HIL to benefit from rising construction activity across the country
HIL Limited (formerly Hyderabad Industries Limited) is a part of CK Birla Group (US$1.6 billion conglomerate) and one of India’s top building material solutions company. Company’s key business is manufacturing of fiber cement sheets which are used as roof tops. This product id mainly catered to the rural and semi urban markets. Recently company diversified its product basket to walling blocks, plywood substitutes, high-quality pipes and fittings, and industrial insulation. It sells all its products under different brand names like Aerocon, Charminar and HYSIL.
Low industry demand in the last couple of years has led to stagnation in the business growth. The demand problem is of two types, one is migrating to alternate products or low demand from rural or semi urban areas due to poor monsoons. This is expected to reverse in the coming days because of good monsoon conditions and rising construction activity across the country.
Majority source of revenue for the company is fiber cement sheets which are used as rooftops. In FY16 this segment contributed 79% to the overall revenue down from 92% in FY15.
Company has done investments in the last 2 to 3 years and introduced new products to reduce its dependence on single product. The contribution of new products mainly AAC Blocks increased significantly from 0 to 15% in the last four years. The AAC block segment is growing at more than 40%. The gross block of the company has increased by 200cr in last two years.
In the last two years, company has commissioned 2 AAC Blocks plants (one in Haryana, One in Hyderabad), Second plant for Advanced polymers in Telangana, started commercial production of color steel sheets and Dry Mix(Wall Putty & Cement based grey mortar) plant in Haryana.
Company is trying to build Aerocon brand under which it has introduced new products likes building panels, pipes & Fittings, Fiber ceiling tiles, block jointing mortar, smart putty etc. Company is trying to offer complete building products solutions under one roof.
In the last year annual report, company has reported that it has applied for two patents in India related to – Non-Asbestos corrugated roofing sheets and Development of Flyash lime for AAC Blocks.
Company can leverage its existing nationwide distribution network to market and sell the new products. The new products have application in construction activities like buildings, infra etc. With the increasing construction activity across the country, all the products have potential opportunities to grow in the coming years.
New products will have better margins and more demand than fiber cement boards. The majority of the demand for fiber cement products comes from rural and semi urban areas where as the demand for new products will be mainly in urban and semi urban areas.
Company has shown better performance compared to industry players during first 9MFY17. Operating margins and PAT margins also improved during the same period. The demonetisation had less impact (7% decline in Revenue yoy) on the company’s business where other industry players like Sahyadri and Everest have seen their revenue declining by 15-25%
Company has not diluted its equity in the last 10 years. It is consistently generating positive cash flows from its operations over the last many years. The fiver year average cash flow for the company is at Rs.73cr.
Company with market cap of Rs.626cr is trading at 10x its TTM earnings and just above its book value. Company has low debt with D/E ratio of 0.3x, and interest coverage of 7.5x. It is also paying dividends consistently and the average dividend payout for the 5 years stood at 31%. AT the CMP of 838, the dividend yield of the company is 2.1%.
Company has very good working capital position. Inventory turnover is more than 5x. The receivable days are around 25 days and payable days are at around 50days. The overall working capital cycle is less than 50days.
Strong & Reputed management (CK Birla & Group), aggressive diversification into new products, commitment to build new brand, backed by strong operational and financial history are the positive factors for the company. The key things to look for going forward are new products contribution and brand building exercise. We have to see how fast the company can transition to fully diversified products company before any significant negative impact of fiber cement boards.