CRISIL Research assigns fundamental grade of 4/5 to HSIL

CRISIL Research has assigned a CRISIL IER fundamental grade of ‘4/5’ to HSIL . The grade indicates that the company’s fundamentals are ‘superior’ relative to other listed equity securities in India. CRISIL Research has assigned a valuation grade of ‘5/5’, indicating that market price has ‘strong upside’ from the current levels. Our one-year fair value of the stock is Rs 222. The stock is currently trading at Rs 162 per share. The grades are not a recommendation to buy, sell or hold the graded instrument, or a comment on the graded instrument’s future market price or its suitability for a particular investor.

The assigned fundamental grade takes into account HSIL’s strong competitive position in sanitaryware and container glass businesses. It is a leading player in the domestic sanitaryware industry with ~40% share in the organised space. The grade factors in strong growth prospects of the domestic sanitaryware industry, driven by housing supply and improvement in sanitation levels in India. HSIL based on its leading position and a strong recall of its popular “Hindware” brand, is well placed to capitalise on this growth. Over the years, the company has not only expanded its product portfolio by launching multiple sub-brands to target different segments at different price points but has also diversified into other related products like faucets, wellness products and tiles. Further, an extensive distribution network of ~1,550 distributors and 15,000 retailers enable HSIL to cater to the widely dispersed non-institutional consumers. The grade is, however, constrained by the significant dependence of the sanitaryware industry on the performance of the real estate market in India, which typically shadows the market conditions.

HSIL is the second largest domestic player in the container glass segment with ~22% share on a pan-India basis and ~75% share in southern India. The grade factors in healthy prospects of the glass container industry, driven by growth in end-user industries - liquor, beer, pharmaceuticals and carbonated drinks. The grade is tempered by the inherent risk the company faces from alternative forms of packaging such as PET bottles and aluminium cans, which are increasingly being used for beer, soft drinks and juices. However, the acquisition of Garden Polymer, a PET bottle manufacturer, brings in significant synergies in terms of similar end-markets and target customers. In addition, Garden Polymer will help offset the cannibalisation effect of glass containers. The grade also takes into account the company’s foray into home retail furnishing (~3% of the total consolidated revenues), which is at a nascent stage and currently making losses. We believe that the turnaround of the business into a profitable unit will be a challenge and is a key monitorable. The success will depend on the pricing power and proper selection of store locations.

Financial outlook
CRISIL Research expects HSIL’s consolidated revenue to grow at a three-year CAGR of 26% to ~Rs 22 bn in FY14 largely driven by growth in sanitaryware and container glass segments along with contribution from Garden Polymer. EBITDA is expected to decline marginally from 18.3% in FY11 to 17.9% in FY14 because of increasing power and fuel cost. EPS is expected to double from Rs 10.7 in FY11 to Rs 21.6 in FY14 primarily driven by revenue growth. We expect RoE to increase from 12.4% to 15.8% in FY14.

Valuation (the current market price has strong upside)
CRISIL Research has used the sum-of-the-parts method to value HSIL and arrived at a one-year fair value of Rs 222 per share. At this value, the implied P/E multiples are 12x FY13E EPS and 10x FY14E EPS. The discounted cash flow method is used to value HSIL’s standalone business and Garden Polymer at Rs 195 and Rs 16 per share respectively. The home retail furnishing business is valued by the price/ book value per share method. A P/BV multiple of 0.7x is assigned to arrive at a fair value of Rs 11 per share.

Disclaimer: This Company commissioned CRISIL IER report is based on data publicly available or from sources considered reliable. CRISIL Ltd. (CRISIL) does not represent that it is accurate or complete and hence, it should not be relied upon as such. The data / report is subject to change without any prior notice. Opinions expressed herein are our current opinions as on the date of this report. Nothing in this report constitutes investment, legal, accounting or tax advice or any solicitation, whatsoever. The subscriber / user assume the entire risk of any use made of this data / report. CRISIL especially states that, it has no financial liability whatsoever, to the subscribers / users of this report. This report is for the personal information only of the authorised recipient in India only. This report should not be reproduced or redistributed or communicated directly or indirectly in any form to any other person – especially outside India or published or copied in whole or in part, for any purpose.

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