HSIL Q3 turnaround in building products division may trigger a re-rating

Despite an year-on-year (y-o-y) increase of 109 per cent in net profit, the market was unhappy with the second quarter performance of HSIL. It was because the company reported a 1 per cent decline in revenue from its core building products division. Its decision to exit the tiles business due to poor margins was the main reason for this fall in revenue. Efforts to reduce the trade receivables and excessive build up of inventory with the dealers was another reason for this fall. After the successful reduction in dealer inventory, the dealer despatches have re-started. Due to a good demand for its faucets, HSIL has also ramped up production at its newly-commissioned faucetware unit. Analysts are now expecting more than 20 per cent y-o-y revenue growth from the building product division in the third quarter.

Given that the sanitaryware and faucets industry is still at a nascent stage in India—around 70 per cent of rural households don’t have decent sanitary options— the long-term demand outlook remains robust. While increased aspiration levels will drive HSILs growth in urban areas, urbanisation and a shift from joint to nuclear families will drive its rural growth. The expected pickup in the economy should also help the building products industry in the coming years.



HSIL’s packaging product division continues to do well and is expected to see more than 25 per cent growth in revenue in the third quarter. Packaging division’s y-o-y third quarter earnings before interest, taxes, depreciation and amortisation are also expected to move up by 200 basis points due to better capacity utilisation and the impact of price hikes undertaken in the container glass division in the second quarter. Having undertaken capacity expansions, HSIL now plans to bring down its debt levels. It has already received shareholder approval to raise Rs 250 crore through equity and it is expected to be used to cut debt.

Reduced interest cost will also increase its net profit in the coming years. As per the consensus estimate, HSIL’s net profit is expected to jump from Rs 34 crore in 2013-14 to Rs 130 crore in 2015-16, an annualised growth of 95 per cent.

Though the counter was performing much better than the market, it started underperforming after the lacklustre second quarter numbers. A decisive turnaround from building products division in the third quarter can be the trigger for the counter. The current low valuation is another reason for this rerating— despite its high growth rates, it is still quoting only at 19 times its expected 2015-16 earnings per share.

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