Stock pick from the construction sector

HSIL is the largest company in the Indian sanitaryware market, growing at a five-year CAGR of over 21 per cent in its topline and 27 per cent in the bottomline. When one looks at the sanitaryware market, which has been growing at around 10-12 per cent, the growth rate of this company looks attractive. Formerly known as Hindustan Sanitaryware, the company has created a niche for itself, with strong brand recall among consumers. 

We are bullish on this stock because the company is expanding its capacity, which assures higher growth and sustainable profits in the future. Its recent synergistic acquisitions in the UK (sanitaryware) and India (container glass) augur well for the company going forward, as these are likely to be revenue accreting. Its promoters have not pledged a single share of their holding, which reflects the confidence that they have in their business. Last year, when the Sensex tanked by 24 per cent, this scrip was down by only three per cent. On the valuations front too, the company looks attractive as compared to its peers. 

HSIL has two business verticals – sanitaryware (47 per cent revenues) and container glass (53 per cent revenues). The glass division was formed by acquiring a non-operational unit, Associated Glass Industries (AGI), and converting it into a profitable business, which reflects the management’s ability to run businesses efficiently. The business is diversified across all Indian territories. The south accounts for 30 per cent of revenues, and 25 per cent comes from the north. The balance 45 per cent comes from the rest of India. Business in both divisions has been good, led by volumes and higher realisations. It has a network of 1550 distributors and 14000 retailers, the biggest for any single company in this industry. 

Its top brand, Hindware, has a 40 per cent market share and accounts for about 68 per cent of revenues from the sanitaryware division. The company's margins have been increasing in the last five years. A majority of its raw materials come from India while the prices of imported raw materials are expected to remain stable, according to the management. It also has the ability to pass on higher costs to its customers, which means that the margins are likely to remain intact going forward.

HSIL is currently expanding its capacities in both divisions. In the glass division, it will touch 1550 MTPD from 1075 MTPD in March 2012. In sanitaryware, the capacity will be increased to five million pieces from the existing 3.5 million by 2014. In faucets, it will hike its capacity to three million pieces from the current 0.52 million by March 2013. This expansion plan, estimated to cost around Rs 650 crore, has been funded by debt (Rs 300 crore), internal accruals (Rs 200 crore) and a QIB placement of Rs 150 crore at a price of Rs 136 per share (October 2010). Its current debt-to-equity ratio stands at 0.9, and the management expects to cap it to below one in the future. Its interest cover ratio of over 5x underlines HSIL’s ability to service its loans. 

Its financial performance in FY11 was good, and it carried the momentum forward in the half year ended September 2011. Revenues grew by 39 per cent to Rs 605 crore, while the net profits grew strongly by 88 per cent to Rs 51 crore during the first half of FY12. On the valuations front, the scrip is currently trading at a PE multiple of 8x to its annualised EPS of Rs 16.32, compared to its peer Cera Sanitaryware, which is trading at a PE of 8.54x.We advise investors to enter the counter with about 25-30 per cent expected returns in a year’s time.