Hindusthan National Glass: Research Meet Extracts

We recently met Hindusthan National Glass Ltd (HNGL), one of the leading container glass bottle manufacturers in India, so as to get a broader idea about their business and industry in general.

Here are the key takeaways:-

Snapshot of the business: HNGL is a leading player in the container glass bottle manufacturing in India with 55% market share. The company basically manufactures container glass bottles which are used across various industries namely Liquor, Beer, Food, Pharma and Others. HNGL’s marquee client list comprises of top companies like UB Group, Radico Khaitan, HUL, Nestle, Pepsi, Coke etc.

Right now, the company has six manufacturing units and the current capacity is about 2,825 tonnes per day (TPD). Going forward, the company plans to expand its overall capacity to about 6,000 TPD by FY14/15. Apart from container glass bottles the company also manufactures float glass which is basically toughened glass used in automobile and construction space. Additionally, it also supplies capital goods & spares to the glass industry.

Key Takeaways:

• Although HNGL is a market leader in the container glass manufacturing space, it has witnessed a decline in market share over the last few years. It may be noted that the market share of the company declined from about 65% to about 55% within a span of 2-3 years. As the company was a bit conservative in its capacity expansion plans, unorganized market captured the market share of the company. As a measure to regain the market share, the company has finally decided to increase its capacity, a step in the right direction. Plans to increase capacity is likely to boost revenue growth over the next 2-3 years.
  
• Power & Fuel cost are an important source of raw material for the company. The furnace used to manufacture glass typically runs on oil. So, whenever oil prices turn volatile margins of the company are impacted to that extent. However, going forward the company has decided to switch from oil to natural gas so as to eschew the volatility in oil prices. The process is ongoing and once it is completed, the company is likely to save Rs 500-700 m per year on a per plant basis. This is likely to bring in some stability in margins.
  
• As HNGL is a market leader it has pricing power. Any cost escalations are passed onto the customers on a timely basis. However, it takes a period of about 2-3 months before the benefit of increased realization is witnessed in the margins. The realizations over the last three years have averaged in the region of 16,300 per ton. Management is of the opinion that if the raw material prices increase from current levels, it has further headroom to increase prices. In fact, the company has already taken an increase of about 10-12% in the month of February.
  
• Typically 1 TPD of capacity requires capex in the region of Rs 10 m. As the company plans to add about 3,000 TPD of capacity, additional capex required would be in the region of Rs 30 bn. Management is confident of meeting the capex requirement through debt, equity and treasury shares which it has at its disposal.
  
• Although the company is not a large force to reckon with in the float glass business (market share of about 15%), it has plans to increase its market share in the float glass business to about 40% in few years from now.
  
• Both top line and bottom line are expected to grow in the region of 10-15% during FY12. Management expects EBITDA margin to increase to about 23-25% in FY12.
  
• Currently, exports contribute negligible portion of the company’s revenues. However, going ahead it plans to increase its market share in the overseas markets and is looking out for a few acquisitions abroad.
  
• Until recently, the company enjoyed tax benefits across few of its plants. However, the benefit is set to expire soon and from now on HNGL will be paying the corporate tax rate.
  
• Although the current D/E ratio is 0.54x the management has shown willingness to leverage its balance sheet in order to meet the capacity expansion plans. Even equity dilution is on the cards to meet the large scale capacity expansion plans.