Buy Hindustan Sanitaryware; target Rs 117: Angel Broking

Angel Broking's report on Hindustan Sanitaryware Industries (HSIL)

Hindustan Sanitaryware Industries (HSIL) is the largest manufacturer of sanitaryware (40 percent market share) and the second largest manufacturer (22 percent market share) of glass containers in India. With increased awareness for improving sanitation coverage coupled with current low penetration and changing lifestyles of people, the sanitaryware industry is poised to witness steady traction. HSIL, with its recently expanded capacity in sanitaryware and strong brand recall is well placed to benefit from the robust growth expected in the industry. Moreover, no further expansion in the low-RoCE glassware division is likely to improve the return ratios going forward.

Due to increasing awareness about improving sanitation, low penetration and changing lifestyles of people, the sanitaryware industry is witnessing traction. HSIL’s greenfield project will expand its sanitaryware capacity by 1.2mp (million pieces) and faucetware capacity by 2.5mp by FY2015E, which in turn will help the company to cater to the rising demand in the market.

HSIL holds a leading position in the sanitaryware industry (organized segment) with ~40 percent market share. Well-known brands like QUEO Hindware Art, Hindware Italian, Hindware, Raasi, and Benevalve, enable HSIL to cater to varied segments of the market. Glassware division - unlikely to be a drag going forward: The company’s glassware division which has constituted ~60 percent of the capital employed has generated RoCE in the range of 6-10 percent historically. On the other hand, the sanitaryware division has a track record of RoCE above 18 percent. Going ahead, we expect no further investments in the low-RoCE glassware division which will aid in improving the overall return ratios.

Outlook and valuation: "We expect HSIL to register a CAGR of 15.8 percent in its top-line over FY2013-15E to Rs 2,363 on the back of robust growth in the sanitaryware industry coupled with stable growth in the glass industry. The EBITDA and net profit are expected to post a CAGR of 16.3 percent and 14.8 percent respectively over FY2013-15E. Valuing the business on SOTP basis, assigning the glassware division a target EV/invested capital of 0.5x and assigning the sanitaryware division a target PE of 7x, we arrive at an estimated market capitalization of Rs 770cr in FY2015E which provides 34.2 percent upside from the current levels. Hence, we initiate coverage on HSIL and recommend Buy with a target price of Rs 117 valuing the business on SOTP basis for FY2015E," says Angel Broking research report.

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