Management Meet Update Sector: Glass Rating: BUY Target ...breport.myiris.com/MR1/HINNATGI_20111209.pdf · 12/9/2011 · HNG has three subsidiaries HNG Global GmbH in – Germany,

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Hindusthan National Glass & Industries Limited

Microsec Research 9 December 2011

Analysts: [email protected] [email protected]

Management Meet Update

Hindusthan National Glass Limited

Analysts:

Nitin Prakash Daga ([email protected])

Gargi Deb ([email protected])

Contact:

Board Line –> +91 33 3051 2100


Sector: Glass

Rating: BUY

Target Price: `203.50

Key Inputs from the Management Meet:

Ramping up production facilities Implementing cost cutting initiatives to mitigate the negative

impact of increase in raw material costs Ability to pass on input costs is an added advantage Depreciation of ` may have a negative, but limited, impact

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Hindusthan National Glass & Industries Ltd (HNG) is a leading container

glass manufacturer with 55% market share that caters the demand of

container glass in processed food, soft drinks, liquor, pharmaceuticals,

and cosmetics segments.

Key Management Inputs:

Ramp up of production volumes is likely to boost performance.

Undertaking following initiatives to limit the negative impact of

rising raw material costs:

Strategic procurement decisions

Use of innovative technology

Larger furnace sizes in upcoming facilities to enable

economies of scale

Seeking alternative sources to fulfill power requirements

at cheap rates

Incorporation of HNG power, a move towards backward

integration

Ability to pass on increased raw material costs is an added

positive

Depreciation of ` is likely to be negative

We valued HNG based on DCF and comparative valuation

methodologies. Our valuation reflects target price of `203.50 per

share, which reflects an upside of 38.4% over the prevailing Current

Market Price (CMP) of `147.00. On an annualized basis our target price

represents an upside of 25.6%.

HNG – Financial Performance at a glance

Source: Microsec Research, Company Data

Particulars (In INR Mn) FY2010 FY2011 FY2012E FY2013E FY2014ERevenue 13,834.45 15,535.23 21,590.93 31,728.98 37,047.12 Growth (%) 4.0% 12.3% 39.0% 47.0% 16.8%EBITDA 2,846.09 2,550.21 3,652.19 6,558.80 8,420.98 EBITDA Margins (%) 20.6% 16.4% 16.9% 20.7% 22.7%Net Profit 1,541.66 587.78 788.86 1,383.46 2,030.39 Net Profit Margins (%) 11.1% 3.8% 3.7% 4.4% 5.5%Net Profit Growth (%) 44.9% -61.9% 34.2% 75.4% 46.8%EPS 17.65 6.73 9.03 15.84 23.25 BVPS 120.73 131.62 142.77 158.61 181.86 P/E 13.37 30.80 16.27 9.28 6.32 P/BV 1.95 1.57 1.03 0.93 0.81 EV/EBITDA 9.21 9.59 9.13 5.82 5.38 ROE 14.6% 5.1% 6.3% 10.0% 12.8%

HNG – Capacity Expansion to drive performance

STRONG BUY Sector – Glass

BSE Code 515145NSE Code HINDNATGLSBloomberg Ticker HNGI IBReuters Ticker HNGI.BOFace Value (INR) 2.00Equity Share Capital (In INR Mn) 174.68 Average P/E 19.3xBeta vs Sensex 0.69Average Daily Volume 6,161 Dividend Yield 1.0%PEG Ratio NA

STOCK SCAN

Current Market Price (INR) 147.00Target Price (INR) 203.50Upside (%) 38.4%52 Week High / Low (INR) 308.0 / 121.5Market Capitalization (In INR Mn) 12,838.98

Market Data

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Company Overview

HNG is a leading container glass manufacturer in India. The headquarter of the company is located

at Kolkata. HNG is catering the demand of glass containers in the different segments such as

processed food, liquor, soft drinks, pharmaceuticals, and cosmetics. Among these, liquor segment is

contributing ~50% of the company’s revenue. HNG has three subsidiaries – HNG Global GmbH in

Germany, Quality Minerals Ltd and Glass Equipment (India) Ltd in India. Through the acquisition of

47.5% stake in HNG Float Glass Ltd, HNG entered into the real estate and auto glass segments.

