Value Pick Stock - HIL Ltd - ROI @ 90% in 7 Months

Dear Reader,

We are pleased to inform you that our Value Pick stock of Aug 2017 - HIL Ltd (BSE Code: 509675, NSE Code: HIL) which was released on 24th Sept'17 is giving as on date returns of 90% to our Value Picks members. We suggested Buy on HIL at price of Rs. 1155.35 on 24th Sept'17 with a target price of Rs. 1680. Stock has already achieved our target price and we advised our members to continue to hold the stock. HIL stock price made its 52 week high of Rs. 2278.70 on NSE yesterday and closed at Rs. 2195.95 giving absolute returns of 90% in period of 7 months.

Below is the summary of HIL Ltd shared by us under Value Pick stock - Aug'17 released on 24th Sept 2017.

1. Company Background:

HIL Ltd, formerly known as Hyderabad Industries and part of the C.K. Birla Group., is engaged in providing complete building solutions. HIL manufactures fiber cement sheets, AAC (Autoclaved Aerated Concrete) blocks, AAC panels, C – boards, ceiling tiles, among others. It is the market leader in the cement fiber sheets products with a share of 23%. Its asbestos products are marketed under the brand Charminar and non- asbestos products are marketed under the brand Aerocon. Both the brands have strong recall in the industry. Charminar - a leading fibre cement roofing solution for the last six decades. Aerocon—a Superbrand alongside HIL itself is a green product line that offer advanced building materials such as blocks, panels, c-board and ceiling tiles. HIL is also the only company in India to receive CE (Communaute Europeenne) certification to sell blocks in Europe.

The company has recently forayed into advanced polymer products manufacturing plastic plumbing products namely CPVC (Chlorinated polyvinyl chloride) and uPVC (unplasticized polyvinylchloride) pipes. The company also has operations in thermal insulation products which are used in fertilizer, petrochemical, power and cement industry.

HIL has 17 manufacturing plants across the country, supported by ~2,000 stockists, 3,500 retailers and 59 sales depots. Apart from these, the company also has four wind power units with an aggregated capacity of 9.35 MW in Gujarat, Rajasthan and Tamil Nadu.

HIL’s R&D department, recognized by the Department of Scientific and Industrial Research (DSIR), has developed and patented many products and processes. Further, green practices are built into every facet of HIL's operations including raw materials, processing, energy and end products. The company has received numerous awards, including the prestigious CII GreenCo GOLD award for creating a global benchmark in green practices at its plant in Golan, Gujarat, the largest blocks plant in Asia. It has also qualified for carbon credit under a United Nations programme for the manufacture of AAC blocks. Its products have been used in several Indian Green Building Council (IGBC)-certified buildings as well as top-rated Green Rating for Integrated Habitat Assessment (GRIHA) constructions.On a standalone level, the company achieved a net profit of Rs. 54.6 crore on an operating income of Rs. 1,053.6 crore during FY2017.

2. Recent Development: (as on 24th Sept'17)

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i) Favourable demand outlook for fibre cement sheets over the medium term

With 2 consecutive years of good monsoon, better farm output and more disposable income is expected in the hands of rural customers. Hence, roofing sheet business is expected to see good growth for the next two years.

Moreover, higher GST on steel sheets of 28%, compared with 18% on asbestos cement sheet, will give cement sheet manufacturers the extra edge. Also, the asbestos industry competes with steel roofs, as prices of steel sheets have risen in the past year due to higher steel prices, we expect HIL to be the direct beneficiary.

ii) HIL wins Asia’s Most Trusted Building Material Brand for 2016

HIL was bestowed with the title Asia’s Most Trusted Building Material Brand for 2016 by IBC INFOMEDIA (A Division of International Brand Consulting Corporation, New Jersey, USA).

This award recognizes companies / brands as Most Trusted in its industry category based on current year market standing. Its evaluation process is based on an Asia-wide, quantitative, qualified consumer survey, expert-analysis and attributes-based qualitative brand research.

3. Financial Performance:

HIL standalone net profit rises 17.57% in the June 2017 quarter

Net profit of HIL rose 17.57% to Rs 36.87 crore in the quarter ended June 2017 as against Rs 31.36 crore during the previous quarter ended June 2016. Sales declined 0.04% to Rs 427.48 crore in the quarter ended June 2017 as against Rs 427.63 crore during the previous quarter ended June 2016.

