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

Va Tech Wabag Ltd

Ringside View: Va Tech Wabag

Order pipline flowsAs ticket size of top 10 client rose 52%, expects growth in revenue of 15-20%and bookings of 20-25% in FY 2014
   
VA Tech Wabag held a conference call on 24 May 2013 to discuss the financialperformance for the fourth quarter and the fiscal ended March 2013 (FY 2013). The companywas represented by Managing Director Rajiv Mittal and CFO S Varadrajan. Keytakeaways:

Order intake of water supply and sewage equipment maker Va Tech Wabag grew 34% to Rs2489 crore in FY 2013. The order book including framework contracts of Rs 1090 crore stoodat Rs 5374 crore. The share of operations and maintenance (O&M) in total revenue was about 16.8% inFY 2013 compared with 14.5% in FY 2012. Slowly the share of the O&M business isgrowing. If this trend continues, the margin will grow. The O&M margin is higher thanthe engineering, procurement and construction (EPC) margin.

Capex incurred was Rs 6.92 crore in FY 2013. Capital work in progress was Rs 34-35crore on office building. Of the total order backlog, the share of EPC India is 41%, O&M India is 29%, EPCinternational 25%, and O&M international 5%. Of the international order book, about51% is from Austria, 16% from Switzerland, 12% from Romania, 10% from Philippines, 7% fromCzech, and balance are others.
  Given the robust order book, there is confidence of continuing good momentum, both inrevenue growth as well as order bookings. Revenue of Rs 1850-1950 crore (or growth of15-20%) is expected in FY 2014. Similarly, growth of 20-25% to Rs 2600 crore-Rs 2700 crorein order inflow is likely in FY 2014. A few very large orders are in advanced stages ofnegotiations. This gives confidence of strong growth in order booking.
 

Of the revenue growth anticipated in FY 2014, about 70% is to come from India andbalance 30% from international. India operations are to see a revenue growth of 10-15% inthe current fiscal over FY 2013 revenue. Similarly, of the anticipated order booking ofabout Rs 2600-2700 crore in FY 2014, about Rs 1700-1800 crore of the order booking is tocome from India. Importantly, the growth in orders a not at the cost of profitability.Consistent improvement in profitability in challenging times has been achieved.

    

The average ticket size of the top 10 orders booked increased 52% to Rs 122 crore in FY2013 compared with the previous year. Some of the major orders booked were the Rs272-crore effluent treatment plant for Reliance Industries, Rs 219-crore Bangalore watertreatment plant (WTP), the Rs 125-crore Philippines WTP, the euro 7.5-million Romania WTP,and the Rs 80-crore sewerage treatment plant upgradation for the Surat MunicipalCorporation.

  There are no slow-moving orders in the order book, barring the Libya WTP and UlhasnagarMunicipal Corporation’s 195 million-litre per day (mld) WTP. One Libya order wortheuro 28 million is not moving. Also, orders worth Rs 300 crore were suspended during theArab Spring. The Libya order book of about Rs 400-300 crore is on hold and that will startmoving once the clearance comes in, which is not yet in place. The Rs 230-crore Ulhasnagarorder is delayed due to land acquisition issues.

 

The Rs 127-crore Aurangabad Municipal Corporation WTP project for 192-mld, the s110-crore Chennai Metropolitan WTP project, and the Rs 110-crore Madinaty of Egypt WTPproject are expected to move to firm order book from framework order book in Q1-Q2 of FY2014.

The Tamil Nadu government has announced four more desalination projects, giving fillipto the desalination business. Of the four, two projects are for Chennai city. Of theremaining two, one is an expansion project of 150 million litres per day (mld) of theNemeli desal plant in Chennai, set up and operated by VA Tech. The Nemeli project in to betendered shortly. The land required is already acquired and in possession. The otherChennai project is for 200 mld, expandable to 400 mld, for which detailed project reportwork has been initiated. The tender may be called in Q4 of FY 2014.

In consortium with Sumitomo, Va Tech has pre-qualified for few projects, which are tobe finalised soon. For some more projects, where expression of interest (EoI) was calledfor, the company in consortium with Sumitomo is to put in its EoI. Of the projects wherethe company is prequalified with Sumitomo is a desal plant and a drinking water plant inOman.

In the domestic market, the focus is more on oil and gas and fertiliser, withinvestment in the power sector and steel sectors being subdued. Large EPC orders in thefertiliser industry are getting finalised. Orders for processed water and cooling waterplants required in fertiliser manufacturing are expected.

  The order inflow guidance given for FY 2014 does not consider any of new Chennaidesalination orders for which Va Tech is prequalified with Sumitomo. These are big-ticketorders. The order booking will get a spike on bagging these.

 Outstanding from the Nemeli project is Rs 150 crore as of now. The delay is largely onaccount of the state government not getting part of the funding, amounting to Rs 300 oddcrore committed by the Central government. Va Tech is hopeful of getting it paid byJune-July 2013.

