Stock Pick From The Sanitaryware Sector

Choice Scrip is a Blue Chip stock pick that is expected to give returns within a 6 months-1 year horizon. The recommendation is based on a fundamental analysis of the company.

The company recommended as the Choice Scrip for this issue is a market leader in sanitaryware.

Here is Why:

• At a PE multiple of 8x on a trailing four-quarter basis, the stock is available at comparatively cheaper valuations as compared to its peers.
• The EBITDA margins for H2FY13 are expected to be higher on account of inventory liquidation. 
• The new faucet plant, which will be commissioned in 2013, will be a major positive

With the realty sector coming back into the reckoning, allied industries like sanitary-ware are also expected to be in the limelight. Factors like growing urbanisation, better lifestyles and higher disposable incomes are expected to drive the demand for sanitary-ware products. No wonder the sector as a whole has gone for a re-rating, with the scrips moving significantly upwards.

In such a scenario, we are recommending HSIL as our Choice Scrip for this issue as the company is expected to be a direct beneficiary of all these factors. It is also available at cheap valuations, i.e. at 8x on a trailing four-quarter basis. With two other stocks from the sector, i.e. Kajaria Ceramics and Cera Sanitary-ware trading at PE multiples of over 15x, HSIL looks comparatively cheaper. Further, it has been a consistent dividend paying company for the past 20 years, indicating that it has rewarded shareholders.

Share Holding Pattern as on :	30/09/2012
Indian Promoters	51.57
Mutual Funds and UTI	2.63
FII's	20.54
Private Corporate Bodies	2.21
NRI's/OCB's	9.39
General Public	13.66
GRAND TOTAL	100

HSIL has two main business verticals, viz. sanitary-ware and container glass. As mentioned earlier, the company is a leader in the sanitary-ware industry, with about 40 per cent of the organised market share. It also enjoys leadership in the container glass market. Its container glass division caters to the FMCG, healthcare and liquor industries, which are the main demand drivers. A strong demand for replacement building products is a main positive for the company. In the container glass business, the company saw some overcapacity as well as slower demand in the last quarter. We do not expect this situation to persist, as it plans to lower production by 10 per cent in the December 2012 quarter and will liquidate its inventories. Nevertheless, these negatives have already priced in, and hence, we are of opinion that there would not be any materially negative impact on the scrip going ahead.

HSIL	Sep ' 12	Jun ' 12	Mar ' 12	Dec ' 11	Sep ' 11
Sales	349.38	324	391.26	342.31	299.05
Other Income	0.8	1.02	2.83	0.77	0.81
Operating Profit	67.42	57	71.75	64.14	55.25
Interest	15.34	13.91	9.62	12.19	9.31
Depreciation	22.62	17.43	15.59	14.39	13.5
Net Profit / Loss	20.5	18.25	32.73	25.85	23
Equity Capital	13.21	13.21	13.21	13.21	13.21

Besides cutting the production in glass division, HSIL is also converting one of the lines in its glass division to manufacture high premium colour glass. In a conference call, the company’s management said that coloured glass commands a premium of about 80 per cent over normal glass. However, the management is yet to provide more insights on the same.

Another positive for HSIL is that it is expanding its faucet plant, which will be operational by 2013. It is also expanding its Bahadurgarh plant in Haryana, which will be operational in the next fiscal year. This capacity expansion will lead to better financials in FY14. The sanitaryware sector is reporting over 20 per cent growth and a large chunk of that comes from faucets.

	Price (Rs)	CMP(Rs)
Company Name	Reco.	11/12/2012	Gain
Ajanta Pharma	171.00	394.00	130.41%
Strides Arcolab	729.05	1063.00	45.81%
GlaxoSmith Kline Consumer Healthcare	2542.00	3759.00	47.88%
M&M Financial Services	685.35	1038.00	51.46%
ING Vysya Bank	325.00	499.00	53.54%
Colgate Palmolive (India),	1014.00	1410.00	39.05%
Asian Paints	2985.00	4296.00	43.92%
Jammu & Kashmir Bank	976.00	1409.00	44.36%

Being a market leader, HSIL regularly passes on increase in costs to its customers. Recently, it has hiked the product prices in both the divisions by about five to seven per cent. The price hikes will keep its margins at the current levels of 16-17 per cent going ahead.

In the financial front, for the September 2012 quarter, its total revenues increased by 17 per cent to INR 349.4 crore. The net profit, however, declined by 11 per cent to INR 20.3 crore on a YoY basis, mainly due to slower offtake in the glass division. However, the demand drivers are already in place going ahead. Further, we expect better margins as HSIL will go ahead with inventory liquidation, which will lower its raw material costs. Considering all these factors, we advise our readers to DS enter the counter with a price target of INR 165