HNG had six manufacturing facilities at Rishra, Bahadurgarh, Neemrana, Rishikesh, Pondicherry,

and Nashik with total capacity of 2710MT/Day, at the end of FY2011. These facilities comprised of

11 furnaces and 44 production lines with fully automated machines that minimize labor costs. In

addition, plants have graphoidal spray system for minimizing water use in the bottle manufacturing

process. Furthermore, by introducing Narrow Neck Press and Blow (NNPB) technology in Rishra and

Bahadurgarh plants, HNG is able to reduce bottle weigh by 15-35% that helps it to curtail the costs

of raw materials, transportation and improve margins. It has got ISO 9000:2000, ISO 14000/18000,

ISO 22000 and ISO 9001:2008 certifications for the manufacturing plants.

Silica, limestone, soda ash, dolomite and feldspar are the prime raw materials for the company. Out

of these, silica and soda ash account for 30% and 35%, respectively. To avail the benefits of price

advantages, HNG replaced 25% of its soda ash consumption with black soda and imports the

material mainly from Kenya. To mitigate the sharp rise in raw material prices, the company hiked

its product prices by 7% and 10% in the months of August 2010 and February 2011, respectively.

HNG – Subsidiaries & Associated company


HNG – Manufacturing facilities


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HNG: Price Trend of Silica Sand (`/MT) HNG: Price Trend of Soda Ash (`/MT)


Strategically located marketing offices in Delhi, Kolkata, Hyderabad, Mumbai, Bengaluru, and

Chennai along with more than 928 dealers help HNG to cater the demand of its products across

India. Moreover, HNG exports its products to 30 countries, which contribute 5% of its revenue.

While Bangladesh, Kenya, Nepal, Yemen form the majority of it, by entering into Brazilian market,

HNG is able to enter in lucrative cosmetic segment. It has wide range of customers in different user

segments. These customers include United Spirit, Coca Cola, PepsiCo, ITC, and Ranbaxy etc. By

addition of 196 new customers, HNG currently supply its products to 1,264 customers.

HNG: Market Presence HNG: Top 10 customers


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We met with corporate finance team of HNG. During the meet, we discussed about the details of

the company’s business including current developments, future expansion plans, and related

activities. Key highlights of the meet are as follows:

Capacity additions to support top line growth. HNG is planning to enhance its standalone capacity

from 2,930 Million Tons per Day (MTPD) in H1 FY2012 to 4,230 MTPD by April 2012. The expansion

is likely to be aided by two additional facilities at Nasik (650 MTPD) and Naidupeta (650 MTPD).

Furthermore, through various rebuilds across facilities and setting up of a new facility in the eastern

part of the country, the company plans to expand its capacity to 6,473 MTPD by FY2016E. A brief of

HNG’s capacity expansion plan along with the planned capital outlay is described as follows:


801

738

337

1,418 470 -

-

1,500

3,000

4,500

6,000

7,500

2012E 2013E 2014E 2015E 2016E 2017E

Capacity addition plan in MT/ Day

16,095

5,151

12,257

13,593

5,778 1,777

-

10,000

20,000

30,000

40,000

50,000

60,000

2012E 2013E 2014E 2015E 2016E 2017E

Planned capital outlay in ̀ Mn

Note: Due to shut down of Rishikesh furnaces total capacity may reduce in FY2017E. So capacity addition is shown as nil during the year.

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HNG has already spent `900 Crores on Nasik and Naidupeta facilities. In addition, it has closed

further funding requirements as well for these projects. The management indicated that the

company will fund its future requirements through a Debt-to-Equity (D/E) ratio of 70:30.

Considering HNG’s current D/E of less than 1, we believe that it will be able to smoothly fund its

future capital expenditure plans. The following exhibit represents HNG’s current and FY2017E D/E

profile.

HNG: Debt to Equity profile


Initiatives to limit impact of higher Raw Material costs bode well. HNG procures one of its main raw

materials Soda Ash from international markets as costs for the same in cheaper therein. For

another essential raw material Silica Sand, the company is planning to procure it from nearest

sources to save on transportation costs. Additionally, to improve quality of the same and making it

usable, the company is planning to introduce sand beneficiation units.

