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Margin sustainability in glass division remains key — retain LONG
HSIL’s 4Q topline grew 22% yoy to Rs 8.1bn, 5% higher than EE. EBITDA was up 52% yoy with EBITDAM expanding 273bps yoy to 14% on higher glass division margins. We expect revenue improvement for the glass division to continue over the next 2-3 quarters with favorable demand-supply dynamics. The building products division (BPD) would see better revenues led by the pipes division, while the consumer products division (CPD) would benefit from some products gaining market traction. We raise FY20/FY21 EBITDA estimates by 10%/11% to factor in better glass division margins and incremental CPD profitability. Retain LONG with a SOTP-based Sep’20 TP of Rs 325 (Rs 297 earlier), valuing BPD at 21x (unchanged) Mar’20 trailing EPS of Rs 11.2 and the packaging division at 5x EV/EBITDA ( unchanged).
Traction in CPD continues; core BPD biz remains muted:
BPD sales grew 26% yoy led by incremental contribution from the pipes division (4Q/FY19 revenue: Rs 623mn/Rs 1.33bn). Adjusted for this, core BPD revenues grew 5% yoy as sanitary-ware continued to see tepid demand recovery and higher competition. CPD revenues grew 41% yoy on increased traction in kitchen hobs, cook-tops & chimneys and water heaters. BPD operating margins (-219bps yoy) were hit by lower sanitary-ware contribution, though the pipe business posted profits of Rs 18mn. The CPD division continued to post profits (Rs 38mn). We expect (a) BPD revenue CAGR of 15% over FY19-FY22E on higher contribution from faucet-ware & pipes (expect pipe revenues to increase from Rs 1.3bn in FY19 to Rs 4.7bn by FY22E) and (b) CPD revenue CAGR of 33% over FY19-22E on better traction across product categories. BPD EBITM would remain between 13-13.5% on (a) higher contribution from lowmargin faucet-ware and (b) initial losses from the new pipes division while CPD should contribute positively ahead.
Glass packaging division to continue seeing improvement:
Packaging division sales grew 18% yoy on (a) demand returning from liquor players and (b) the beverage industry seeing growth improvement in 2H. Adj. EBITM came in at 14% as HSIL benefitted from 2-3 price hikes (totaling ~15%) taken in the last 3-4 months; this should also help sustain margins going ahead. With the third furnace also coming on-stream last quarter and with a key competitor struggling with debt restructuring issues, management is confident of gaining market share in this segment. Securities caps/closure divisions should contribute meaningfully from FY20E (FY19 revenues: Rs 290mn) and we expect PPD to post a 13% CAGR over FY18-FY21E.
We expect HSIL to post revenue/EBITDA CAGR of 16%/22% over FY18-FY21E. The demerger of consumer and building products businesses would take another two quarters for completion. We feel that a pure marketing & distribution company will have better ROEs and attract higher multiples vs. a manufacturing unit, thus benefitting shareholders. The pending de-merger could remain an overhang on the stock.
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