best mid cap stock hindustan sanitary ware

Hindustan Sanitary ware & Industries Limited (HSIL)- A Play on Indian Consumption Growth

Content Index

• HSIL– Investment Snapshot :- Slide #3

• Indian Sanitary ware Market – An Overview :- Slide #5

•Container Glass Segment – An Overview :- Slide #9

• HSIL– Business Overview :- Slide #13

Institutional Services

• Investment Rationale :- Slide #23

• HSIL – Financials:- Slide #31

• Conclusion :- Slide #37

HSIL – Investment Snapshot (as on August 25, 2011)

Recommendation :- BUYAccumulation Range :- 180-210Target Price range :- 340-360Investment Period :- 15 to 24 months

Current Market Price – Rs. 201.85

Bloomberg / Reuters Code – HSI IN / HSNT.BO

BSE / NSE Code – 500187 / HSIL

Mkt Cap (INR BN / USD Mn) – 13.31 / 289.31

HSIL was incorporated as Hindustan Twyfords Ltd in 1960by Somany family (Promoters) in collaboration withTwyfords Ltd, UK to introduce vitreous China ceramicsanitary ware in India.

AGI Glaspac, glass division of HSIL was acquired by thecompany in 1981 through a state government sale and itturned a loss making company into a profitable andhealthy venture through various changes at both theoperational and organizational levels.

Thus, HSIL now has two business units of sanitary wareand container glass contributing almost equally to itsrevenues and positioned firmly in both the segments


Mkt Cap (INR BN / USD Mn) – 13.31 / 289.31[1 USD – Rs. 46.05]

Total Equity Shares [Mn]– 66.2

Face Value – Rs. 2

52 Week High / Low – Rs. 245.85 / Rs. 106.8

Promoter’s Holding – 51.34 %

Institutional Holding – 25.97 %

and container glass contributing almost equally to itsrevenues and positioned firmly in both the segmentsthrough its long standing experience.

HSIL’s sanitary ware brand “Hindware” is the marketleader and has acquired a strong mind space of thecustomer. It has been voted as a super brandcontinuously for the past 5 years.

HSIL has a pan Indian presence in the sanitary waresegment and a dominating share of South Indian marketin the container glass segment. HSIL has built a strongmoat through extensive distribution network, strongclientele and low cost manufacturing presence across itstwo business divisions.

Key Investment HighlightsMarket Leader with Pricing Power – HSIL is the market leader in Sanitary ware segment with more than 40 %market share and its container glass segment being a regional business (glasses are not economically viable totransport over 700 Kms) has more than 70 % market share in South India. This strong market leadership in bothsegments gives good pricing power for HSIL through aspirational brands and strong clientele. Market Leadershipalong with strong pricing power enables HSIL to grow profitably on the back of Indian Consumption boom.

Healthy Industry Trends – India is hugely underpenetrated in terms of sanitation (~40%) and the demand forhousing is expected to grow healthily for many more years thus helping sanitary ware manufacturers to grow. Indiansanitary ware market is moving towards premium products and brand consciousness is increasing. All the end userindustries of container glass segment is witnessing healthy growth and currently the demand for glass is much morethan supply. The main advantage for HSIL is that both the industry segments where it operates are concentratedbetween 3-4 players having more than 90 % market share, showing the strength of the incumbents and thedifficulty for a new player to scale up.

Strong CAPEX to drive growth – HSIL is undergoing strong CAPEX to expand its manufacturing presence across both


Strong CAPEX to drive growth – HSIL is undergoing strong CAPEX to expand its manufacturing presence across both its lines of business which will help it to grow for the next 5 years. At present, all the manufacturing plants of glass and sanitary ware division are operating at more than 100 % capacity and thus there is no need to worry about the capacity utilization of the up coming facilities as the demand is strong. HSIL is spending about 300 Crs in sanitary ware expansion and 350 Crs for creating new capacities in container glass division.

Healthy Balance Sheet and inorganic growth– HSIL did a 150 Cr QIP last year and its balance sheet is strong enoughto absorb the CAPEX plans through internal accruals and by raising debt. Its current debt: equity is around 0.6: 1 andhence there is enough strength to add capacities without diluting equity. HSIL is not averse to inorganic growth asthe company is pragmatic about synergistic and value adding acquisitions at a good price as can be seen from itsacquisitions of Barwood, Crabtree Faucets and Garden Polymer over the past 2 years.

Attractive Valuations – HSIL is available at attractive valuations considering its strong growth and operations, atabout 10 times its FY-12 expected earnings and is one of the few reasonably valued consumption stocks.

Indian Sanitary ware Market- An Overview


Strong Structural DemandHousing Shortage in Millions Country Sanitation

Coverage %

Developed Countries ~ 100

Thailand 96

Malaysia 94

Sri Lanka 65

Pakistan 50

India 400

5

10

15

20

25

30

35

40

2001 2005 2008 2010 2014

Urban Rural


• The total housing shortage in India is huge at over 35 Million units and hence there is a strong structural story for the growth of new housing units thus signaling demand for sanitary ware and other bathroom products. The average growth of new housing is expected to be around 16 % CAGR for the next 3-5 years.

• India’s sanitation coverage compared with even our poorer neighbors is low and hence the scope for increasing coverage will act a growth catalyst for the sanitary ware manufacturers in India.

