HSIL - VIEWPOINT - Challenging environment ahead - Sharekhan

HSIL operates in two key business segments, namely sanitary ware and container glass division. Each business segment contributes 50% revenue. The company sells sanitary ware under the Hindware brand and manufactures glass under the AGI brand. While it is the number one player in the sanitary ware market with a 40% market share, it is the second largest player in the container glass space with a 17% market share (70% market share in southern India, the biggest market for container glass).

The organised segment is growing at over 12% per annum and we expect the growth to sustain driven by the increased demand for new houses and the burgeoning young earners with a rising disposable income. Being the largest domestic player in the sanitary ware business HSIL is likely to benefit the most from this incremental demand. However, the slowdown in the property market in recent times has affected the overall volume growth of this industry.

Key risk includes longer than expected slowdown in the real estate market will affect the demand for building products while sharp volatility in prices of soda ash can affect the margins in the container glass division. Moreover, in order to fund the huge capex of Rs650 crore it could see an increase in its debt-to-equity ratio, which presently stands at 0.6x. This will increase the interest burden on the earnings of the company. The return on equity (RoE), which stands at 15%, could fall to around 10% in the coming two years.

Outlook and valuation: The company has a strong financial track record in terms of earnings. It is also operationally efficient. With the new capacities coming on stream in the next two years the company is well placed to capture the incremental demand in both the sanitary ware and container glass markets. The company's management is confident of achieving a 25% growth in its revenue in the coming years. However, a longer than expected slowdown in the real estate market (which is the key consumer of its sanitary ware) and an increase in the price of soda ash could adversely affect the performance of the company. At the current market price the stock is trading at price-to-earnings ratio of 10.7x, discounting its FY2011 earnings per share. On a comparative basis, the stock's valuation is in line with that of its peers despite its lower return ratios.

Source : Equity Bulls

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