Besides, HNG was pioneer in introducing Narrow Neck Press and Blow (NNPB) technology in India.

NNPB allows it to enhance productivity by manufacturing up to 80% higher output units from same

quantity of raw material. Currently, units manufactured through the new technology constitute

~10-12% of the company’s total supplies, which is expected to increase to more than 15% in near

term. HNG also plans to aggressively push the products manufactured through NNPB technology.

HNG’s ability to pass on increased raw material costs to its clients also helps it protect margins. If

higher raw material costs persist for ~75-90 days, the company passes on the same to its clients.

Larger furnaces, strategic initiatives are likely to reduce per unit costs. While expanding its capacity,

HNG is installing large capacities at the desired locations. Large furnaces help the company reap

benefits of economies of scale and thereby lead to lower per unit cost of power. Furthermore, HNG

is planning to procure its power requirements through 132 KV lines at some of its plants. Moreover,

as per APIDC incentive, the company is likely to get power at a fixed rate for next five years at its

Debt36%

Equity64%

FY2011A

Debt58%

Equity42%

FY2017E

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Naidupeta facility. HNG, through incorporation of HNG Power Ltd, also intends to fulfill part of its

power requirements, in house. Additionally, implementation of new technologies in upcoming

capacities / plant rebuilds is expected to result in lower personnel and variable costs, going

forward.

Liquor and Beer are expected to retain lion’s share in top line. HNG generated more than 63% of its

top line from Liquor and Beer manufacturers during FY2011. The company’s management expected

the contribution from these two segments to increase over 67% by FY2017E. Except these two

segments, contribution from all other industries is likely to remain within single digits in FY2017E.

Soft Drinks manufacturers are expected to contribute ~9.7% of the top line in FY2017E followed by

Food (9.1%), Pharmaceuticals (8.9%), House Hold (1.8%), Toiletries (1.7%), and Vials (1.0%). An

overview of the changing customer profile of HNG, over the years, is depicted in the following

exhibit.

HNG: Expected customer segments


Depreciation of ` is expected to have a negative impact. As HNG imports its key raw material Soda

Ash, any depreciation of local currency adversely affect its performance. However, the company

generates ~5% of its top line through exports, which helps it offset some of the negatives.

Moreover, despite sharp depreciation of `, imported Soda Ash costs still remains lower by `2,000-

2,500 per ton.

-

100,000

200,000

300,000

400,000

500,000

600,000

FY2011A FY2012E FY2013E FY2014E FY2015E FY2016E FY2017E

Food Soft Drinks Beer Liquor Pharma Toiletries Vials House Hold

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Peers

Source: Microsec Research, Company Data: ROE represents the September quarter’s annualized ROE except HNG. HNG’s ROE represents ROE for FY2011

Valuation

We followed consolidated approach to value HNG based on Discounted Cash Flow (DCF) and

Comparative valuation methodologies. In comparative valuation, we pursued Price-to-Earnings

(P/E) and Price-to-Book Value (P/BV) methods. In addition, to arrive at a final valuation, we provide

different weights to each of our valuation methods. A description of valuation through each of the

adopted technique and consolidated valuation is as follows:

Discounted Cash Flow (DCF)

We utilized Weighted Average Cost of Capital (WACC) of 9.4% to discount the future earnings of

HNG. In addition, we applied a terminal growth rate of 1.5% for the earnings beyond FY2017E. We

arrived at the WACC with a Cost of Equity of 12.2%, post tax Cost of Debt of 8%, and Debt-to-Equity

of 1.97x. By adopting Capital Asset Pricing Model (CAPM), we arrive at Cost to Equity based on

Market Return of 11.2%, Risk Free Rate of 8.5% and Beta of 1.38x. Considering the low volumes of

the stock, we doubled the Beta obtained from Bloomberg. Furthermore, the Cost of Debt represents

expected interest cost after deducting the tax impact. With this, our DCF valuation reflects a target

price of `221.60 for the stock, which reflects an upside of 50.7% from the CMP of `147.00.