• Commercial segment though now is weak considering the high interest rate and costly real estate, it will pick up in the coming years through the construction of new malls, office spaces, IT Parks, SEZ’s etc. Sanitary ware industry is a wonderful proxy play on the growing construction demand.

India 402001 2005 2008 2010 2014

Sanitary ware Market ScenarioFresh Demand

ReplacementDemand

DevelopedCountries

20 % 80 %

India 93 % 7 %

Market Share in

Organized Sector

Un-Organized Sector

Revenue 60 % 40 %

Volumes 55 % 45 %


• Sanitary ware market world over is a very brand conscious product and is dominated by a few players who have strong brands and distribution networks. Even in India, sanitary ware segment is dominated by the top 3 players who account for more than 95 % of the organized market.

• Indian sanitary ware players have constantly increased their market shares over the last decade as consolidation forced several smaller players to move out as the business requires size and scale to compete across various price points and across different products.

• Replacement demand which has been very low in the Indian markets has started to pick up on the wake of changing social trends like, people re-furnishing their bathrooms during big events like children’s marriage and also younger generation replacing their sanitary ware of their ancestral homes.

Volumes 55 % 45 %

Changing Attitudes & Supporting Trends• Most important trend is the changing customer mindset about their bathrooms. Increasingly, bathroom products are becoming more fashionable and people are aspiring for better designed products and looking at bathrooms as a place to unwind after a tiring day and are willing to spend on branded products to build a classy bathroom. This trend is also witnessed amongst commercial spaces likes malls and multiplexes where developers are willing to spend lavishly on their toilets to project a premium image.

• This shift in attitudes is improving the demand for premium products like Bath-tubs, Jacuzzi's, shower panels, high end faucets, fittings etc. Thus, the spend on the entire bathroom has risen which has naturally increased the revenue share of the organized sector. Premium end of the market is growing at a better pace when compared with the low end of the segment thus helping the branded players to out-perform the growth rates of un-organized sector.

• Un-organized players still dominate the lower end of the market as they do not pay excise duties, sales tax etc thus helping them to price much cheaper than the organized segment. Un-organized players have also been growing


helping them to price much cheaper than the organized segment. Un-organized players have also been growing though exports to African countries and other poorer countries.

• Cost of producing sanitary ware in India is low when compared with developed countries because of the low labor cost and abundance of raw materials at cheaper costs from the states of Gujarat, Rajasthan from where most of these manufacturers operate. Considering India’s production is low cost, there is a good scope to increase the % of Indian sanitary ware compared with the global market from the present 3.5 %.

• Indian sanitary ware market is expected to be around 1600 Crs and is growing at over 20 % in revenue terms and this growth is expected to accelerate with more premium and new products. Improved housing scenario will also augur well for the growth of the bathroom products once the interest rate scenario improves. India’s per capital income is expected rise to 1000 S’s will spur consumption of housing as homes become more affordable and hence better demand for sanitary ware products.

Indian Container Glass Industry– An Overview


Glass Packaging IndustryIndian Packaging Industry (by Value) Glass Consumption Industries


• Indian packaging industry is a 14 Bn $ industry and is growing at ~ 15 % for the past few years and in that Glass packaging industry is growing at a rate of ~ 12 % and is more than a billion dollar industry.

• Glass has been growing slower than the industry because of the high costs involved in production when compared with other packaging and also because of the lack of flexibility like plastics.

• But Glass has maintained its status as a premium packaging material and is also environmental friendly because of its capacity to get recycled and it does not get adulterated with chemicals like the other packaging materials. Glass is inert and safe and more importantly has a better emotional connect with the customers than other packaging materials like cans and PET’s.

Significant Growth Opportunity


• India’s per capita consumption of glass is one of the lowest amongst all countries at 1.4 Kgs per person and the glass consumption has a direct co-relation with the growth of its end industries.

• If we believe in the Indian consumption story and the fact that Indians will get affluent over the next decade and start consuming more liquor, soft drinks etc, there is a huge scope for growth. Even if we assume 5 times the glass consumption per capita as of now, to be reached in the next decade, it would require huge production of glass.

• Scope of the opportunity is pretty huge and the entire glass production in this country is concentrated amongst the top 3-4 players and the main moat is the capital intensity in setting up a glass plant.

Strong Industry Trends• Glass is a regional industry and its economic viability depends on the distance of the service industries. A glass plant will be able to service industries within 700 Sq. Km of its presence thus rates depend upon the local demand –supply and discourages captive glass plants as most industries don’t have the volumes at one location to justify captives.

• Main deterrent for entrants is the capital intensity of manufacturing glass as any furnace which produces less than 400 tonne per day (tpd) is not viable and the cost involved will be greater than 350 Cr. But a Brownfield expansion can produce the same capacity at a much lower cost of around 200-250 Crs. Thus giving the incumbents a huge advantage and that is one of the main reason for consolidation in the industry and the presence of few large players across India.

• Since it takes more than 2 years to put up a glass plant, it is not difficult to analyze the demand- supply equation and from the present capacities, it is said that the demand will exceed supply for at least the next 2-3 years. This gives the companies better pricing power and it can seen from the rate revisions happening with a smaller lag than


gives the companies better pricing power and it can seen from the rate revisions happening with a smaller lag than before depending upon the increase in cost of manufacturing thus allowing glass manufacturers to maintain margins over a period of time.

