Ideas for Profit: HIL reinvents itself as global building material solutions player; accumulate

While blocks and panels plant capacities are running near optimum utilisation (90 percent), the same for panels is nearing 80 percent of capacity.

New capacities and products to aid growth Roofing sheets, the major revenue and profit contributor for the company, has witnessed stagnation in sales in recent years. To cater to growing demand in infrastructure and construction, the company is gradually expanding capacities across product lines and diversifying its revenue stream by launching new products.

The company has recently launched Charminar Fortune (asbestos-free roofing product) to cater to the requirements of institutional customers. The initial response for this product has been very good and HIL expects Charminar to have a substantial financial impact from H2 FY19.

Earlier this year, the company started commercial production of SWR (soil, waste and rain) and pressure pipes at Faridabad (Haryana). The new 5,000 tonne U-PVC (un-plasticized polyvinyl chloride) and C-PVC pipe (chlorinated polyvinyl chloride) plant at Golan (Gujarat) will start contributing to topline and bottomline from Q2 onwards. Capacity expansion of 7,000 tonne in this product line is being planned at Thimmapur (Telangana). This will propel the total pipe capacity to 30,000 tonne.

Acquisition of Parador Holdings HIL has acquired Germany-based Parador Holdings for an enterprise value of 82.8 million euro. Parador designs, manufactures and distributes flooring solutions to customers across 65 countries. The company has 2 manufacturing facilities located in Germany and Austria.

The cash consideration for the acquisition is 72.3 million euro and will be used to repay loans of 19.3 million euro. The balance amount will be paid to existing shareholders.

The company is funding the acquisition through a combination of equity and debt. Around 40 percent of total debt (Rs 350 crore or 42 million euro) is being financed from Europe and the balance 60 percent is being availed through Indian banks. The blended cost of borrowing will be around 5 percent due to low interest costs prevailing in Europe.

In terms of financials, Parador reported sales of around 142.2 million euro in 2017 and generated an operating profit of 10.7 million euro. The management expects the acquisition to be EPS (earnings per share) accretive and the consolidated debt-to-equity ratio to be around one times after completion of this transaction.

Outlook and recommendation On the demand front, we expect the company to benefit from a normal monsoon, rationalisation in GST rates (from 28 percent to 18 percent) and pick-up in the rural economy.

For HIL, growth in topline will primarily be aided by new product lines (plumbing, pipes and putty). The recent acquisition of Parador will further expand its product and geographic footprint and position it as an integrated building solutions provider. HIL’s association with Chennai Super Kings during the IPL season as a sponsoring partner has improved its brand image and visibility. On the cost front, the margin will continue to gain from economies of scale, but prices of raw materials (cement and fly ash) needs to be monitored closely.

The stock price has witnessed a near 40 percent rally in the last two months and current valuations (around 19 times FY19 price-to-earnings and 13 times FY19 enterprise value-to-earnings before interest, tax, depreciation and appreciation (EV/EBITDA) appears a little stretched for entry from a near term perspective. We therefore advise long term investors to keep this stock on radar and accumulate this stock on a correction.

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