  Gradually, there is movement to decentralize low-cost operations from the high-costcentralised operations model. Through multi-domestic unit model, movement is to low-costcountries such as Turkey, are Philippines from high cost country like Austria. Since thistakes time, the fruits of this shift will kick in over the years and will not happen inthe year of change.

 There is also move to double-digit the operating profit margin (OPM) for consolidatedentity. There was 60 basis-point improvement in the OPM to 9.6% in FY 2013. Theconsolidated OPM will be in double digits in FY 2014. 

 

source: capitalmarket

SEBI's new baby - rules for illiquid stocks

I am sure most of you must have heard of SEBI's new rules for trading in what it calls 'illiquid stocks' which came into effect from 8th April 2013. Some of you may not have heard of it because surprisingly, the media has just not highlighted the issue! Perhaps there is not much incentive for the media to get involved here! ;-) These rules hit more than 2100 hundred companies among the listed space, as can be seen in the annexure to this notice. SEBI has not explained exactly why this has been done, but supposedly it has been to control manipulation in smaller companies. In my very humble opinion, the new rules can be best described as insane! (To put it mildly).

Lets see what all this is about..

I think it all started when, in 2010, an academician decided to write a paper on how call auction system can be implemented to solve certain difficulties in the capital market. The paper can be downloaded here. The author is an extremely accomplished academician and a highly educated individual and is a member of SEBI's SMAC from January 2009. Her CV can be viewed here.
Well, it seems like SEBI really liked the paper and decided to take a cue from it and thus were born rules for call auctions in illiquid stocks. In it, firstly, SEBI defines what it means by 'illiquid stocks' by prescribing few quantitative criteria..


Criteria for illiquidity – For the purpose of this circular, a scrip, whether trading 
in normal market or trade for trade settlement, shall be classified as illiquid on 
a stock exchange if all the following conditions are met:
2.2.1. The average daily trading volume of a scrip in a quarter is less than 
10000;
2.2.2. The average daily number of trades is less than 50 in a quarter; 
2.2.3. The scrip is classified as illiquid at all exchanges where it is traded.


All those stocks which come under this will not be traded in the normal fashion. Instead, they will be traded through an auction mechanism which goes like this..


2.6. Number of auction sessions – Periodic call auction sessions of one hour each 
shall be conducted throughout the trading hours with the first session starting 
at 9:30am.
2.7. Session duration - The call auction session duration shall be one hour, of 
which 45 minutes shall be allowed for order entry, order modification and order 
cancellation, 8 minutes shall be for order matching and trade confirmation and 
remaining 7 minutes shall be a buffer period for closing the current session 
and facilitating the transition to next session. The session shall close randomly 
during last one minute of order entry between the 44th & 45th minute. Such 
random closure shall be system driven.
2.8. Un-matched orders- All un-matched orders remaining at the end of a call 
auction session shall be purged.


Fancy!!! But practically speaking, it has merely made investors like me miserable.

1. Investors now have to track and keep a watch on the market (stocks) the whole day. They are being encouraged to always keep tracking the market, which is a big negative as far as long term investing is concerned.
2. Every hour, a fresh order has to be placed. I think my broker would now hate me more than he hates his mother-in-law.
3. Since a lot of market participants are clueless as to what is all this, there has been extremely low participation and volume in the affected stocks. People must surely be feeling 'trapped' in certain stock, since virtually no exit is available.
4. Practically, this whole section of the listed space will now be closed to institutions, since I am sure they will have better things to do!!! Such lower participation does not help proper price discovery.
5. Also, will promoters take advantage of lower liquidity and panic selling to shore up their holding at lower prices?

I suppose that all this was done to curb manipulation. But setting up quantitative criteria for this purpose does not help. Manipulators can just ensure that these criteria are met and their stocks remain out of the net! But in the process, a lot of genuine companies with genuine shareholders will suffer.

I am no-one to preach on this. What is right/what is wrong is immaterial. Laws are laws and rules are rules. So what can be done about it?

1. I am hoping that as time passes, the market participants will get slowly used to the new method and some bit of sense will return to this section of the market. Otherwise, effectively, this section of the market is practically dead. The stocks covered by these rules for illiquid stocks have become more illiquid than they were earlier!!!
2. I tried viewing this as an opportunity. Probably some panic selling due to absence of liquidity may help us get some good stocks at lower prices. Somehow, that just hasnt happened till now. Lets see what the future holds.
3. I feel it is best to try and adapt to the new system, instead of cribbing or complaining about it. Have a good talk with your broker and ensure his cooperation without frustration in this matter. If instructed properly, the broker can handle the order placing and monitoring part, without much botheration to us.

In a nutshell, this is surely a huge negative for people who invest in small, unknown companies with a lot of value. If price discovery is hampered, returns just cannot be earned. I am keeping my fingers crossed and hoping that over a period of time, all the problems associated with this will be ironed out. After all, we must accept finite disappointment, but never lose infinite hope!! - Martin Luther King, Jr.

Cheers and happy illiquid investing!!

P.S. One may also like to read about this whole issue in Moneylife.

HAPPY UGADI

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