HSIL`s container glass margins under pressure: CRISIL

CRISIL Research has come out with its report on HSIL . According to the research firm, the company commissioned the 0.3 mn units faucet capacity in Bahadurgarh, Haryana in October 2012 which will add to revenues in Q4FY13.

HSIL`s Q3FY13 standalone results were below CRISIL Research's expectations. Revenues grew by 15% y-o-y to Rs 3.9 bn and were in line with estimates. However, EBITDA margin contracted 452 bps y-o-y to 14.2% due to a sharp decline in the container glass segment's margin. As a result, PAT declined by 53% y-o-y to Rs 123 mn. Capacity expansion in the building products segment is on track. We expect this division to continue to witness momentum and stable profitability. However, the profitability of the container glass segment is expected to remain under pressure due to increase in competition and higher soda ash prices; the state of competition, raw material price movement and demand are key monitorables for the container glass segment. Driven by HSIL's leading position in both its business segments, we maintain the fundamental grade of 4/5.

Container glass margin declined due to high raw material prices, competition
The container glass segment's revenues increased 11% y-o-y. Sales volumes picked up and grew by 7% y-o-y compared to a decline of 2% and 10.7% in Q2FY13 and Q1FY13, respectively. However, EBIT margin declined to 3.9% from 14.3% in Q3FY12 and 10.9% in Q2FY13 due to:

• Lower utilisation rates as the company curtailed production following an inventory buildup in H1FY13 because of slow demand.
• Increase in raw material prices (mainly soda ash) and power and fuel costs, which the company was unable to pass on.
• Oversupply situation in the industry after commissioning of Hindusthan National Glass'

capacity in Andhra Pradesh, which is putting pressure on margins.
A price hike does not seem likely in the near term due to the over-capacity. Hence, we expect margins in this division to remain under pressure. Further, HSIL's volume growth could also get subdued due to intense competition and is a monitorable.

Building products strong sales, marginal drop in profitability
The building products segment's revenues grew by 20% y-o-y driven by (a) 8% increase in volumes, (b) 10% increase in realisations due to price hike and better product mix, and (c) revenue from newly launched brands Queo and Benelave. EBIT margin declined by 180 bps y-o-y and 40 bps q-o-q to 18.2% due to increase in power and fuel costs. We expect EBIT margin to return to normal levels of ~19% following a price hike of 4.5% in November 2012. Further, the company commissioned the 0.3 mn units faucet capacity in Bahadurgarh, Haryana in October 2012 which will add to revenues in Q4FY13.

Earnings estimates revised downwards, fair value maintained at Rs 185
We have lowered FY13 and FY14 earnings estimates due to lower-than-expected EBITDA margin in the container glass segment. We have rolled forward our model by one year to FY15 and maintain the fair value of Rs 185 per share. At the current market price of Rs 113, our valuation grade is 5/5.

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