• Glass industry is also moving towards more clean and better designed glasses as liquor and soft drink manufacturers start looking at glass packaging as a source to attract customers and maintain competitive advantage. At present, very high end glass bottles are being imported but since volumes are picking up, local glass manufacturers are also starting to produce these high value bottles thus improving their average realizations. At present, the three major varieties of glass which are manufactured are flint, umber and green glass.

• The main growth drivers of glass consumption in its end industries are increasing disposable incomes, low per capita consumption of liquor, increasing social acceptability to drinking, changing lifestyles, penetration of soft drinks in rural markets and increased acceptance of pharma products.

HSIL – Business Overview


Key Highlights

HSIL has strong moats in the building products division through its well

entrenched brands and in the container glass segment through the

strategic location of low cost manufacturing plants.

Strong Moats

HSIL’ s has leveraged its brand and distribution network in building products division to introduce a wide variety of products. Even in

Glass division, HSIL has been introducing bottles with higher

Product ExpansionHSIL is promoted by Somany

family who have a great understanding of the business

through their long association in the industry. They have also

reached their previous guidance's

Capable Management

HSIL


introducing bottles with higher EBIDTA margins.

HSIL has been growing at significantly higher rates than the

market and hence is gaining market share in Building products division. HSIL has also guided for a healthy growth of 25-30 % in both the top

line and bottom line.

Good Growth & Healthy Guidance

HSIL in sanitary ware has a 40 % higher distribution network than

its nearest competitor.

HSIL has a strong set of Institutional clients in both its line

of business, especially in glass segment which is very vital.

Strong Distribution Network + Clientele

reached their previous guidance's which gives us comfort for its

execution of future plans

HSIL

Strong BrandsVolume Pyramid Brand Price Point (Rs)

Kermag ( Tie-up with Sanitec) 10,000 – 75,000

Hindware Art + Hindware Italian Collection

5,000 – 2,00,000

Hindware 300 - 5300

Raasi 200 - 350

Bene Lave ( Premium Faucet Brand ) 2,000 Onwards


• HSIL is the only sanitary ware player with various brands straddling across the entire market pyramid from low end to premium segment. HSIL’s brands through its aggressive marketing has a strong top off the mind recall and is usually associated with quality products which people aspire for.

• HSIL’s brand management has been excellent which can be seen from the creation of sub-brands of Art and Italian collection from the mother brand of Hindware, 5 years ago. HSIL also has introduced premium faucets under the brand name of Bene Lave without affecting the perception of the existing brands.

• HSIL’s focused marketing and gradual shift to the high end segment can be seen from the fact that, in Q1-FY 12, more than 54 % of its sales were from the Art and Italian Collection brands thus giving it better margins. HSIL’s brands in the premium segment has been very well received in the market as it is at a very competitive price.

Strong Distribution NetworkDistribution Strength in No's

Distributors 1,550

Retailers 13,000

Depots 21

Exclusive Distributors 60 %

Service Centers 18

Service Professionals > 230

• HSIL has one of the strongest Pan- India distribution strength amongst all building product manufacturers with a large network of dealers and retailers ( 40 % higher than nearest competitor) covering each and every town which has a population of more than 50,000 people.

• HSIL has considerably increased its depots from over 2 to 21 to cover all parts of the country in the past 2-3 years. This has enabled distributors to have a low inventory cycle and thus efficient working capital which increases their ROI.

• This has made the distributors happy and loyal to HSIL products which gives them better returns. Thus the sales push from these retailers


Service Professionals > 230

• HSIL has implemented ERP and a strong IT platform amongst its distribution network to keep track of the market and hence work efficiently depending upon the demand for various products.

• HSIL has been active to build the brand amongst the plumbing community who have a great influence in buying of sanitary ware through better interactions and providing them good service. HSIL’s strong network of service centers addresses service calls within 48 hours through its focused after-sales service professionals.

• HSIL plans to strengthen its distribution network by addition of over 400 distributors and 3000 retailers in the next 2 years and thus covering each and every town in India with a population of over 25,000 people. This strong network of distribution is difficult to replicate and helps in increasing its market share.

which gives them better returns. Thus the sales push from these retailers and distributors has been good.

Forward Integration through Retail presenceDisplay Center

No’s Location Details Future Plans Store-Type Ownership

Hindware Boutiques

33 All India Exclusive to HSIL (600-1500 Sq.ft)

To open 10 boutiques each in 3 years

Selling Point Dealer owned but maintained by HSIL.Special dealer discounts for boutiques.

HindwareArcade

2 Hyderabad, Chennai

Over 3000 Sq.ft To open 8 arcades in 3 years

Display center + Selling Point

Dealer Owned but maintained by HSIL

Lacasa 2 Mumbai, Cochin

Over 3200 Sq.ft To open 2 stores every year

Display centers

Company owned exclusive showrooms for brand display


EVOK 8 NCR Over 10000 Sq.ft retail stores selling home furnishing, lighting, flooring, bath & kitchen products

To open 4-5 stores annually and expand foot print. 35 Cr investment has been planned

Large Format Home Retail with over 9000 SKU’s

HSIL owned through subsidiary

Shop in shop

80 All India 200-500 Sq.ft, shops within showrooms for exclusive display of HSIL products

To open 30 stores in 3 years

Selling Point Dealer Owned

Product Portfolio Expansion• HSIL’s strong distribution and retail presence has enabled it to expand into other building products other than sanitary ware like wellness products and modular kitchens. HSIL has concentrated into expanding product portfolio where the margins are higher and it has competitive advantages.

