Haldyn Glass Gujrat Ltd

Stock Opportunities Untested - but worth a good look
1

FV - Re.1

CMP - Rs. 11.70

Sector: Glass Container and Packaging

Customer Segment :- Liquor and Foods & Beverages Industry, Pharma

Consistent dividend paying company

**Valuation on FY 11 Figures: **

PE - 4

EV i.e Market Cap / EBIDTA = 1.83

Current Market Cap Rs 62crores

Financial Highlights

Sales has grown by more than 20% CAGR in last 5 years to Rs. 156 crores in FY 11

Secured Debt of Rs. 30 crores ( approx )

OPM % consistently above 20%

NPM % consistently above 10%

**Other Important Points
**

Last August, one of the promoter companies having 10% stake i.e Gujrat Industrial Development Corporation sold its 2% stake in open market in a gradual manner. In a swift move, the other promoters bought out the balance 8% in an off market transaction when the then market price was around Rs. 17. According to me, this is a very positive move.

Q1FY12 Results

Sales - Rs. 41 crores

EBIDTA Rs. 9.81 crores i .e. 23%

PAT Rs. 4.89 crores i.e 12%

Concerns

There is no information available on current production capacity and future expansion plans. But given the growth achieved by the company, it seems that the management will be well tuned to meet future demands.

**
**

2

This was a brief synopsis of the company I had posted on theequitydesk back in oct 09.

HALDYN GLASS is listed only on bse, code 515147

Haldyn glass manufactures soda lime amber and clear glass containers for use in various pharmaceuticals, chemicals, liquor, beverages, beer and other industries. The product range is from 1ml to 2500 ml containers.

It has also started manufacturing clear glass vials and bottles for nail polish, cosmetics, toiletries, hair oil etc.

Its products are used for packaging by various companies like Cadila,Wyeth, Mcdowell,camlin, Cipla, and various other leading pharma companies. Besides it exports its products to countries like the gulf countries, African countries, Srilanka etc.

NEW DEVELOPMENTS

The company has recently expanded the capacity from 150 ton to 200 ton from Feb 09.

It has also commissioned captive power plant and waste heat recovery system.

All these factors have contributed to improvement in the profitability of the company which is visible from the results of the March 09 and June 09 quarters.

FINANCIALS
YEARMar 06Mar07Mar 08Mar 09 Q409 Q1-10
SALES60 686710426.4 31.2
NP4.8 886.82.54 3.39

EQUITY IS 5.38 crores. Promoters hold around 54 percent out of which they have pledged around 73%(as on June09) . Market cap is around 45 crores and debt for FY 09 was around 50 crores.

The company is expected to show substantial improvement in margins going forward and as is evident from last two quarters because of reduction of power cost and modernisation and expansion of production capacities.

POSITIVES

Good growth prospects after expansion and modernisation
Improved profitability

NEGATIVES

High debt burden
Promoter pledging
Looking at the last two quarter results the company is expected to post earnings of around 20-25 per share and currently available at around 80-85. The stock could be kept under watch for consistency in earnings.

3

Hi Sandeep

Having looked at this one after a long time it looks more intersting after the recent correction in the price from 20 odd to 11 levels.

And I think this has more to do with poor “perceived” March 11 quarter results where depreciation took its toll on net profit figures.

One thing I constantly see in this company is very high depreciation figures. Dont know if this is a good or a bad thing.

Another thing is that the promoter pledging seems to be coming down quickly which is a good sign.

This looks like a stable business with very good margins. Only thing we need to find out is where growth is going to come from and whether the company has managed to increase capacity from the earlier expanded capacity of 200 tons.

Anyone having soft copy of FY 11 AR?

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**

4

Hi Hitesh,

Thanks for your comments.

As far as depreciation figure is concerned, it seems to be reasonable at about 11% on the net block of around Rs. 80 crores.

Yes, i agree we need to find out expansion plans and future growth avenues.

But u will agree that at these levels, the stock offers immense margin of safety.

