HIL – Eco (onomic) friendly way to play rural prosperity in India

Key takeaways, Concall highlights

The Roofing Solutions division

 HIL’s roofing volumes in Q4 grew 14% (industry growth: 9% in FY21)
backed by healthy rural demand. In FY21 the company raised its market
share 1%.

 Asbestos-fibre mining has been allowed by a Brazilian Court and supply
to HIL was begun three quarters back. The advance payment required,
however, will keep working capital high. Further, the quality of the fibre
is not so good, leading to an increase in material costs. The R&D team
is working on this. Any low-cost benefits will show in Q2 FY22.

 The division operated at 77% capacity, with demand continuing to be
encouraging. Despite Covid-19 hitting rural areas, demand in April was
good backed by efforts to create consumer pull (from distribution
push). Management expects demand slowdown, if any, will be
temporary.

 Management expects single-digit revenue growth, backed by sound
demand due to a good monsoon/harvest and the greater emphasis on
farmer income in the Budget. Management talked of maintaining
margins at current levels, backed by price hikes (Rs3-4 in Q4, Rs2-3 in
Q3 FY21) and declining fibre prices (from Q2),which had already
peaked. The raw material cost rise (cement/flyash) and discretionary
expenses returning to pre Covid levels will be offset by price hikes.

 HIL continued looking at and evaluating unlocked pockets in newer
regions and rural areas. Besides, it capitalised on opportunities at hand
such as roofing for Covid centres and hutments for labour built by the
government.

 The 60,000-ton Faridabad unit for non-asbestos roofing sheets
commenced in Jan and has sold 7200 tonnes till now. Management aims
at over Rs.1bn revenue in the next 2-3 years.

The Building Solutions divisions

 The building solutions division operated at 90% capacity. Its revenue
was split 70:30 between blocks and panels. With efficiency and reputed
brand names, both did well in the new tier-II and -III cities.

 On 28th April, the Odisha government’s State Level Single-Window
Clearance Authority (SLSWCA) approved its application to set up a
manufacturing plant for blocks (150,000 cu. mtr), panels (36,000 ton)
and boards (30,000 tons) at Balasore, Odisha. Capex would be Rs820m
and generate Rs1.1bn revenue. The plant is expected to commence in
Q1 FY23. This would result in a 20% increase in capacity for blocks,
and 50% for panels and boards.

 With an 18%-19% market share in AAC blocks and ~62% in panels,
HIL is the market leader. 50% of the AAC blocks market falls in the
regulated or formal sector. Management expects demand for AAC
blocks to grow due to rising construction in tier-II/-III cities. With
operations already in the south, west and north, the company is now
setting up a plant in the East.

 Panels is a Rs1.2bn market in India; HIL’s share is Rs600m-700m. The
division benefitted from sales to Covid centres and labour hutments,
which brought 42% to panels revenue in Q4.

 The cement boards market is of Rs3.5bn. HIL is very small player.
Management said HIL can produce boards at its Faridabad unit and
from its roofing plant in the east during the off season.

The Polymer Solutions Division

 Polymer Solutions capacity utilization: Faridabad and Hyderabad units
100%, the Golan unit 45%. With its present capacity in plumbing
solutions, the company aims at Rs4bn revenue in coming years with a
15% EBITDA margin. Having operations in the north, west and south,
HIL started addressing the east through supply from existing factories.

 The pipes market is 80-90% B2C. HIL is well positioned to reach
various pockets of India through Charminar, its roofing sheets. In tier-
II and -III cities, most stores earlier sold GI pipes with roofing sheets.

 With less interest from big distributors who already have big brands,
HIL is focusing more on plumber connect. The pipes industry works
on brand and quality. Management says HIL is the only company with
the Birla pipe brand and the current focus is to get the right SKUs at
the point of consumption at the right price. Further, the quality is
similar to Aashirwad pipes

 Wall putty is a negative working-capital business. The company has two
putty manufacturing plants, in Jhajjar and in Golan. Its operations cover
the north and west and it is now aiming to go all-India. For this, it has
started outsourcing the material, packing it under the HIL brand and
marketing it in the east and south.

Parador

 With most of Europe out of lockdown, Parador has seen a significant
improvement in performance over the last few months. Re-opening of
trade routes has furthered the company’s expansion outside Europe
(North America/Nordic countries/Spain/France/ Switzerland etc.).

 Parador grew 20% (in rupee terms) and is expected to grow 10% vs 3-
4% in the past for European companies, doubling revenue from €170m
to €300m in the next 4-5 years. Its EBITDA margin was 12%.
Management talked of a sustainable EBITDA margin of 10% (7.5%
when Parador was acquired). The RoCE is 14%.