• HSIL’s retail presence gives it a better brand experience amongst the users and helps mainly in getting large institutional customers away from foreign brands like Kohler and TOTO.

• EVOK, retail subsidiary of HSIL has been doing pretty well and except for one store it has become EBIDTA positive in all its stores and is in an expansion mode. EVOK provides all the products required to furnish and decorate your bare constructed house though its wide range of SKU’s.

• EVOK though now produces 8-9 Cr losses on PAT level, is an important strategic initiative which along with its other retail formats will allow HSIL to sell high end products and leverage its brand positively, thus creating a sustainable competitive advantage.


sustainable competitive advantage.

• Retail presence helps in gauging the demand for various products and HSIL also has a well established trading business in building products where it imports from outsourced manufacturers and sells through its distribution networks items like high end tiles, shower rooms etc.

• HSIL faucet manufacturing plants are being set-up only after the trading of faucets has been able to generate enough volumes for the plant to become viable. The strength of HSIL can be seen from the fact that it has able to scale up the faucet business at a rapid pace and aims to be the number 2 player in the business within next year.

• HSIL’s brand strengthening and retail presence can be compared to TTK Prestige which used its brand and “Prestige Stores” retail format to morph from a cooker manufacturer to covering all kitchen related products thus growing profitably at a rapid pace like HSIL’s transformation from sanitary ware to total bathroom solutions.

Strategic Manufacturing plants

• HSIL’s existing manufacturing plants are at strategic locations with clear linkages to raw materials, like the Haryana sanitary ware plant which sources raw materials from the mines of Rajasthan and Gujarat.

Manufacturing Location Existing TPD Mn bottle Pc’s

Hyderabad, AP 650 1110

Bhongir, AP 475 690

Manufacturing Location Existing Capacity

Bahadurgarh, Haryana 1.5 Mn Pieces

Bibin Nagar, AP 1.3 Mn Pieces


Bhiwadi, Rajasthan (Crabtree Acquisition) 0.3 Mn Pieces

Sanitary ware Production

Faucet Production

Container Glass Production


• In container glass segment, the main reason for the good performance of HSIL over competitors is its two manufacturing plants in AP which is by far the biggest market for liquor and soft drinks even on a per capital basis and is growing at over 20 % CAGR compared with the all India growth rate of 12-14 %.

• HSIL’s furnaces has been de-bottlenecked and hence operating at great efficiency and there is no need for any furnace shutdown for maintenance purpose in the next 3 years. Its Bhongir plant is a dual fuel furnace and can operate on both natural gas and LSHS/ FO.

• HSIL’s low cost manufacturing operations helps it in better margins over its competitors in both segments. Though, Parry-Roca has higher manufacturing capacity than HSIL its market share is less than HSIL, showing the efficient management of its manufacturing facilities.

AGI Glaspac Operations

• AGI Glaspac has a wide range of customers across various industries helping it to take advantage of the growing demand for glass bottles in the south India. HSIL is also foraying into high end specialty glasses which have 8 %higher margin than the ordinary bottles thus expanding its profits.

Beer43%

Pharma14%

Beverages21%

Food Products22%

Volume

Beer38%

Pharma15%

Beverages21%

Food Products26%

Revenue


higher margin than the ordinary bottles thus expanding its profits.

• HSIL has recently acquired “Garden Polymers” which is into packaging using PET bottles, caps and closures for about 89 Crs. This acquisition will enable it to provide a wide range of packaging solutions to its customers and also leverage its strength to grow the business of Garden Polymers at 30-40 % CAGR.

• Garden Polymers is already a profitable company with a revenue of 104 Cr, EBIDTA of 22 Cr and PAT of 10.4 Cr for FY-11. Thus, the acquisition will be EPS positive for HSIL and gives a boost to the growth of packaging division through a new form of packaging.

• HSIL’s glass division has seen improving realizations due to better product mix, cost efficiencies and lower lag in price revision from large customers and we expect the supply – demand situation which is the main reason for stable margins, to stay for at least the next 2-3 years.

Strong Institutional Clientele

DLF Group

Unitech

Omaxe Construction

Mahindra Gesco

Lokhandwala Construction

Mahadev Homes

Oberoi Group

NCC

Taj Hotels Group

ITC Hotels

The Park Hotels Group

Grand International Hotels

Hyatt Hotels

Larsen & Tourbo

GlaxoSmithKline Pharma

Ranbaxy

Dr.Reddy’s Laboratories

Pfizer

Wyeth

Amruntajan

Aurobindo Pharma

PepsiCo India

Hindustan Coca- Cola

United Breweries

McDowell & Shaw Wallace

SeagramHindustan Unilever

Real Estate

Corporate’s

HotelsPharma

Foods

Beverages

Sanitary ware Segment Container Glass Segment

• It can be seen from above that HSIL has a very strong customer portfolio in all its segments of business and it has been only growing over the years, showing the quality of HSIL’s products and its services.

