HSIL Ltd BUY -88.00

Fall in OPM reversed


 The top line to grow 25% and Ebidta 15-20% in FY 2014


 HSIL held its conference call after it declared its FY 2013 results. VicePresident-Building Products Division RB Kabra addressed the meet. Highlights:

HSIL has two businesses: building products and packing products (glass business). Thecompany started with the sanitaryware business but ventured into bathroom and kitchenproducts, together called building products. The glass business and building products eachaccount for around 50% of sales. HSIL’s net sales for the financial year ended March 2013 (FY 2013) stood at Rs1550.28 crore as against Rs 1322.85 crore in FY 2012. However, profit declined to Rs 99.12crore as against to Rs 110.1 crore in FY 2012.

The earning before interest, depreciation, tax and amortisation (Ebidta) margin has notgrown much because of pressure in glass business. HSIL commissioned new line (furnaces of475 tonnes) in glass business in FY 2012. Competition has also raised capacities, whichhas not given the company a chance to raise prices. Moreover, prices of power, soda andfuel have gone up. But now soda and fuel prices are coming down in international markets.Power is being purchased from the power exchange. This is a bit costly but is still lessthan its own generation cost. The glass business spurted 34% in Q4 of FY 2013. It can grow 24-20% in FY 2014. In Q4,the building product business sales were up 17%. 

The building products business isexpected to grow 20-25% in FY 2014. Thus overall 20-25% sales growth is expected in FY2014.HSIL disinvested its entire investment in equity shares of its wholly owned subsidiary,AGI Glasspack. Accordingly, AGI Glasspack ceases to be a subsidiary of HSIL from 05 March2013.HSIL earned Rs 23 crore profit by selling shares. But after tax, extraordinary (EO)profit was Rs 21 crore. So, the profit after tax (PAT) after deducting net EO gain was Rs27 crore in the quarter.In the building product business, a luxury brand was launched in April 2012. Luxuryproducts are expected to grow faster than normal products. This brand, owned by subsidiaryin UK, is not famous in India.

 

The Ebidta margin in building products is 19% and in the glass business is 16%. TheEbidta margin in building products can rise to 20% and to 18%-19% in the glass business.But improvement in the margin in the glass business will take time. But by FY 2014 it canrise to 17%. Overall, for FY 2014, the topline growth will be around 25% and growth in theEbidta margin will be 15-20% 

The Pet bottle business has not yet been merged as necessary permission has not beenreceived. The Pet bottle business grew 12-13% in FY 2013 and it can grow 20-25% in FY 2014as the company has now acquired new customers. Earlier this business had one customer,which accounted for 80% of business. Now, the share has fallen to 60%, which the companyhopes to bring it down to 40%. Conversion from glass to Pet bottles has been done few years ago. In the past two yearsor so, no noticeable shift has been visible. Currently, shift from glass to Pet is notseen because glass products in soft drink and liquor are recyclable. Each glass bottle isrecycled 22-30 times. So glass is more economical for companies.With 40% market share in sanitaryware business, no new store was added in FY 2013. Butplans are on to open five stores in FY 2014. One store has already opened in Bangalore,Remaining four will open in due course of the year. Products are sold through an extensive distribution network, enabling reach to newmarkets and target more consumers. The network comprises 2,000 plus distributors. Therehas been consistent diversification of product portfolio, both in terms of differentproducts variants and different customer categories.

 

The falling operating profit margin seems to have reversed and will improve goingforward. The building products business increased prices by 3-3.5% from April 2013. Sothis business will see margin growth. A few glass manufacturing companies have closed their plants in India. Thus, demand isgood. HSIL hopes equilibrium will come from the second quarter of FY 2014. Thus, the glassbusiness will see margin improvement from the second quarter. Demand for container glass is driven by diverse industries such as beverages, alcoholicbeverages, pharmaceuticals and food industries. Beer consumption in India has started topick up. This will benefit the glass business. HSIL is confident of 8-10% volume growth inthe glass business.
 

 Total debt is Rs 900 crore. There is no capex as of now for the glass business. Capexfor the glass business will be decided after looking at market conditions. 

SOURCE: CAPITALMARKET