Folks
This is my first “starting new thread” on valuepickr. Am very excited to be here and my work is greatly inspired by David Einhorn.
I am attaching my analysis on HIL
CMP : Rs. 560
Target Price : Rs. 1000 (12- 18 months)
One of the books that left quite an impression on me was Peter Lynchâs âone up on wall streetâ which espouses the idea of digging into the popular products and services that you see around you and then locate the company behind them.
So, it seems, when my friend who is a small time builder was complaining about how it is difficult to get aerocon blocks for constructing new houses, I decided to do a âscuttle buttâ and speak to a few people in the know, posing as a customer.
I spoke to 4 aerocon dealers in Chennai, Bangalore and in Delhi and the opinion was unanimous HIL has the largest set of factories across India â 13 factories, 45 warehouses and 2500 stockists. The brand Aerocon is almost synonymous with light weight, eco criendly concrete blocks and slabs (donât take my word for it â do a dip stick yourself) and the other brands are buildcon (owned by the Thapar group).
Governance & heritage:
HIL was founded 60 years back by CK Birla group to manufacturer asbestos sheets (yes, thatâs a legacy business) under the brand Charminar and then diversified onto other building products.
HIL has three strong brands :
Building products group (80% of the turnover):
_Charminar brand _( 65% of revenues and growing at 10-12%) of fibre cement roof sheets. These are the eponymous sheets that one finds in practically every factory shed, two wheeler stand across India. Again opinion is divided as to whether this should be still sold as the product is banned in other developed countries. The
_Aerocon blocks and pre-fabs _(~ 15% of the revenues and growing at 30 % +): Primarily driven by aerated, light weight concrete blocks which are now starting to replace red bricks everywhere
_HYSIL _: A calcium silicate insulation that is used in energy intensive industries to reduce heat loss and leakage. This is still a very small business
Growth drivers:
For the fibre cement industry, increased rural demand and an uptick in capital expenditure by industry will be a key growth driver. This is what I got for a quote â
âSirâa few years back there were other companies in this space which were also very strong - Everest industries was doing very well and Charminar was second largest brand. Of late, there are some quality issues with Everest brand of roofs and Charminar people are very aggressive in providing us branding support. Most customers these days ask for Charminar roofs. After election, we are seeing a 20% increase in offtake (since May â14).â
My estimate is that HIL has a near 25% market share in roofing solutions and has an installed capacity of about 1,000,000 tonnes which is roughly 20% higher than its other key competitor â Everest industries.
The moat in this business is the brand and the massive sales and distribution network that the company has built up over the last 60 years. Just ask any one in a village about a Charminar roof and you will know what the brand stands for.
Aerocon blocks :
This is a game changer in my opinion. Based the considerable time I spent on the field talking to a mason (who fills in walls with bricks/tiles) and with three builders (in Delhi and in Chennai). The dynamic is such that an Aerocon block which is about 60% costlier than its brick equivalent results ina 40% saving on unskilled labour (which is often as big as a cost as a raw material on filling up a brick wall). Add to that the superior thermal efficiency and the lesser cost involved in storage and transportation, the 15-20% premium commanded by an Aerocon block (in terms of overall cost of ownersip) is turning out to be positive in terms of overall perceived utility.
This, I believe is quite a tipping point and this is going to translate into runaway growth in the years ahead given the size of the red bricks market and how little of that has become organized. I think a Rs. 200- 300 Cr. Business in the next 2-3 years (a 1 cu. m block costs Rs. 140-150).
The moat in this business is the early mover advantage and the near universal recognition of the Aerocon brand coupled with the massive sales and distribution network where it is easy to upgrade capacity without having to worry about throughput.
Lubrizol tie-up
After having seen the success of Astral Polytechnik, HIL management has woken up to the size of the big opportunity in CPVC pipes (which are replacing steel pipes everywhere). I do not expect a lot of revenue traction from this but given the near universal brand recognition of Aerocon and the strong trust that the plumber/mason community has with the brand, it might be able to push some volumes through. I have assumed a revenue of about INR 500 Mn in two yearsâ time for this.
As always, Like howard Marksâ says, â Now. Who does not see that ?â and let me dive straight into the valuation.
Valuation:
I prefer to always look at balance sheet metrics like cash flows. Receivables etc. A deep dive into the annual report of FY 14, shows an OCF yield of 27% (INR 1,300 MM of OCF). With the company having invested heavily in capex in FY 12 (which was the reason for the decline in profitability in FY 13 and FY 14), one has the opportunity to own a valuable building materials franchise at less than 5 x FY 15 OCF and about 10-11 x FY 15 FCF.
The other thing I look for is an improvement in credit cycles and working capital and I was quite surprised to find that in FY 14, the company has considerably shortened its WC cycle and that has improved cash flows substantially.
Bake in the optionality of the Lubrizol tie-up and all of this points out to a 2-3 bagger in the next 18- 24 months.
At the CMP of INR 565, the stock is trading at 4 x FY 15 PE. For a company that is professionally managed, has a been a part of a respected conglomerate for 60 years and has possibly two of Indiaâs most valuable building materials brands, I think itâs a steal.
I do not do a lot of DCF, but a quick back of the envelope calculation points to a target price of INR 1000 based on a 8 x FY 15. Based on Q1 FY 15 results and EPS of INR 130-150 is eminently possible and given the head room for capacity utilization next year, an EPS of INR 200 for FY 16 should be a 70 % + probability event, as things stand.
Risks:
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Variation in global prices of chrysotile â key ingredient of fibre cement roofs.
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Change in regulation related to asbestos â looks unlikely in India, given the strong lobbying capabilities of the industry, led by HIL CEO himself.
Scuttlebutt done :
)- Spoke to 4 distributors/retailers of building material products across Chennai, Bangalore and Delhi
)- Spoke to a builder to understand the drivers of aerated concrete blocks
)- Spoke to a mason/contractor to understand the value proposition of concrete blocks versus red bricks
)- Dip sticks of brand recognition in a couple of hardware stores in rural India in Tamil Nadu
)- Inputs from asbestos sheets dealer
HIL.docx (17.5 KB)
but have you noticed these being used by builders instead of bricks ?