• At present the sales between Institutions: Retail in sanitary ware is 25: 75 and HSIL aims to maintain it going forward as Institutions give better volumes and retail sales have better margins.

• In Glass business, requirements are given by customers before-hand and pricing is variable on cost pressures.


NCC

Shapoojee Palonjee

Purvankara

IVRCL Projects

Infosys Technologies

Bengal Ambuja

The Prestige Group

Everest Group

Seagram

Radico Khaitan

Parle Agro

Fosters India

GSK Consumer

Dabur Healthcare

Priya Foods

Global Green

Inorganic GrowthBarwood Products :

HSIL acquired Barwood products in June, 2010 which is a small boutique manufacturer of specialized bathroom ceramics in UK and other European countries. HSIL paid 1 million pounds for the company which had revenues of about 2 million pounds. This acquisition gives HSIL the much needed distribution strength and entry into the European markets which have much higher realizations than Indian markets. HSIL targets to grow the revenues of Barwood from the current 2 million pounds to about 8-10 million pounds in the next 4 years through introducing more products. Considering the turmoil in European markets, this might be a aggressive target.

Crab Tree Acquisition :

HSIL had acquired Crabtree faucet plant from Havells in 2010. It has been able to ramp up the production of the unit and increase the capacity utilization from 45 % to over 100 % in the past 12 months showing the capability


the unit and increase the capacity utilization from 45 % to over 100 % in the past 12 months showing the capability of the management to make synergistic acquisitions. The brand has recently been changed to Bene Lave and being positioned as a high end faucet maker.

• HSIL’s management has not been averse to acquisitions and has along the way made good acquisitions like Krishna Ceramics (1989), Raasi Ceramics (1999) and AGI Glaspac (1981). They have turned around loss making businesses.

• HSIL all three latest acquisitions will add substantially going forward. Especially the “Garden Polymer” acquisition has still not been consolidated in the accounts and we expect it to contribute at least 13 Crs to HSIL’s bottom line.

• HSIL also plans for backward integration by buying out mines and also entering new markets through acquisition of front end companies in developed markets to increase realizations and grow margins. HSIL has the balance sheet strength for mid sized acquisitions and the company is always on the look out for good assets at fair price.

Investment Rationale


Total Bathroom Solutions Provider

Building Products Allied ProductsSanitary ware

• Water Closets• Wash Basins• Pedestals• Squatting Pans• Urinals• Bidets

• Showers• Kitchen Faucets• Bathroom Faucets

Faucets

• Hobs• Chimneys• Cook Tops• Sinks

Kitchen Appliances

• PVC Cisterns• Fittings/ Seat• Covers• High End Tiles

Accessories

• Bath Tubs• Shower Panels• Shower Enclosures• Whirlpools• Concealed Cisterns

Wellness Products


• HSIL has leveraged its brand and distribution strength to venture into several allied products and now morphed into a total bathroom solutions provider. The moat of brand and distribution is difficult to build for any new player.

• At present, nearly 77 % of building products revenues comes from sanitary ware, 18 % from faucets and other allied products constitute the remaining. If HSIL, is able to scale up the wellness products and Kitchen appliances,which have huge potential then % of revenues from sanitary ware will come down.

• Once the volumes pick up, HSIL will put up its own manufacturing plant for high end ceramics and usually the margins of outsourced products are at least 4-5 % lower than own manufacturing.

• HSIL is well positioned to capture profitably the strong Industry trends of higher discretionary spending for bathrooms and changing social mindset.

Strong CAPEX PlanManufacturingLocation

Existing Capacity

IncrementalCapacity

Type Cost Of Expansion in Mn Rs

Operational Timeline

Bahadurgarh, Haryana

1.5 Mn Pieces 0.3 Mn Pieces Brownfield Sep, 11

Bibin Nagar, AP 1.3 Mn Pieces 0.7 Mn Pieces Brownfield Mar, 12

Gujarat -- 1.2 Mn Pieces Greenfield 1,250 Mar, 13


Incremental Capacity

Type Cost of Expansionin Mn Rs


900

Sanitary ware

Faucets


in Mn Rs

Bhiwadi, Rajasthan (Crabtree Acquisition)

0.3 Mn Pieces

0.2 Mn Pieces

Brownfield Aug, 11

Bhiwadi, Rajasthan ( Near the old plant )

-- 2.5 Mn Pieces

Greenfield Mar, 131000


Incremental Capacity

Type Cost of Expansionin Mn Rs


Bhongir, AP 475 tpd 425 tpd Brownfield 3200 Jan, 12

Container Glass

Faucets

Strong Utilization Ratios• HSIL had more than 100 % utilization ratio in both its business segments, thus spreading fixed costs and improving margins of the company at both EBIDTA level and PAT level.

• With a CAPEX of 650 Crs, spread over 3 years which will add capacity in a phased manner we can expect the utilization ratios to dip but strong demand will help utilization in the long term and these increased capacities will prove vital for the growth of HSIL.

• Margins which gets decreased due to reduced capacity utilization will get partly offset by revenue shift from outsourcing to manufacturing products.