HIL standalone net profit rises 30.51% in the March 2017 quarter

Net profit of HIL rose 30.51% to Rs 5.86 crore in the quarter ended March 2017 as against Rs 4.49 crore during the previous quarter ended March 2016. Sales declined 0.85% to Rs 257.06 crore in the quarter ended March 2017 as against Rs 259.26 crore during the previous quarter ended March 2016.

4. Investment Rationale: (as on 24th Sept'17)

i) HIL is the market leader in asbestos cement sheets used for roofing, and its brand Charminar, which commands nearly 23% of the market and contributes near 70% to its total sales, can deliver double-digit growth for the next two years after a muted to negative sales growth during the past few years considering favourable business growth prospects.

ii) Over the years, HIL has used the ACS business as a cash cow and developed several other building products likes pipes and fittings, AAC blocks, tiles, wall panels, mezzanine flooring panels and partition blocks. Currently, it sells all these products under the brand Aerocon. These are businesses which are going to be the real growth drivers for the company and show exponential growth according to the management. AAC blocks or fly ash bricks business (15% of total sales) is growing at 50% for the past three years due to sand shortage. The company strategy of diversifying into non-asbestos products is likely to drive the growth going forward. We are positive on the company strategy of establishing itself as a one stop building solutions provider.

iii) GST rates for cement fibre sheets has come down from 28 percent to 18 percent. Moreover, higher GST on steel sheet of 28 percent which gives a great competition to company’s cement fibre roofing solutions is a strong positive for HIL. Moreover, with implementation of GST, unorganised segment will get consolidated and the market share of organised sector will increase which will augur well for HIL.

iv) HIL enjoys dominant market share in most segments. Despite the impact of demonetisation during Q3 of FY2017, the company has posted robust growth in earnings with strong cash flows during FY2017. Moreover, HIL debt to equity ratio is low with past capital expenditure being largely funded through internal accruals.

v) With the increasing thrust on rural development and rural housing, the fibre cement sheet industry is likely to grow at 6-7% CAGR over the next 2 years. Demand prospects for the near to medium term is likely to remain strong aided by expected growth in farm output with better monsoons, and loan waivers schemes in few regions. HIL being the market leader is in a sweet spot to harness the improved demand opportunity.

vi) The company has paid uninterrupted dividend since 2005. The dividend pay-out increased from Rs. 2.50 per share in FY2005 to Rs. 20 per share in FY2017 with rise in net profits. The dividend yield at current market price is 1.7%.

vii) HIL has demonstrated better financials over last couple of years which is expected to improve going forward. The company has registered sales CAGR of 6.6% and profit CAGR of 82.8% with ROE of 12% over last 3 years.

viii) As of Jun’17, promoter’s shareholding in the company is 40.99%, promoters have not pledged any shares. Promoter’s shareholding is same since March 2014. Institutions shareholding in the company is low at 2.22%.​

5. Key Concerns & Risks:

i) Rupee depreciation along with increase in raw material prices may impact the profitability of the company. In the event of adverse raw material cost, the profitability is likely to come under pressure.

ii) Good monsoon and improving rural income are the key drivers for the demand of roofing materials. Any weakness in demand can lower company’s utilization levels which in turns can impact the company’s profitability.

6. Saral Gyan Recommendation: (as on 24th Sept'17)

At current market price of Rs. 1155.35, HIL is trading at trailing 12 months price to earning multiple of 13.9. As per our estimates, HIL is expected to deliver PAT of Rs. 68.5 crores in FY17-18 and Rs. 83.9 crores in FY18-19 with annualized EPS of Rs. 91.8 and Rs. 112.5 respectively. At current price of 1155.35, stock is available at forward P/E multiple of 10.3X based on FY18-19 earnings which makes HIL a good investment opportunity considering better earning visibility and strong growth prospects for the industry. 

Considering company's performance which is likely to turn around strongly helped by domestic macro factors such as increasing thrust on rural development and rural housing, rising income of rural India, lowering raw material prices, GST implementation and a good monsoon, Saral Gyan team recommends "Buy" on HIL Ltd at current market price of Rs. 1155.35 for target of Rs. 1680 over period of 12 to 18 months.

Buying Strategy:

• 70% at current market price of Rs. 1155.35
• 30% at price range of Rs. 1000-1040 (in case of correction in stock price in near term)

Portfolio Allocation: 3% of your equity portfolio.

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Regards, 
Team - Saral Gyan