Sensitivity Table

Source: Microsec Research

Particulars HNG Zignago Owens Haldyn EmpireCurrency (Data in Mn) INR EUR USD INR INRRevenue 16,615.7 286.0 7,268.0 1,640.1 1,697.3 Growth(%) 13.83% -22.13% 7.34% 13.56% 6.87%EBITDA 2,709.1 82.9 1,104.0 366.8 542.3 EBITDA Margins (%) 16.30% 28.99% 15.19% 22.37% 31.95%Net Profit 705.9 36.0 204.0 173.9 308.1 Net Profit Margins (%) 4.25% 12.59% 2.81% 10.60% 18.15%Net Profit Growth (%) -38.66% 12.66% -15.77% 11.76% 12.02%EPS 8.1 0.5 2.4 3.2 51.3 BVPS 136.5 1.4 11.8 13.1 128.1 P/E 18.2 10.1 8.6 3.5 13.0 P/BV 1.1 3.3 1.7 0.9 5.2 ROE (Annualized Sept Quarter) 7.82% 34.78% -7.79% 27.78% 44.78%EV/EBITDA 7.1 5.2 6.6 2.1 7.8

WACC

Terminal Growth Rate

- 0.5% 1.0% 1.5% 2.0% 2.5%

7.4% 392.30 463.20 546.10 644.20 762.20 8.4% 248.70 300.10 359.00 427.10 506.60 9.4% 139.40 178.10 221.60 271.00 327.50

10.4% 54.00 83.90 117.10 154.20 196.00 11.4% (14.10) 9.40 35.30 64.00 95.90

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Price-to-Earnings (P/E)

Based on a targeted P/E multiple of 8.31x on FY2013E EPS of `15.84 per share we arrived at a

target price of `131.60 per share for the company. Our targeted P/E multiple for the valuation

reflects a 7.5% discount for FY2012E and a further 15% discount for FY2013E over the last three

year average P/E of HNG.

Price-to-Book Value (P/BV)

Based on a targeted P/BV multiple of 1.05x on FY2013E BVPS of `158.61 per share we arrived at a

target price of `166.70 per share for the company. Our targeted P/BV multiple for the valuation

reflects a 7.5% discount for FY2012E and a further 15% discount for FY2013E over the last three

year average P/BV of HNG.

The following exhibits reflect HNG’s price movement amid historical as well as expected P/E and

P/BV multiple bands over the stated period.

Source: Microsec Research, Bloomberg

Consolidated Valuation

Considering HNG’s earnings growth visibility, current market scenario, and relatively lower

similarity of peers’ operations with the company, we assigned 75% weight to the DCF approach

followed by 12.5% weight each to P/E and P/BV methodologies. With this, we arrived at a target

price of `203.50 per share for HNG, with a one and half year time horizon, 38.4% up from CMP of

`147.00 per share. This represents an annualized return of 25.6% over the CMP.

Source: Microsec Research, Prices in `

IN OUR EARLIER COVERAGE DATED 15 JANUARY 2010 WE ASSIGNED A TARGET OF `289.70 FOR HNG, WHICH HAS ALREADY BEEN ACHIEVED.

PLEASE FIND BELOW THE LINK FOR THE SAME:

http://www.microsec.in/Static/Pdf/634591269660114000_HNG%20%20Initiating%20Coverage%20Final.pdf

-

50.00

100.00

150.00

200.00

250.00

300.00

350.00

400.00

3/31/2009 3/31/2010 3/31/2011 3/31/2012 3/31/2013

5.0 x 10.0 x 15.0 x 20.0 x CMP

0.00

100.00

200.00

300.00

400.00

3/31/2009 3/31/2010 3/31/2011 3/31/2012 3/31/2013

0.75 x 1.25 x 1.75 x 2.25 x CMP

P/E BANDS P/BV BANDS

Consolidated Valuation

Particulars Target Price Weight Share in Target

Price

Value based on DCF Approach 221.60 0.75 166.20

Value based on P/E Approach 131.60 0.13 16.50

Value based on P/BV Approach 166.70 0.13 20.80

Consolidated Value 203.50

http://www.microsec.in/Static/Pdf/634591269660114000_HNG%20%20Initiating%20Coverage%20Final.pdf�

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Risks

As glass industry is a capital intensive industry and several regulatory approvals are

required to set up new facilities, any delay in execution of new facilities may lead to

deferment in addition of new capacities. This factor may lead HNG to underperform our

expectations thereby could trigger a downward revision of estimates.