0.00%

20.00%

40.00%

60.00%

80.00%

100.00%

120.00%

2007 2008 2009 2010 2011

Sanitary ware

Container Glass


• HSIL’s planned capacity addition in container glass segment of 425 tpd will increase its capacity significantly but considering the fact that market has been growing at over 14 % and only HNG is putting up a glass plant in South India, we expect the plant to operate at good utilization ratios.

• HSIL has also acquired gas connection for its AP plant from one of the city gas distributors and expects the gas supply to start before the end of this year. This alone could fetch HSIL nearly 6-10 Crs of additional profits each year which is a significant improvement.

• Considering all the happenings in the company and taking the demand situation into account, we feel that HSIL will be able to maintain its margins for the next 2-3 years. We are not factoring in any huge changes in the interest rate scenario.

Consistent Growth• HSIL has seen consistent growth for the past 4 years in all parameters and is set for another cycle of growth through increased capacity.

• One of the major plusses of this growth has been the improving margins in both the business. Bottom line has significantly outperformed top line growth.

• EPS has grown well in spite of taking equity dilution into consideration.

• Main reasons for the improvement in margins are improved product mix, higher average realizations,

576 666 851 1050

2008 2009 2010 2011

Revenues In Cr Rs

26.8 31.73 43.65

87.35PAT in Cr Rs


improved product mix, higher average realizations, cost efficiencies and increased capacity utilization.

• Except for the dip in capacity utilization, all the other margin levers are only expected to get strengthened going forward.

• HSIL in spite of volume growth of just under 12 % , has been able to generate value growth of over 30 % in sanitary ware industry and similarly in container glass also value growth has outperformed volume growth by over 5 % which indicates the strength of the underlying business model.

26.8 31.73

2008 2009 2010 2011

4.61 5.49 7.5914.09

2008 2009 2010 2011

EPS in Rs

Healthy Balance Sheet

• HSIL has strengthened its balance sheet by raising 150 Crs of money through QIP during Oct, 2010 at the rate of around 136.5 Rs/ Share.

• HSIL reduced its interest cost lost year by using some amount of its QIP money in working capital and hence interest costs will rise considering the increased deployment of cash for creating capacities and increased cost of funding in high interest scenario which we expect for the medium term.

HSIL’s implementation of CAPEX is spread as 180 Crs in 2012, 245 Crs in 2013 and 75 Crs in 2014. This phased

QIP Money 150 Crs

Working Capital Loans around 30 Crs

Long Term Debt 270-300 Crs

Debt: Equity 0.6: 1

CAPEX Plan 650 Crs Phased over 3 Yrs

Internal Cash Generation/ Year

~ 165 Crs


• HSIL’s implementation of CAPEX is spread as 180 Crs in 2012, 245 Crs in 2013 and 75 Crs in 2014. This phased implementation of cash outflow will allow the balance sheet to expand without any strain.

• HSIL has a land in Hyderabad which doesn’t currently house any manufacturing plant and is available for monetization. The value of the land is estimated to be about 100-150 Crs.

• HSIL can fund all its expansion plans without diluting any equity and dilution may happen only if the company acquires a very large asset, possibility of which is less. Even in case of acquisition, company has said that it will be ready to sell the land to fund it.

• HSIL cash generation is very healthy and since the depreciation of glass plants is pretty high, the cash profits will be much more than the reported PAT in the next 3 years.

Competitor Analysis in Sanitary ware Industry• HSIL in spite of having less manufacturing capacity than Parry- Roca, has higher market share signifying the higher realization/ unit which Hindware gets because of its premium positioning in market.

• HSIL’s other competitor CERA’s realization is just over half of what HSIL commands in the market. HSIL has been out performing the market and has extended its market share from about 32 % which it had 5 years ago to over 40 % currently.

Company Name ProductionCapacity ( Million Pieces/ Annum)

Parry - Roca 4.5 – 5.0

HSIL 2.8

Cera Sanitary ware 2.0

Kohler 0.3

• Jaguar which is the largest player in Faucet segment with more than 45 % market share of the 3000 Cr market is aggressively expanding into sanitary ware segment leveraging its brand and distribution strength. A significant


aggressively expanding into sanitary ware segment leveraging its brand and distribution strength. A significant disadvantage for Jaguar is the lack of manufacturing capacity, in spite of which it will carve a part of growing market.

• But, sanitary ware segment has been a tough business and there has been a lot of consolidation over the years and hence it is difficult for new players to scale up. Bigger building product players like HR & Johnson, Kajaria and Somany Ceramics have tried to enter this market for the past few years but unable to get hold as sanitary ware is a much more brand conscious market when compared to other building products.

• It is also difficult to compete in the market without a wide variety of products across different price points and more importantly just by importing outsourced products without manufacturing them or having a strong sales and service team. It can be seen from the fact that Kohler in spite of being in the market for over 10 years has been unable to scale up and has just 108 distributors and it concentrates on just the top end of the market. Thus penetrating this market is tough and incumbents have a strong moat, thus fending off new players like Jaguar.