5

Just to put a few figures so that we get a better idea about the company,

LAST SIX YEARS FINANCIALS

Year

06

07

08

09

10

11

Q1 fy 12

Sales

60

68

76

115

142

171

45.54

OP

13.5

15.5

18.6

21.5

30.57

34.14

9.81

Int

2.75

3.21

2.63

5.84

5.95

4.65

1.15

Dep

3.1

3.6

4.73

6.97

7.76

9.86

2.05

NP

4.78

6.13

8

6.7

11

15.85

4.89

Last Six Quarters Results

quarter

Mar 10

Jun 10

Sep 10

Dec 10

Mar 11

Jun 11

Sales

38.71

39.65

41.89

44.82

44.89

45.54

Pbidt

6.51

8.73

8.4

8.56

8.52

9.81

Dep

1.61

1.94

1.95

1.96

4.01

2.05

Int

1.32

1.09

1.19

1.19

1.18

1.15

NP

2.21

3.9

4.54

4.64

2.78

4.89

FY 11 EPS WAS 2.95 PER SHARE.

Dividend per share is around 25 paise per share since past two years.

What is most interesting to note is that the managing director has been buying from the markets even in july. Twice I noticed from announcements that he had bought 10000 shares. So I think this one does look like interesting bet. I think it can be played for around 30-40% pop with targets of around 14-15 in 4-6 months.

6

Agree with your point of view. Also, by that time a couple of more quarters results will be out and we will have a fair idea on the future of the stock.

7

As per simple valuation parameters its valuations are very cheap.I think it is running at full capacities hence no growth in sales.Due to operational efficiencies net profits are stabilizing at 4-4.5 cr.Waiting for the annual report for future plans.If there will be any indications for capacityexpansions valuations will improve.As Hitesh told if its P/e enhances to 5 X its price will reach to 15-20.So Downside is capped as well as there is no upside.

8

On 24/10/2011, promoters have acquired further 17000 shares thorugh open market purchases

9

Haldyn Glass has declared its Q2 results today. Exactly similar to Q1 results in terms of sales, profitability, margins, etc.

But most importantly, debt has reduced from 24 crs in March 11 to 12 crs in Sept 11. The company has been very good in generating free cash flow for last few years and the trend continues. By end of Q3 the company should be debt free.

The company should end the year around Rs 4 EPS as compared to Rs. 2.95 last year. So we have a company virtually debt free, OPM% around 20%, NPM % around 13%, available at at PE of around 3, EV of 1.5.

No wonder promoters have been buying actively from open market. Also, all promoter shares pledged have been removed.

10

Sequential growth is muted for last 5/6 quarters. But Q3 is the best for the company and I have no doubt that the company will achieve an EPS of Rs. 4. Given the debt free status, high OPM and NPM%,free cash flow, it definitely deserves better valuation than PE of 3. Even if it is rerated to PE of 5 it gives a price target of 20 on FY12 earnings.

Add it to it the dividend yield of around 3%. Get paid while you wait.

11

Hindusthan National Glass is the biggest player in this segment with 55% market share. HNG has posted a turnover of 1500 crs in FY11 with an EPS of Rs. 10. Its quoting at PE of 17, PSR of 1. It has debt of 623 crores and OPM and NPM% at around 18% and 6%.

Being a market leader it definetly deserves better valuation than Haldyn but I just feel the gap is too wide. Plus HNG is always on expansion and acquistion spree resulting in negative free cash flow.

Comments invited since I feel this is one stock which deserves more attention from us.

12

H1 EBIDTA is Rs. 20 crs. Full year EBIDTA could be around 42 crs. Consisdering a desired interest coverage ratio of 5 and interest rate of 13%. the company has a debt capacity of Rs. 65 crores.

Current market cap is Rs. 63 crores. Here I am presuming (more or less certain) that Rs. 42 crs is a sustainable EBIDTA even without any growth. Also, the existing net debt of Rs.9 crs is likely to be retired by Q3 end.

Views invited as to whether I am right on above and also whether we need to consider EBIDTA or Free cash flow.

13

while i agree with your valuation analysis, I want to contest your conclusions on ‘promoter buying stock’…while true that he is buying small quantities in the open market and making disclosure announcements…you need to look at the SHP of the company over 2 years…promoter holding was was 55% a couple years ago…then went to 53 and now is at 52…its holding at that level for over a year…

the tidbits that he is buying doesn’t amount to much and should not be considered in your analysis.

