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Hindustan Sanitaryware: Hygienic promise! - Views on News from Equitymaster

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Hindustan Sanitaryware: Hygienic promise!

May 18, 2006

Performance summary
Hindustan Sanitaryware & Industries Limited (HSIL), India’s leading sanitaryware and glassware manufacturer, has reported good results for fiscal ended March 2006, wherein revenue and net profits have grown by 34% YoY and 36% YoY respectively. Rise in power, fuel and other costs have however dented operating margins. Further, substantial rise in other income has led the bottomline growth outpace growth in topline during the fiscal. While the company has outperformed our topline estimates by 2%, the bottomline is relatively 6% lower, mainly due to pressure on margins.

Financial performance: A snapshot…
(Rs m) 4QFY05 4QFY06 Change FY05 FY06 Change
Sales 993 1,226 23.4% 2,971 3,965 33.5%
Expenditure 801 1,036 29.4% 2,400 3,255 35.6%
Operating profit (EBDITA) 192 190 -1.2% 571 710 24.3%
Operating profit margin (%) 19.4% 15.5%   19.2% 17.9%  
Other income 16 45 184.9% 36 74 109.0%
Interest 34 35 1.8% 109 129 18.7%
Depreciation 56 65 16.3% 208 251 20.7%
Profit before tax 118 136 14.6% 290 404 39.5%
Tax 23 54 129.6% 99 146 46.7%
Profit after tax/(loss) 95 82 -13.6% 190 258 35.7%
Net profit margin (%) 9.6% 6.7%   6.4% 6.5%  
No. of shares 18.7 46.8   18.7 46.8  
Diluted earnings per share (Rs)         5.5  
P/E ratio (x)         28.8  

What is the company’s business?
HSIL is a leading player in two business segments – building products (sanitaryware) and glass containers (glassware). The company holds 40% and 13% share of the organised market in these segments respectively. In the sanitaryware business, HSIL provides complete solutions for bathroom and kitchens, sold under the ‘Hindware’ and ‘Raasi’ brands. The company also acts as a marketing partner of Sanitec, a leading international player in the sanitaryware business. Revenues from the sanitaryware business have grown at a CAGR of 20% during the period FY01 to FY06. In the glassware business, the company manufactures and sells glass containers, thus servicing user industries like beverages, liquor, pharma and food. Revenues from this business have grown at a CAGR of 20% during the period FY01 to FY06. During the same period, HSIL’s net sales and profits have grown at compounded rates of 21% and 45% respectively.

What has driven performance in FY06?
All round growth: As was estimated by us, both the sanitaryware and glassware businesses have contributed to HSIL’s topline performance during FY06. While the former grew by 38% YoY in revenue terms, the latter recorded a growth of 27% YoY. In the sanitaryware division, the company has benefited from increased construction activity in the housing sector and enhanced move towards better sanitation and hygienic living standards. Readers should also note that the addressable market for the company is not only restricted to urban housing development. It is also targeting the masses in rural and semi-urban areas through its low-end products (sold under the ‘Raasi’ brand). The expansion in organised retailing and hospitality sectors has also seemingly aided HSIL’s growth in sanitaryware division during FY06.

One negative news for the company as far as the sanitaryware division is concerned is that Grohe Pacific, the largest manufacturer of faucets and kitchen and fittings in the world, and with whom HSIL has an exclusive marketing alliance, has decided to set up its own subsidiary for its Indian operations. Consequently, this marks the end of relationship between HSIL and Grohe (effective July 2006), which will have some implication on the company’s growth prospects. This is because the market, which Grohe’s products serve, is expected to grow at a rate of 30% to 40% per annum in the future, faster than the expected growth of domestic sanitaryware market.

Segment-wise performance…
  4QFY05 4QFY06 Change FY05 FY06 Change
Building products (Sanitaryware)
Revenue 533 698 30.9% 1,709 2,359 38.0%
% share 47.4% 50.7%   51.1% 53.2%  
PBIT margin 16.0% 19.2%   15.8% 19.2%  
Revenue 591 679 14.9% 1,636 2,075 26.8%
% share 52.6% 49.3%   48.9% 46.8%  
PBIT margin 14.1% 6.7%   10.6% 6.7%  
Revenue 1,124 1,377 22.5% 3,345 4,434 32.6%
PBIT margin 15.0% 13.0%   13.2% 13.3%  

In the glassware business, growth in user industries like FMCG, pharma, liquor and beverages seem to have aided HSIL’s growth during FY06. As a matter of fact, HSIL has a 13% share of the Rs 15 bn Indian glass container market and sells its products directly to institutional customers like Coca Cola, Pepsi, HLL, Pfizer and McDowell. The industry is operating at about 90% capacity and no new capacity is expected in the near future, which might have resulted into realisations being stable during the fiscal (though the management has indicated nothing on this front).

Higher power costs dent margins: Despite the strong growth in revenues, HSIL reported a 1.3% contraction in its operating margins during FY06. This was mainly a result of higher power and fuel costs, which increased from 18.5% of FY05 sales to 21.4% in FY06. Rise in these costs is seemingly on the back of higher global crude prices, whose derivatives like diesel and LSHS are used as feedstock in the glassware division. To pare the pressure on this account, HSIL has tied up for natural gas, which is expected to be available at its glassware plant at Hyderabad by the end of FY08.

Other income aids bottomline growth: Despite the contraction in operating margins, HSIL has reported a marginal expansion in its net profitability. This has been mainly aided by a substantially higher other income (109% YoY). For the fourth quarter, despite a higher other income, strong rise in tax outgo has led to a decline in net profits.

What to expect?
At the current price of Rs 159, the stock is trading at a price to earnings multiple of 17.6 times our estimated FY08 earnings. While FY06 performance has almost been in line with out estimates, we remain cautious with respect to valuations. Adverse effect on profitability on account of higher raw material costs was something that we had anticipated earlier. However, the end of tie-up with Grohe has come as a surprise. We maintain our ‘Sell’ recommendation on the stock.

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Feb 21, 2019 11:13 AM


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