HSIL’s reported standalone numbers for 4QFY2016 have come in mostly in-line
with our estimates. The top-line grew by 6.6% yoy to Rs596cr. The raw material
cost declined by 77bp yoy to 39.9% of sales while employee and other expenses
increased by 139bp yoy and 168bp yoy to 11.1% and 32.4% of sales,
respectively. As a result, the EBITDA margin declined by 230bp yoy to 16.6%.
Interest cost was lower by 49.9% yoy while tax rate was higher at 38.5% vs 30.8%
in 4QFY2015. Consequently, the bottom-line de-grew by 4.3% yoy to Rs38cr.
Building products’ performance under pressure; but long term prospects intact:
The quarterly numbers for the core Building products division were under pressure
reflecting overall sluggishness in the new construction market. However, the
Faucets division continued its strong performance which will likely drive the
revenue growth in the near term. On the profitability front, the company has
made incremental investments in setting up its sales channel for the Consumer
products division and increased its advertisement spend by roping in some
Bollywood celebrities to endorse products, coupled with initial losses in the
consumer products business which impacted segmental margins during the
quarter. However, the Management has indicated that excluding the cost for
development of sales channel, the EBIT margin for the core business is stable. We
believe that the margin for the segment should improve gradually once the
Consumer products division’s sales pick up. In the longer run, we expect HSIL to
leverage on its strong position/brand in the sanitaryware industry to capitalize on
improvement in the real-estate sector.
Packaging products’ profitability improves: Although the segment has posted
muted growth numbers on the top-line front, the profitability of the segment has
improved on account of a better product mix in terms of revenue composition,
better cost management, and due to decline in fuel prices. Going forward, the
Management has acknowledged the threat of further prohibition on liquor by state
governments but expects the damage to be somewhat offset by rising beer consumption.
Outlook and valuation: We has revised downwards our estimates for FY2017
for both Building and Packaging products segments but expect FY2018E to be
better on account of contribution from newer businesses as well as pick up in
volumes. Further, favorable pricing for the core Building products business should
also aid the company in delivering better numbers.
At the current market price, the stock trades at 15.0x its FY2018E earnings. We
have an Accumulate rating on the stock with a target price of Rs310.
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