Rupee Depreciation

Rising cost and unavailability of raw materials could hamper profits as the company does

not have any long term contract for raw material procurement.

Technological obsolesce may affect quality and productivity.

Growing alternative forms of packaging such as PET bottles, aluminum cans increasingly

being used by food & beverage manufacturer and blister packs for tablets and capsules may

stagger the demand for container glass.

Financials


Income Statement (in INR Mn) FY2010 FY2011 FY2012E FY2013E FY2014ERevenue 13,834.45 15,535.23 21,590.93 31,728.98 37,047.12 Increase / (Decrease) in Stock 14.41 (37.08) 181.77 682.57 378.74 Materials 4,008.57 4,255.18 7,054.75 10,487.91 11,859.64 Manufacturing and Other Expenses 6,994.19 8,692.77 11,065.76 15,364.84 17,145.23 EBITDA 2,846.09 2,550.21 3,652.19 6,558.80 8,420.98 Depreciation 902.65 1,040.79 1,487.15 2,314.05 2,395.84 Transferred from Revaluation Reserves (33.28) (32.40) - - - EBIT 1,976.72 1,541.82 2,165.03 4,244.75 6,025.14 Interest and Finance Expenses 472.34 511.50 1,197.08 2,394.28 2,451.83 Other Income 346.57 180.17 22.43 34.90 80.15 Profit Before Tax 1,850.95 1,210.49 990.38 1,885.37 3,653.46 Income Tax 309.36 344.81 - 199.63 1,169.65 Share of Profit/(Loss) in Ass for the yr - (183.20) (201.52) (302.28) (453.42) Share of Profit/(Loss) in Ass for 2009-10 - (94.70) - - - Net Profit before Minority Interest 1,541.59 587.78 788.86 1,383.46 2,030.39 - Minority (0.07) 0.01 - - - PAT After MI and Share of Associates 1,541.66 587.78 788.86 1,383.46 2,030.39 Basis and Diluted Earning per Share 17.65 6.73 9.03 15.84 23.25

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Balance Sheet (In INR Mn) FY2010 FY2011 FY2012E FY2013E FY2014ESOURCE OF FUNDS 16,911.44 18,611.73 34,282.48 42,806.63 51,487.75 Share Capital 174.68 174.68 174.68 174.68 174.68 Reserves and Surplus 10,370.46 11,320.81 12,294.29 13,677.75 15,708.14 Shareholders' Funds 10,545.13 11,495.49 12,468.97 13,852.42 15,882.82 Loan Funds 5,666.45 6,405.17 20,685.20 27,269.84 32,943.76 Secured Loans 5,495.38 6,244.12 20,524.15 27,108.79 32,782.71 Unsecured Loans 171.07 161.06 161.06 161.06 161.06 Minority Interest - 0.06 0.06 0.06 0.06 Deferred Tax Liabilities (Net) 699.87 711.02 1,128.26 1,684.31 2,661.12 APPLICATION OF FUNDS 16,911.44 18,611.73 34,282.48 42,806.63 51,487.75 Gross Block 16,699.86 17,781.70 36,983.47 40,714.67 42,779.47 Less : Accumulated Depreciation 5,594.32 6,301.42 7,788.57 10,102.62 12,498.46 Net Block 11,105.54 11,480.28 29,194.90 30,612.05 30,281.01 Capital Work in Progress 274.68 2,242.27 - 1,252.00 10,569.60 Investments 1,446.15 1,472.81 2,840.40 3,025.40 3,465.40 Current Assets, Loans and Advances 6,802.71 6,183.55 8,566.46 12,570.90 13,980.52 Inventories 2,223.33 2,325.74 2,751.33 3,691.24 4,286.45 Sundry Debtors 2,200.97 2,480.76 3,395.17 4,168.64 4,822.00 Cash and Bank Balances 57.35 49.36 174.63 1,933.25 462.72 Loans, Advances and Other Current Assets 2,321.06 1,327.68 2,245.33 2,777.78 4,409.35 Less: Current Liabilities and Provisions 2,717.64 2,767.17 6,319.29 4,653.71 6,808.78 Current Liabilities 1,679.14 2,158.49 6,319.29 4,653.71 6,808.78 Provisions 1,038.50 608.69 - - - Net Current Assets 4,085.07 3,416.38 2,247.18 7,917.18 7,171.74

