HSIL Reports Subdued Q3 results, Stock Still Available At Discount

HSIL’s Dec 2012 (Q3) numbers have been quite disappointing since their profits have declined by more than 50% to Rs 12 crore. Sales, however, grew by 19% to Rs 429 crore. The higher power and fuel expenses have eaten its EBITDA margins, which have declined by more than 450 basis points to 14.21%.

The company, during the Sep 2012 quarter (Q2), had faced inventory issues in its container glass division, which affected its margins in that quarter. The same issue seems to have continued during the Dec quarter as well. The company, in the September quarter conference call, had said that it will liquidate inventories in the December quarter and will also take some production cut.

That strategy may not have worked, at least for the Dec 2012 quarter. Despite a revenue growth of 11% in the container glass division, PBIT margins have come down heavily from 14.35% a year before to 3.87%. On a sequential basis too, there is a drop in the margins which the management needs to explain. We tried to contact the company, which eventually will update the investors in a conference on Monday, Feb 4, 2013.

In its building products division, revenues have grown by 20% to Rs 184 crore. The PBIT margins, here too, have taken a beating as they have fallen by 179 basis points on a YoY basis to 18.19%.

A significant drop in the margins is mainly due to the rise in the power and fuel expenses. The company has reported a 46% rise in power and fuel expenses, which were 23% of the sales. Employee costs and materials costs grew moderately during the quarter. Cost of materials (16% of its sales) has in fact declined as percentage of sales by more than 400 basis points sequentially. The heavy rise in power and fuel expenses was, however, enough to bring the margins down. The rise was due to the hike in the power tariffs by Andhra Pradesh Discom, which took a toll on its margins.

The company is in a heavy expansion mode, with most of its new capacities expected to come to life in FY14. For the capacity expansion, the company has raised debt earlier. By Sep 2012, its total debt increased from about Rs 85 crore to Rs 850 crore. The impact of this is evident in the Q3 results as its interest payment has increased by nearly 45% to Rs 17.6 crore. The interest cover ratio has also declined from 4x to 2x, which is a concern at the moment. The tax rate during the quarter was 32% in line with the same in the last quarter.

We still see a value in the stock, as on PE of 8.4x it is available at about 20% discount to its peer group’s Price to Earnings ratio of 10x. The new capacities, slated to commission this year, also offer a value in the stock and hence we would advice investors to invest in the stock with one year horizon.