Competitor Analysis in Container Glass Industry

• Container glass industry like sanitary ware industry is a concentrated industry and dominated by a handful of

Company Name Production Capacity in tonnes per day (tpd)

Key Segments of Glass Supply

HNG 2,825 Liquor, Beer, Pharma & Food

Piramal Glass 1,115 Specialty glass to cosmetics, pharma and perfumery

HSIL 950 Liquor, Pharma, Food & Beverages


• Container glass industry like sanitary ware industry is a concentrated industry and dominated by a handful of players indicating huge competitive advantages for the incumbents and market leaders taking full advantage of the growth in the industry profitably.

• Market leader HNG which has 55 % market share of organized market is expanding capacity in South India by putting up a 650 tpd plant in Naidupet, Andhra Pradesh. Considering the volume growth in the South Indian markets and no capacity addition except for the two players, absorption of the increased capacity will not be a problem and the demand- supply situation will be in favor of glass manufacturers.

• Brownfield expansions usually have a Revenue/ Capital invested ratio of around 1.2 compared with 0.8 for green field plants, thus creating huge advantages for the incumbent players. HSIL’s new Greenfield expansion also has provisions for further expanding capacity in the future.

Financials


Earnings Projection (without integrating Garden Polymers)

Income Statement (INR Crs) FY 09 FY 10 FY 11 FY 12E FY 13E

Net Sales 615.8 804.2 1078.6 1395.2 1680.5

EBIDTA 104.2 145.8 206.3 290.5 370.5

Depreciation & Amortization 28.4 50.3 55.4 74.0 80.0

Interest 16.8 40.2 36.5 40.5 44.5

Other Income -9.6 1.6 3.8 10.9 14.6

PBT 49.3 56.9 118.2 187 260.6

Tax 16.7 9.1 40 63.5 88.6


Tax 16.7 9.1 40 63.5 88.6

Net Profit 31.7 43.6 78.3 123.5 172

Diluted EPS 5.8 7.9 12.9 18.7 26

- EPS Growth % 13.4 37.6 63.1 45 38.6

Cash Flow from Operations 118.4 18.3 165.9 198.0 305.5

ROE % 13.9 12.4 13.7 17.5 19.8

Management QualityKey Person Designation BackgroundR K Somany Chairman & MD 55 Years of experience & leading HSIL since inception. Active

participant in Industry associations.

Sandip Somany Joint MD Associated with HSIL since 1985 and director since 1994. He is the driving force behind the organization.

Arun Kumar Dukkipati

President, Container Glass

Associated with HSIL since 1996 and a qualified mechanical engineer with 39 years of experience.

RB Kabra President, BuildingProducts

Associated with HSIL since 1981 and is a qualified chartered accountant with 30 years of experience.


• It can be seen that, Somany family has been leading the glass industry and sanitary ware manufacturing in this country and have very detailed knowledge about the business.

• HSIL, though a family business has professional people in key positions and a well diversified board with 7 independent directors.

• Sandip Somany at the age of 48 is well positioned to drive the company through the next decade with his vast experience and industry knowledge.

Other Somany Family firms ( Each independent and no inter relationships between firms )

HNG C K Somany India’s largest glass manufacturer

Cera Sanitary ware

Vikram Somany India’s 3 largest sanitary ware manufacturer

Somany Ceramics

Shreekanth Somany

Premier Tilemanufacturer

Investor Support

• HSIL has been enjoying good investor support and it can be seen from the fact that its QIP fund raising last year had strong foreign investors appetite and easily raised 150 Cr Rs.

Share Holding %

June 2011

Mar 2011

Dec 2010

Sep 2010

June 2010

Promoters 51.34 51.34 51.01 60.49 60.49

FII 24.14 22.29 21.58 1.14 0.47

DII 1.83 3.76 4.13 7.39 6.44

Notable Investors Share Holding %

HFC Mauritius 9.09

Royal Bank of Scotland 3.99

T. Rowe Price International discovery fund

3.60

Commonwealth Equity Fund 3.39

The India Fund Inc 2.92


investors appetite and easily raised 150 Cr Rs.

• HSIL has been a consistent dividend paying company and also a very profitable and healthy company, since its inception. Hence it has rewarded its share holders well.

• HSIL’s stock performance has been good as investors are starting to recognize its potential and its competitive advantages.

• Henderson PE has been associated with HSIL since 2005, when it picked up a 14.99 % stake in the company for 12.2 Million $’s and the investment has rewarded it well.

The India Fund Inc 2.92

GMO Emerging Markets Fund

1.78

Sundaram Mutual Fund 1.72

Jupiter South Asia Investments

1.57

California Public Employees Retirement System

1.04

Concerns• Raising Interest Rates : RBI has been raising interest rates continuously and recently raised 50 bps for a consecutive 11th time since March, 2011 to control the spiraling inflation. This has led to a serious slow down in the economy and especially the real estate sector with new housing projects getting delayed. Raising interest rates will also put more pressure on the earnings due to increased interest costs.

Though the raising interest rates will have some negative effects, we have factored in higher interest cost in the earnings projection and it will look better if the interest rate cycle peaks and cost of funding falls. Though, the new housing is delayed there is 12-16 % volume growth for sanitary ware industry on the back of which strong brands like Hindware will grow their value by over 30 %.

• Demand Slow down: Indian consumption demand though pretty robust on the long term, might slow down temporarily due to un favorable macro economic scenario. But the key end users of glass industry have been growing robustly in spite of these. This year’s monsoon has been widely spread with good rainfall across India and this will boost demand in rural areas. More over, the supply in container glass being less than supply should keep the manufacturers steady.


manufacturers steady.