Cash Flow (In INR Mn) FY2010 FY2011 FY2012E FY2013E FY2014ENet Profit Before Tax & Extraordinary Items 1,850.95 1,210.49 990.38 1,885.37 3,653.46 Dep 869.37 1,008.39 1,487.15 2,314.05 2,395.84 Interest Exp 472.34 511.50 1,197.08 2,394.28 2,451.83 Provision for Loss on Derivative Transactions 30.52 46.94 (201.52) (302.28) (453.42) Operating Profit Before Working Capital Changes 3,040.55 2,850.57 3,473.09 6,291.42 8,047.71 Loans & Advances 215.45 364.52 (917.65) (532.45) (1,631.57) Trade & Other Receivables 73.30 (285.45) (914.41) (773.47) (653.36) Inventories 55.11 (102.41) (425.59) (939.90) (595.22) Trade & Other Payables (332.91) 349.33 3,552.11 (1,665.57) 2,155.07 Net Cash Generated by Operating Activities 3,051.50 3,176.56 4,767.56 2,380.03 7,322.63 Direct Taxes Paid (192.68) (412.47) - (199.63) (1,169.65) Net Cash From Operating Activities 2,858.56 2,764.21 4,767.56 2,180.40 6,152.98 Purchase of Fixed Assets & Changes in CWP (2,424.79) (3,223.80) (16,959.51) (4,983.20) (11,382.40) Purchase of long term investments (350.00) (379.88) (1,367.59) (185.00) (440.00) Net cash from investing activities (2,939.49) (2,860.25) (18,327.10) (5,168.20) (11,822.40) Proceeds/(Repayment) from LT borrowings (Net) 504.63 275.71 14,280.03 6,584.64 5,673.92 Proceeds/(Repayment) from ST borrowings (Net) 80.16 454.94 601.85 556.06 976.81 Interest paid (459.31) (509.36) (1,197.08) (2,394.28) (2,451.83) Net cash from financing activities 20.70 88.06 13,684.81 4,746.41 4,198.90 Net changes in cash and cash equivalents (60.23) (7.99) 125.27 1,758.61 (1,470.52) Opening cash and cash equivalents 117.57 57.35 49.36 174.63 1,933.25 Cash and cash equivalents at the end of the year 57.35 49.36 174.63 1,933.25 462.72

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MICROSEC RESEARCH IS ALSO ACCESSIBLE ON BLOOMBERG AT <MCLI>

RecommendationStrong Buy >20%Buy between 10% and 20%Hold between 0% and 10%Underperform between 0% and -10%Sell < -10%

Expected absolute returns (%) over 12 months

Ajay Jaiswal: President, Investment Strategies, Head of Research: [email protected]

Fundamental Research Name Sectors Designation Email ID

Nitin Prakash Daga IT, Telecom & Entertainment AVP-Research [email protected]

Naveen Vyas Midcaps,Market Strategies AVP-Research [email protected]

Gargi Deb Agriculture & Pharma Research Analyst [email protected]

Sutapa Roy Economy Research Analyst [email protected]

Sanjeev Jain BFSI Research Analyst [email protected]

Anik Das Mid Cap Research Analyst [email protected]

Neha Majithia Mid Cap Research Analyst [email protected]

Prabir Adhikary Metal Research Analyst [email protected]

Soumyadip Raha Mid Cap Executive Research [email protected]

Saroj Singh Mid Cap Executive Research [email protected] & Derivative ResearchVinit Pagaria Derivatives & Technical VP [email protected]

Ranajit Saha Technical Research Sr. Manager [email protected] Desk

Dhruva Mittal Institutional Equities Sr. Manager [email protected]

PMS Division

Siddharth Sedani PMS Research AVP [email protected]

Research: Financial Planning Division Shrivardhan Kedia FPD Products Manager Research [email protected] Subhabrata Boral Research Support Asst. Manager Technology [email protected]

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Management Meet Update Sector: Glass Rating: BUY Target ...breport.myiris.com/MR1/HINNATGI_20111209.pdf · 12/9/2011 · HNG has three subsidiaries HNG Global GmbH in – Germany,

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