Smooth As Glass - HSIL

HSIL, which in its earlier ava-tar was known as Hindustan Sanitaryware & Industries, has the distinction of manufacturing almost five sanitaryware pieces and 1,815 bottles every minute and has plans to increase that number by a few more in FY10. HSIL, a Kolkata based company, has come a long way from its 600 tonnes per annum capacity at its inception to 32,000 tonnes per annum as of now and in between has diversified into container glass through acquisition of a closed company called Associated Glass Industries. Now the HSIL business can be classified into two divisions.

Building Products Division
HSIL started with its building product division and has now a port-folio which caters to bathroom products like vitreous China sanitaryware, tubs, faucet fittings, steam cabins, home appliances like kitchen sinks etc. HSIL has even launched the world’s premium brands Teuco and Keramag in the Indian market. Currently the company has a manufacturing facility situated at Bahadurgarh (Haryana) and Somanypuram (Andhra Pradesh). Last year the total capacity utilisation was 76 per cent. This lower utilisation was due to a lower demand of the product after the economic slowdown. Nevertheless, it is now picking up slowly and the management expects it to be around 90 per cent by the next quarter.

Sales from this division have contributed only 50 per cent of the total revenue in FY09. It has come down from 52 per cent a year ago. The total growth that the company has witnessed YoY is a mere 10 per cent. It increased from Rs 304.4 crore in FY08 to Rs 337.47 crore. The growth can be attributed to a volume increase of 5 per cent, a 4 per cent increase in price realisation and the rest to a change in the product mix. Generally, institutional clients that include Taj Hotels, GMR, Unitech, ITC Hotels, Mahindra, Infosys etc constitute 28 per cent of the total sales of this division and the rest is due to retailers, which is by way of sales to dealers and they in turn sell to retailers or individual house owners.

The last six months of FY09 has hampered the growth of institutional sales and that led to a de-growth in this section for FY09 over FY08. Its contribution came down to 26 per cent from 29 per cent a year ago. However, the company was able to grow this division in difficult times due to growth in the retail segment. This growth mainly came from Tier II and Tier III cities where the apartment system is still naïve and people build individual homes. The company is strong in this segment. According to R B Kabra, President, HSIL, “Going forward we feel that the same percentage will remain for FY10, with a percentage increase due to some sign of revival from institutional clients in the month of July.” The future growth in this section will mainly be in an inorganic form.

HSIL is planning to acquire a company in the European market so as to get a good brand and design and then slowly shift the lower end production to India and keep the marketing channels there. This will help market the company’s own brands too. For any such acquisition, the management does not plan to dilute equity and hopes to do it through internal cash generation but if the size of the acquisition gets bigger, it cannot be ruled out.[PAGE BREAK]

Glass Container Division
This particular division operates under the brand name of AGI GLaspac. Though this division was a late entrant in the company business it shared almost the same amount of revenue last fiscal (FY09). Even the growth in this section was double that of the building products division. It was a little more than 20 per cent on a yearly basis. HSIL sells its glass containers to different buyer categories, chief among whom are soft drink companies like Pepsi and Coke, pharmaceutical companies like Ranbaxy and Glaxo, liquor companies such as United Brewries and Shaw Wallace etc. The future organic growth of HSIL will mainly come from this division only.

Recently, the company commissioned a manufacturing facility at Bhongir near Hyderabad. It is a green-field plant and has a capacity of 425 tonne glasses a day. This has the potential of generating an additional revenue of Rs 125 to Rs 140 crore per annum. This investment becomes inevitable because the company was operating more than 100 per cent capacity in its glass division since the last two years. To finance this expansion the company raised Rs 240 crore through ECB. The average interest cost for the company works out to around 6 per cent.

Performance And Valuation
The compounded annual growth of the company in the last five years has not been very exciting. Its revenue has increased by 19 per cent whereas its profit by 21 per cent. However, for FY09 it increased by 15 per cent and 40 per cent respectively. This was mainly due to improvements in margin, which was backed by better control of costs. The management expects to achieve a growth of 32 per cent in topline in FY10. Looking at the growth in down-stream companies like Pepsi and Coke which are growing at the rate of 30 per cent and the government’s focus on providing better sanitation will definitely help the company achieve its growth target.
With most of the capital expansion plans already implemented we feel that the company will be in a better position to control its interest cost which has come down by 40 basis points this fiscal and is just 2.8 per cent of total sales. To protect itself from any forex fluctuation the company has completely hedged its liability on the balance sheet and rest of the import (soda ash mainly used in glass container production) which effects the P&L account has natural protection from its export, which is 10 per cent of the total revenue. One of the striking features of the company for its investors is its dividend paying history.

HSIL has been consistently paying dividend since 1992 and for FY09 it was Rs 1.6 per share, which translates into a dividend yield of 3.5 per cent at the current market price. Another comforting factor is the increase of the promoters’ holding in the company which has increased from 55.99 per cent at the end of December 31, 2008 to 60.49 per cent at the end of June 30, 2009.  The current market price of the company discounts its last 12-month earning by 7.85 times and looking at the type of growth that is demonstrated by the company it looks attractive enough. Though the EV/EBIDTA of the company at 9.5 times looks a little expensive, looking at the growth prospect and limited downside from this level, one can take exposure to this counter with a 15-20 per cent return in the next few quarters.