-P

14

Gujarat Industrial Development Corporation ( GIDC ) was a co-promoter along with the Shetty Family. GIDC held around 10% of which they sold around 2% in open market at around 22 and the balance 8% was bought over by Shetty family in an off market transaction at Rs. 17. Hence, the promoter holding has fallen due to exit of GIDC. However, the stake of Shetty family has increased by around 10%. This is the reason the name of the company has now been changed to Haldyn Glass Lt dfrom Haldyn Glass Gujarat Ltd.

Hope you are now satisfied.

15

Guys,

I will be meeting the CFO of Haldyn Glass in the second half of next week. Hence, ia m in the process of framing some questions in order to have better understanding of the company. Would appreciate if fellow members can contribute as well. Mr. Hitesh Patel, if you can chip in? Some of them from my side will touch upon the following points though not necessarily in the same order: -

The current production capacity was last expanded in Feb 09 and at present is 1,08,000 MT per annum. Is the capacity fully utilised. What are the future expansion plans which will drive growth. How do you propose to fund the same?

Is there are a formal quality approval process followed by your customers before buying from you? Does this prevent other vendors from stealing your market share?

Liquor, Pharma and F&B sector are your major customers. What is the breakup of revenue between these?

What is the % of your customers annual requirements do you cater too?

What is the pricing policy? Is it locked in for certain period or is it ad hoc?

What are sources of RM procurement especially cullets?

Last September GIDC exited from the company by selliung around 2% stake in Open Market. The balance 8% was bought over by Haldyn Glass in an off market transaction. Was this a pre structured deal?

16

Glass container industry in India is worth about Rs. 4500 crores. HNG has 50% market share followed by Piramal Glass 15%. Haldyn glass has a market share of about 4%.

Is this sufficient reason for the stock to quote a PE of less than 3 when HNG is at 17PE and Piramal Glass is at PE of 13. Both HNG and PG have sizeable debt and the return and profitablity ratios are inferior to Haldyn. On PSR basis, both HNG and Piramal are at level of 1 whereas Haldyn is quoting at PSR of 0.33.

17

Hi Sandeep,

Looks interesting.

I wanted to highlight a couple of points, and wanted your opinion on those.

a) Why does the tax rate of this company keep fluctuating? In 2008-09, they had an effective tax rate of 21.2%, in 2009-10, they have an effective tax rate of 35% and in 2010-11, they have an effective tax rate of 19.8%. Why such a fluctuation in tax rates? And what will their effective tax rate be for FY12? (that will have a big impact on EPS).

b) Contingent liabilities of 11 cr. Of this, approx. 70% is related to taxes. 40% sales tax related. 30% income tax related. Do you have any idea of the resolution on these?

c) And existing net debt is not 9 cr. It is 20.7 cr (you need to consider both secured and unsecured loans). How did you deduce that this debt would be retired by end of Q3?

And with regard to your questions, it is not a debt capacity bargain. You can work a debt capacity bargain in a couple of ways. You need to take an average (or median) of EBIT (and not EBITDA) for the past 5-10 yrs and then calculate the debt capacity. The safer way would be to do this for free cash flow. Also, you need to include the (Cash - Debt) part to the equation for non-debt free companies.

Your responses to my questions would be appreciated.

Thanks
Kiran

18

Kiran,

I am posing these questions to the management, esp the one related to taxation. It is very difficult for us to have make a computation of income and the resultant taxation from the available information.

With regard to contingent liabilities, it doesn’t seem abnormal. But still we need to find answers.

In debt, I have ignored unsecured debt since it is more of Deposits and other advances. The amount repayable within a year is hardly a couple of lacs. We give importance to debt since it carries a cost and a repayment obligation, The same doesn’t seem to be the case here with unsecured debt.

Given the robust FCF generated, better prospects in Q3, I have presumed that debt will be substantially reduced by end of Q3. Will get in more details soon.

19

I think this co has its manufacturing plant in Gujarat while gujarat being a dry state, is their location not a disadvantage?

What are their growth plans? Other cos have been aggressive in expansion in this field.

1 Like
20

Ayush,

Yes, the manufacturing plant is in Vadodara, Gujarat. Gujarat state will have a disadvantage to the liquor manufacturers who are the end consumers of Haldyn Glass. I don’t think it will have any effect on Haldyn Glass.

As far as growth plans are concerned, there is nothing coming from the management. The question has already been posed to them and I am awaiting their response. But you must have observed that the company has been a steady grower for past 5 years.