 The share from Germany and Austria rose 10-12% due to the lockdown
and travel problems for other countries. The revenue mix normally is
Germany and Austria (50%), Europe (25%) and the Rest of the World
(25%). The China JV contributed €3.5m revenue.

 The HI FY21 performance is expected to be impacted by non-
availability of HDF boards and higher raw-material costs.

Others

 HIL’s goal is to become a $1bn company by FY26 with Parador and its
India operations to double. Pipes revenue would reach Rs10bn (vs
Rs3.6bn in FY21), building solutions revenue would grow Rs1.1bn due
to the Odisha expansion and added products, and Rs10bn through
inorganic expansion.

 HIL continues to look for newer markets to unlock and capitalise on
opportunities, so as to reduce the risk to business in case of further
lockdowns.

 The business has not yet been impacted by the second Covid-19 wave
as manufacturing units are still functioning, and most states and cities
have not implemented full lockdowns.

 The company has improved upon the various initiatives undertaken last year, such as zero-based planning, daily huddle meets, digital connect
with customers and daily cash-flow monitoring.

 During FY21 and Q4 FY21, it reduced debt by Rs.3.32bn and Rs.910m.
It repaid in two years the debt taken for the Parador acquisition (vs the
scheduled six years) Net-debt-to-equity was 0.41x at 31st Mar’21 (1x at
end-Q4 FY20), which management expects to maintain.

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“While ICRA notes that the management has been putting in conscious efforts to de-risk the business risk profile as reflected in the decline in the revenue share of asbestos to 30% in FY2021 from 71% in FY2018, the PBT share of asbestos linked business remains significant at 62%”

Note from ICRA credit rating report says PBT of asbestos linked business is at 62% while revenue is around 30%. While company is sharing segmental revenue in investor presentation, segmental profitability is not shared.

Is profitability of other segments is so poor… especially Parador and piping segment ?.. or is it that i’m missing something ? Pls share your comments !

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The EBIDTA margin in PARADOR stands at 12% now, an improvement from 7% before the acquisition by HIL.

Excerpt from the May2021 Concall:

Jigar Sah: Going forward, what would be the outlook? Will you be able to continue the
EBITDA margin of 11%-12%?
Dhirup Choudhary: For a safe consideration, I will say consider for Parador a 10% EBITDA and a
higher single digit growth, but the team will try to do far better than that.”

HIL.came out fabulous set of Q1FY2 numbers today. Revenue growth at Rs. 983 Cr (41.9% YoY)
EBIDTA: Rs. 162 Cr (61.6% YoY)
Margins: 16.5% (vs YoY 14.5%).
PAT at 111.5 1 crores against 57.44 (YOY), against 45.44(QOQ).
EPS for the quarter stands at 132.84.
If HIL continues to deliver such numbers in coming quarters as well, there is no stopping HIL’s bull run. It shot up intraday to 6550 after results from lows of 5148. In the mast two weeks, it started moving up from lows of about 4200 to 5500 levels probably anticipating food numbers .
With additional revenues from the acquired German flooring solutions provider Parador Holdings, HIL has become niche player in roofing and flooring solutions provider.

Disc: Invested and may be biased in my opinion.

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Hello everyone… Just a newbie here and enjoying the amount of research and brain storming everyone has been putting up here.

I came across this company recently and the numbers here look interesting (Haven’t been able to do a detailed business research yet).

However, the past week looks like the share price had been beaten badly. Anyone having any information on the same? Also read on Moneycontrol forum that the CEO has dumped his holdings… Any insight on that?

Right. These are ESOP shares but very surprising for CEO and MD to sell entire stake and reduce it to zero. Isnt a director required to hold minimum qualification shares?

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India Ratings Upgrades HIL to ‘IND AA’/Stable; Withdraws Bank Loan Rating
From the rating details, it looks like roofing segment’s share of EBIT has further reduced to 58% and flooring segment’s share has increased to 30%

HIL’s investments in flooring and polymer solutions have reduced its dependence on roofing solutions. With robust growth in Parador’s profitability, HIL’s product mix has improved with a steady rise in the flooring segment’s contribution to HIL’s EBIT (FY21: 30%; FY20: 26%; FY19: 5%) while reducing the dependence on the roofing solutions segment (58%; 67%; 86%).

The pledged shares have been released. 79780262_B64E_4B49_9409_2B07B7C77BA3_193825.pdf (2.7 MB)

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Wanted to know forum’s view on current HIL prospects as an investment.

  1. As a building material theme I like their good product line - pipes, roofs, wall putty, bricks,wooden flooring etc.Impressive product diversification.
  2. Nice fundamentals- toppline,profits,ROE,ROCE
  3. Available at 12 PE and 0.3 PEG
  4. CK birla group company so CG wise good
  5. Moving away from asbestos roof to non-asbestos. Earlier asbestos share was 50-60%, now it is 30% and they want to move to non asbestos fully.
  6. CEO mentions 1 Bn USD sales by 2025, that makes a sales CAGR of around 20%.

