of 340 basis points in its EBITDA margins, we believe that the yearly margins will remain in line with those of the last fiscal. The company will also commission its Bhongir glass plant in March 2012 which will take its capacity from 1,075 MTPD to 1,550 MTPD. This will see a further revenue boost in the next fiscal.

We believe that the outlook for the business remains strong, reflected through the healthy growth in its sales. With the interest rates peaking out and the RBI giving clear indications towards a trend reversal soon, we believe that the home demand will pick up and this will increase the demand for sanitaryware products in India. Its glass products have shown a very high growth rate, indicating a very robust demand in the economy.

In our opinion, the current fall in the scrip provides a good opportunity to accumulate the stock at a lower price. Our recommendation is to continue holding the stock.