HSIL Reports Poor Performance

Gurgaon-based HSIL yesterday announced its September quarter results which turned out to be lower than the management’s expectations. Its total revenues increased by 17 per cent to Rs 349.4 crore while its net profit declined by 10.87 per cent to Rs 20.3 crore on a YoY basis. The drop in net profit is due to the sharp rise in depreciation, fuel cost and interest payment. The revenues of the company also dipped due to a slowdown in the demand for its glass products. 

During the last fiscal the company expanded its container glass capacity and was running it at 80 per cent utilisation rate in the September quarter. But the slower off-take from its customers saw sales rising only by 8 per cent as against the management’s expectation of 20 per cent. The volumes also shrunk by 2 per cent. The company has, however, successfully hiked the prices of its glass products due to which the revenues of its container glass segment saw 8 per cent growth despite the low volumes. 

HSIL is now planning to reduce its glass production by 10 per cent and liquidate the inventories in the next quarter. The capacity utilisation will be about 75 per cent in the December quarter which will rise to about 80-85 per cent in the March quarter. According to the management, the utilisation capacity will not touch 100 per cent in the current fiscal due to the high inventory levels. It is also converting one of its container glass manufacturing facilities to make different coloured glasses which will be commissioned mid-November. The company expects a good demand for these coloured products.

In its building products segment, HSIL registered 26.5 per cent growth. The volume growth was 12 per cent and the capacity utilisation remained strong at over 90 per cent. The company has also hiked the prices of its products in this segment by 5 per cent effective today and hence is expecting better growth in the December quarter.

The power and fuel costs of HSIL showed a surge of 57 per cent during the quarter. It uses diesel to generate power to run its plants. Due to the recent hike in the diesel price, there was a substantial increase in its power cost. The company also bought power from power exchanges for its Andhra Pradesh unit which cost it over Rs 9 per unit. The short-term power cost is high in Andhra Pradesh as compared to rest of the country. The reason for this is the lower gas output from the KG-D6 basis on which most of the gas-fired power plants in Andhra Pradesh are dependent.

Meanwhile, the sanitaryware market is currently seeing a growth of about 25-30 per cent. To grab this opportunity HSIL is expanding its faucet making plant which is slated to be commissioned by the next fiscal. It is also expanding its Bahadurgarh plant in Haryana which may become operational by the end of next year. Both these enhanced capacities will cater to the output of sanitaryware products and this may give a positive spin to the stock.

The company had also acquired another glass container company called Garden Polymer in 2011. It is now also looking to consolidate its financials with HSIL and is in the process of seeking legal approval. The company has declined to comment on the financials of Garden Polymer for now and it would be some time before we can analyse the impact of the consolidation.

Our concerns about this scrip at the moment are related to the lower off-take of the products from its container glass division. The management has said that it may have to borrow additional Rs 50-60 crore if the inventory does not get liquidated as per its expectations. Also, the rising fuel and power expenses may be a drag on the stock going ahead. The shares of HSIL have been underperforming on the bourses over the last two quarters out of which the last quarter, in particular, witnessed a strong decline in the company’s operating margins due to the high raw material costs.

On the valuation front the scrip is trading at a PE of 8x of its annualised EPS. Though the shares seem attractive at this valuation as compared to those of its peers which are trading at a PE of 12x, we are currently being cautious about the stock. We believe that the short-term issues related to its expenses and inventory levels need to be resolved before the capacity expansion comes on stream. After its disappointing first half we would advise investors to avoid this scrip for now. Nevertheless, we will update our readers about entering the counter at the right valuation.