CRISIL maintains HSIL`s valuation grade to 5/5

HSIL Ltd’s (HSIL’s) Q1FY13 results were below CRISIL Research’s expectations due to underperformance by the container glass segment. Sales grew by 6% y-o-y to Rs 3,240 mn driven by 18% growth in building products that was offset by 4% y-o-y decline in container glass. EBITDA margin contracted by 250 bps y-o-y to 17.6% because of a steep rise in power and fuel costs. PAT margin declined by 367 bps y-o-y to 5.6% due to lower EBITDA margin and increase in interest cost and depreciation. We remain positive on HSIL’s strong position in sanitaryware and container glass segments and long-term growth prospects. We maintain our fundamental grading of 4/5.

Weak sales growth; uncertain macro environment likely to play spoilsport
The container glass segment witnessed lower demand from pharma and beer segments. HSIL also faced difficulty in getting payment from one large customer that led to the company reducing supplies which impacted its sales. The building products segment faced supply-side constraints in purchasing faucets for sale that constricted growth to 18% y-o-y. The management believes these constraints are temporary and, hence, has maintained its sales growth guidance of 25% for FY13. While we believe that long-term growth prospects remain structurally intact, we expect persisting high inflation, weak monsoon and high interest rate to impact demand. Hence, we have lowered our FY13 growth estimate to 16% from 26% earlier.

Expect EBITDA margin to likely remain under pressure from persisting cost inflation
Power and fuel costs increased by 45% y-o-y because of a raise in power tariffs (of around 30% in Andhra Pradesh [AP]) and higher usage of generated power. The cost of generated power for the company was around 2.5x than that available from the grid. The management has indicated that they will purchase power from Indian Energy Exchange (IEX), which is expected to be ~25% cheaper than generated power. While we believe that it can improve EBITDA margin sequentially, we expect EBITDA margin to remain under pressure from the expected slowdown in demand, increase in power tariffs and diminishing visibility on getting gas supply at the AP plant.

Earnings estimates reduced and fair value revised to Rs 185
We have lowered our FY13 and FY14 revenue estimates from Rs 18.5bn/ Rs 22bn to Rs 17.0bn/ Rs 20.7bn respectively. Taking into consideration 250 bps margin decline in Q1FY13, grim power situation in AP and diminished visibility on gas supply to AP plant, we lower our FY13/ FY14 EBITDA margin estimates by 110 bps/ 70 bps respectively. FY13/ FY14 EPS estimates are lowered from Rs 18.3/ Rs 21.1 to Rs 13.6/ Rs 17.0 respectively. Weak monsoon, non-availability of power from the exchange and further weakness in rupee are few short-term risks to our estimates. We continue to use the sum-of-the-parts method to value HSIL and lower our fair value estimate to Rs 185 per share following cuts in our earnings estimates. At the current market price of Rs 130, the valuation grade is 5/5.

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