Concern: only concern I have is that CEO offloaded his major chunk of ESOPs worth approx Rs 10 crores in august at peak price of 6500 odd. Not sure how to take that. But my sense says that if he is so hung ho about 20% business growth then he could have used other channels if at all he wanted money for some purpose.

Please let us know your views.

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The story of HIL is pretty interesting and the Parador acquisition seems to have worked out well. The revenue of flooring solutions have gone up from 725 crores in 2018 to 1481 crores in 2021. That’s roughly 20% growth. The margins also seem to have gone up from 3% to 6%. The revenues don’t seem like one-off incidents and the growth has sustained for few years. My reading is, a money making machine has been served to HIL on platter. Would like understand the circumstances under which Parador had to sell their business to HIL. I am not questioning the reason for sale but more of trying to understand the facts here.

On the red flags: I see the company making 100s of crores of investment in financial instruments. Would like to understand why a growth company wants to invest in market (when the index can give you 10% and your business can make 20% why is this not being re-invested). I have cross-checked with other successful companies like Astral, Prince Pipes and found that their exposure to market is minimum.

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Weak Q2 results and the management was honest enough to admit it on the call.

• 8% increase in revenue YoY. 32% drop in EBITDA yoy.
• Operating margin of 8% vis-à-vis 13% Q2 FY 21
• Net profit down to 26 cr vs 94 cr YoY
Q2 results

Key notes from the earnings call
Flooring business
• Degrowth in Parador. Flooring division has seen 40% increase in price.
• Globally there is huge shortage of MDF & HDF – more of a transient phase. Due to sudden increase in demand for MDF among furniture clients.
• Had to let go of 25 mn order in H1 FY 22 owing to raw material shortage. Prices have gone up 12 to 13%.
• Sold more of non-MDF based flooring solution to clients in order to deal with the challenging situation. Margin profile of alternative product is not good & not sustainable.
• From next 2 quarters perspective - have been able to muster up Raw material and next quarter will be better than Q2 on profitability. Lowest point of the bell curve has been reached.
• Sourcing: Primarily source HDF -MDF from West Europe, Eastern Europe & China. Huge freight cost impact if they were to source from India or South east.
• Haven’t lost any market share. Degrowth is due to shortage of raw material which has affected other players as well.
• Nothing wrong with the brand or the acquisition synergies as such. Parador had an exceptional year last year. Issue is more transient in nature
• Do not see merit in having investment in MDF plant (backward integration) –
o Putting up new capacity for MDF in Europe requires 125 to 150 mn Euros. Will have to keep finding clients to sell if there are excess capacities. Many plants have closed in Europe in the recent past since they were stuck with excess capacities & weren’t able to sell those.
o Do not see the problem to be a structural one and its more transient in nature.

Roofing business -
• Did not face any margin pressure. Fibre business is well poised.
• Charminar Fortune: Can make a thumping statement on superior product quality. Cited the case of markets where Fortune non-asbestos sheets have sustained heavy rains whereas other roofing brands got severely impacted.

PVC Business: 50% growth in PVC business. Almost 50% of it due to volume growth and another 50% is due to price increase.
Margin guidance – Worst is over in Q2. Q3 is likely to be tough but likely to be better than Q2 .
Capacity utilization – 65% in roofing. 55-60% polymer solution; 90% building solution, 70% in Parador.

Disc : Invested

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I recently discovered this company while going through screener for undervalued good quality companies.
I have started researching the company and till now I have the following observations:

Positives:

  1. The company looks undervalued. The free cash flow it is able to generate every year tells us that the intrinsic value of the company is much more than what it is currently available for (Rs. 3931 as on 26-04-2022).
  2. The de-risking of business by diversification into non cement asbestos products.
  3. The Corporate Governance looks solid. Mr. Dhirup Roy Choudhary very well addresses every queries of investors during concalls. The transparency is commendable.

Negatives:

  1. The OPM is low. The management reiterates about the company being a leader in the industry but the fluctuating and lower margins tells that it is price taker rather than price maker.
  2. I’m skeptical about whether so much diversification will affect the margins in a negative way.
  3. The CEO talks in a very humble way during the concalls and sounds very ethical but the dumping of shares worth Rs. 10 cr at peak price does not give me comfort as an investor.
  4. As someone has already pointed out, I see huge amount of money being invested in capital market. Why not reinvest the money in business or repay the loans outstanding?

