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An Ideal Re-Rating candidate!

* HHIL is a credible play on rapidly growing building material segment. HHIL is a leading manufacturer of Sanitaryware & Faucets in India. Incrementally company is gaining market share in plastic pipe segment as well with focus on plumbing segment. Company also has a sizeable presence in Consumer appliance biz wherein company offers vide range of products & possesses strong distribution network.

* Biggest beneficiary Sanitaryware & Faucet industry growth: The Rs180Bn industry is likely to grow by 10%CAGR over next 5-years & HHIL having prominent market share should witness healthy growth. Moreover, with growing consumer preference for branded products & company growing presence in Tier-II & III cities, HHIL should outperform industry growth by registering 14%CAGR over FY23-FY25E.

* Expanding presence in rapidly growing plastic pipe industry: HHIL via its brand “TRUFLO”, has registered stellar volume growth of 16% over FY20- FY23E & given company’s focus on plumbing segment & higher contribution of CPVC, HHIL’s ASP improved by 26% CAGR over similar period. With upcoming capacity & growing brand presence of TRUFLO, we reckon plastic pipe biz to report volume growth of 13%CAGR over FY23-FY25E. Further, with company’s higher share of value-added products, EBITDA/Kg should be Rs15 in FY25E

* Double digit margins on cards: With manufacturing & selling under same company, EBITDA margins are bound to improve. Incrementally the input cost is expected to remain steady, gas cost is contracting & company is enhancing the contribution of high margin products. Moreover, with worst of PVC volatility behind, plastic pipes biz should also report better profitability. Hence, we reckon EBITDA margins to come in at 11.6%/11.9% for FY24E/ FY25E. Therefore, EBITDA should grow by 31%CAGR over FY23-FY25E.

* Improving balance sheet & return ratios: HHIL’s debt stood at Rs7.11Bn as on FY23, which is largely pertaining to restructuring and working capital requirements. Though company plans to reduce debt by Rs1bn annually, we haven’t factored the same in our estimates. With improvement in margins, return rations are also likely to expand, hence we reckon ROE/ROCE to come in at 24%/24% in FY25E from 12%/18% in FY23.

* Lucrative Valuations: We expect HHILs Revenue/EBITDA/PAT to grow by 11%/31%/71% CAGR over FY23-FY25E & have valued the company at P/E(x) of 30x on its FY25E EPS of Rs26.8, arriving at a target price of Rs803, implying an upside of 44% from CMP. Hence, we initiate coverage on Hindware Home Innovation Ltd by assigning a BUY rating to the stock.

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