• Increasing Cost Pressures: Container glass division is slightly vulnerable to increased soda ash prices. We believe though, high cost may be a concern companies will be able to pass on the increased costs with a small time lag. Presently, power and fuel consists of 33 % of the production cost in container glass segment and any un favorable changes will affect the company.

• Margin Concerns : A dip in utilization ratios will create pressure on margins but considering the fact that presently all its capacities are running at greater than 100 % capacity, the utilization ratios will remain stable. HSIL has good margin levers in the forms of moving to high end specialty glass, improved product mix in sanitary ware and reduced dependence of outsourced products.

We have considered all these effects and the earnings projection is pretty conservative.

Attractive Valuations

Company NameM-Cap in Crs Net Sales P/E (TTM)

Price/ Book (TTM)

HNG 1754 1685 26.5 1.61

Piramal Glass 1054 1252 10 2.26

Cera Sanitary ware 251 255 8.8 2.26

HSIL 1331 1050 17 2.4

• Parryware was acquired by Roca in 2008, valuing the company at over 1500 Cr Rs from the strong Business group of Murugappa.

• Now considering it with the valuation HSIL is getting for its sanitary ware business at about 700 Crs, it is definitely cheap in spite of it having larger market share than Parry ware and higher growth rates.

• The acquisition also shows the difficulty for a new player even like Roca ( World’s largest and most renowned bathroom brand) to scale up and the need for an acquisition to grow.


• HSIL doesn’t have any peer comparison as such, since it is into two business segments. Hence, we have taken companies from both the business segments and also a company on the domestic consumption theme. ( VIP Industries )

• Though HSIL like VIP Industries is not a small ticket domestic consumption item, its still a proxy play on the rising affluence of the Indian Middle class and the changing consumption patterns in the country.

• HSIL is piggy backing on the changing customer preferences to grow profitably. Considering the superior growth rate of HSIL with respect to its competitors, it deserves a premium rating especially when companies like TTK Prestige, Titan, Hawkins etc are quoting at over 30 times P/E.

VIP Industries 2370 759 24.4 10.6

most renowned bathroom brand) to scale up and the need for an acquisition to grow.

Conclusion


Price chart


• HSIL stock price has been on a strong run and the markets have acknowledged the performance of the company in the last two years. Stock has climbed from below 50 levels to 200 in the past 2 years showing the strong buying interest in the counter.

• But considering the run up in stocks of other similar consumer focused industries, HSIL still has a lot of room to rise and with the increased institutional investors interest in the stock, the buying interest will be strong.

• Stock is definitely a buy on dips for many investors and hence the downside is pretty much limited.

ConclusionHSIL is a one-off company with strong business operations and market leadership in two consumer focused

industry segments. There are very few companies which have little competition in their industry segments in spiteof the industry showing strong growth trends. Main reason for little competition being strong moats for theincumbents in its businesses.

The fact that the company’s volumes in sanitary ware segment can improve once the housing scenario improvesand the continuous increase in realizations of 6-8 % each year in sanitary ware segment, gives us tremendousconfidence in the future of the company. Both the segments have strong and sustainable growth momentum.

Though, everyone acknowledges the Indian consumption story and the middle class boom, there are very fewcompanies in the market which can take full advantage of the growth in their sector in a profitable manner byexpanding margins, having market leadership and more importantly quoting at a fair price.

HSIL has posted strong Q1 results with a PAT of over 28 Crs. Considering the fact that Q1 is the weakest quarter


HSIL has posted strong Q1 results with a PAT of over 28 Crs. Considering the fact that Q1 is the weakest quarterfor both its business segments and business improves over the year with the peak quarter being Q4, we canextrapolate the numbers and easily see the company posting nearly 130 Crs of PAT for FY-12. Consolidating GardenPolymers numbers, PAT can be above 140 Crs and at the current M-Cap of around 1300 Crs it is by far one of thecheapest consumption stocks at less than 10 P/E on projected earnings.

Considering the projected EPS growth of over 40 % over the next 2 years and sustained business growth of over25-30 % expected for the next 3-5 years, we expect the company to get re-rated and quote at around 14 P/Ewhich on projected growth comes to over 350 Rs in the next 2 years which is nearly a 75 % return from thecurrent prices. On a conservative basis, even if the company posts 24 Rs EPS in FY-2013 the share can easily ruleover 300 Rs which itself is a 50 % return in share capital appreciation in 24 months which is great in this volatileenvironment. Thus, we feel there is enough margin of safety in the stock investment.


For more information on HSIL’s business and the opportunity in it, feel free to discuss with Gokul Raj. P

Mail Id : [email protected] Mobile: +91-9994577745

Best Way to generate Alpha for your portfolio

HBJ Market Performer ServiceHBJ Market Performer Service is focused on helping Institutional Clients beat market returns by is focused on helping Institutional Clients beat market returns by a wide margin without taking large risks through ina wide margin without taking large risks through in--depth research and analysis of the stock.depth research and analysis of the stock.

THANK YOU


best mid cap stock hindustan sanitary ware

Documents

haryana bibin

indian consumption

improved product

raising interest

sanitary ware

container

container

sanitary ware