While going through the Annual Report 2021, under Related Party Transaction, I found one transaction which I was not able to get:

Upon searching, I couldn’t find what exactly CK Birla Corporate Services Limited does. Even in the website of CK Birla group, there is no trace of this company. HIL is paying 4-5 cr annually for “professional services” which I failed to understand. If anyone has any idea please share.
I’m still reading about the company mainly because of valuations.

Disc: Initiated a tracking position.

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As per my understanding these are the Advisory/Consulting fees the company pays.

You have nicely summarized the company. The market is pricing this at a low PE probably because a lot of their PAT appears to be asbestos related. The diversification and goals of becoming a “total housing solutions provider” is commendable, but commodity inflation remains an overhang. Paradox acquisition has not fully blossomed yet.

Keenly watching, will start nibbling if the diversification start panning out

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Notes from the Q4 call:

Business Overview
• Building Solutions business grew by 20% year-on-year and 9% QoQ
• Flooring solution grew by 16% YoY. Orienting the Parador business for a global growth curve.
• Polymer Solution business grew by 13%. PVC prices have come down in this qtr leading to inventory loss.
• Debt reduced by 122 cr in FY 22

Roofing business
• Charminar – volumes have shown improvement .
• Raised price by 6%. Several headwinds on RM cost – fiber cost, cement cost, etc . Inventory levels were kept higher, to be better prepared for what the mgmt. estimates to be another bumper Q1…
• Raised prices by another 8 to 10% this quarter.
• Improved market share from 19.5 to 22% in 1 year. Some other players are increasing capacity – that is not a problem for HIL.

Flooring / Parador
• Q4 FY 22 has been the highest revenue for Parador. Segment had 16% growth in revenue.
• Strong fabric in place for Parador. Currently at 180 mn Euro turnover. Were at 140 mn Euro 3 years back. Aiming to reach 350 mn Euros in next 3-4 years.
• 16 to 17 mn order backlog.

Challenges faced in Parador
HDF, MDF availability issue has been sorted out, however new challenges now, due to the ongoing war. Ukraine supplies almost 40% of 3mm and 4mm thick Oak - global supplies of Oak /lamellas . 80% of lamellas that Parador buys, comes from Ukraine. Doing everything possible to counter this challenge.

Competitive intensity in Europe -
Germany – Parador is #1 in flooring. Very strong in Austria. Number 2 in Spain. France, UK – still a smaller player. Will look to make inroads…
Spain has grown immensely, UK has seen good growth.

Polymer
Overall, 60% capacity utilization. Telangana plant– 100% utilization.
Company is growing and will continue to be aspirational… Confident of reaching 1500 cr in 2 to 3 years. Currently at 500 cr. Added 200 new skus in last 1 year

Building solutions
• 400 Cr revenue in Building solution. Blocks comprises the majority – 250 Cr. Rest is panels and boards…
• New capacity in East on Building material
o Board mfrg will come in 3 -4 months. Panels – By Q3 or Q4
o Blocks – Next year

Disc: Invested

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Looks like the Flooring division has done extremely poor in Q1 FY23. Sharp decline in OPM to about 1% for this division has dragged the overall bottomline.

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Can anyone please share his recent study or latest reports by the company.
Anyone closely tracking can share his opinion for the overall growth in sector too

Q1 Concall takeaway

$1 billion one-stop is building solutions provider by 2026.
Debt reduced by Rs. 35 crores during the quarter. The debt at the consolidated level stands at Rs. 253 crore on the total debt-equity ratio is at 0.20.

Roofing gained a market share close to about 1% over last year’s Q1. Roofing we are #1 by far big numbers to the next level.

Q2 FY23 will be again quite a challenging quarter for HIL. But in way of growth, volumes, and market share, we will outshine everyone else, and amongst what is available in the market and the present situation,

Polymer segment as well as from PARADOR - interesting segment to put a lot of energy and investments. While continuing to strengthen our Roofing and Building materials because they are evergreen, and are solid profit providers.

Grow PARADOR to more than double where it is today in the next 3 to 4 years

Entering into Construction Chemicals - consisting of waterproofing solutions, primer, distemper, and many such products. R&D is working aggressively towards these.

Europe is their major market hence war will impact HIL.

@Shikhar_Seth - listen to their concall, you may find it interesting.

Disc: Invested

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thanks @Deven for notes
personal view have been holding from last 1 year and can see few more upcoming quarters.
Definitely they are #1 in roofing, I am just bit concerned with external factors impacting growth.
Dic: Invested and added more recently in last few days

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I wanted to contribute to the feed and give back to the community. This is my analysis of HIL after talking to their ex-MD, Dhirup ji a month back and after reading multiple con-call transcripts and the company reports. The word document is the company fundamentals and the excel sheet is a simple valuation of the company. Please share your feedback. Thank You.

HIL - VP.docx (30.9 KB)
Hil Valuation.xlsx (10.7 KB)

Disclosure - Invested.

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