Accumulate HSIL; target of Rs 178: SKP Securities

SKP Securities is bullish on HSIL and has recommended accumulate rating on the stock with a target of Rs 178 in its November 15, 2012 research report.

“HSIL Limited is the flagship company of the Somany group, was initially incorporated as Hindustan Twyfords limited and later it was named as Hindustan Sanitaryware and Industries Limited in 1967 which was later on renamed as HSIL Ltd. in 2009. HSIL is largest manufacturer of sanitaryware products with a significant market share of 40% of organized sanitaryware market in India. In the container glass front, HSIL is currently having 20% market share. The company has five manufacturing facilities across Andhra Pradesh, Haryana and Rajasthan.”

“HSIL has undertaken Brownfield and Greenfield expansion in the sanitary ware and faucet business. The company is increasing sanitary ware capacity by 42% to 5 mn pieces annually from current level of 3.5 mn pieces annually by FY 15. The faucet capacity will be increase to 3 mn pcs from 0.5 mn pcs by FY14. The company has already undergone for 0.7 mn pieces brownfield expansion in Nov 2011 which is included in current capacity of 3.5mn pieces. Similarly 0.2 mn pieces were increased as brownfield expansion in faucet division in Aug 2011 leading the current capacity to 0.5 mn pieces from earlier 0.3 mn pieces. The brown field expansion plant of Container Glass at Bhongir, AP has been completed and the additional production capacity incremental by 42% to 1600 TPD in May 2012.”

“The Margins were under pressure due to increases in prices on soda ash (raw materials for the container glass business), increase in cost of imported components and outsourced products due to rupee depreciation. The increase in the power and fuel costs was mainly due to 40% power cut (12 days/month) in the Andhra Pradesh plants and increase in power tariff by various state grids. We expect HSIL to undertake price hike in both the business division to offset pressure on margins due to increase in input costs. The total price hike undertaken by the company in the building product division was 9% i.e. (4% in June 2012 and 5% in Nov 2012) and in the container glass division, it undertook 7% price hike with few customer, thereby enabling the company to maintain current margins.”

“Enhanced capacities in both division, along with efforts to reduce current high inventories (in Container Glass division), would enable HSIL to report topline growth. At current market price of Rs 124, we recommend ACCUMULATE rating on the stock with a target of Rs. 178 (43% UPSIDE) at the EV/EBIDTA of 5.5x on FY14E earning over the period of 15 month,” says SKP Securities research report.

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