Emkay. Revenues traction improves; Retain BUY HSIL. Healthy revenue performance; miss on margins

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1 HSIL India Equity Research Others February 3, 2016 Result Update Emkay Your success is our success Revenues traction improves; Retain BUY CMP Target Price Rs271 Rs370 ( ) Rating Upside BUY ( ) 36.6 % Healthy quarter Revenues up 9.5% at Rs 5.1bn, EBITDA grew 1.1% yoy to Rs 954mn, EBITDA margin at 18.8% down 160bps yoy and APAT at Rs 370mn, up 22% yoy Building products grew by 17.3% aided by consumer product and healthy uptick in faucets; Retail segment seeing steady growth however industrial bleeding. Packaging products reports steady revenue despite a high base EBITDA margins decline 160bps yoy to 18.8% impacted due to unfavorable mix. Lower fuel cost benefit channelized on Ad spend and distribution spends in consumer appliances Cut FY17 earnings by 4% factoring lower margins due to spends in consumer appliances segment. Penetration of faucets and consumer appliances are revenue drivers. Retain BUY with revised price target of Rs 370/share Change in Estimates EPS Chg FY16E/FY17E (%) NA/(4.7) Target Price change (%) (7.5) Previous Reco BUY Emkay vs Consensus EPS Estimates FY16E FY17E Emkay Consensus Mean Consensus TP Rs 348 Healthy revenue performance; miss on margins Q3FY16 result was above estimates led by strong revenues. Key highlights: (1) Standalone revenues at Rs 5.1bn, up 9.5% yoy (2) EBITDA at Rs 954mn, grew 1.1% yoy with EBITDA margin down 160bps to 18.8% with lower fuel costs being offset by higher other expense and employee cost. (3) APAT at Rs 370mn, up 22% yoy led by lower interest outgo. Strong growth in building products; packaging product grows amid high base Building products reported healthy growth of 17.3% yoy driven by its consumer appliances segment and healthy uptick in faucets (~30% growth yoy). Sanitaryware growth was steady at 8-9% yoy led by retail segment, which institutional segment remains under pressure. Given the weak real estate demand, company is adding new product lines for growth and is thus aggressive on consumer appliance segment and is targeting revenues of Rs 4-5bn over next 3-4 years. Packaging products reported 2% growth despite high base, led by favorable mix aided through traction in specialty colour glass segment, while volumes were flat. Other expenses on consumer appliances offset lower fuel cost, mute margins EBITDA margins was down 160bps to 18.8%; lower fuel cost (-1% yoy) was offset by higher other expenses due to ad spends and distribution costs in consumer appliances (up 19% yoy) and higher employee cost (up 20% yoy). We have cut our margin estimates to 17.4/17.6% in FY16/17E, citing rise in investment in consumer appliances (Rs mn). Revenues traction improves; Retain BUY Despite weak sentiments, growth in both segments were healthy. We have cut our FY17 earnings by 4% factoring lower margins due to spends in consumer appliances segment. Penetration of faucets and consumer appliances are revenue drivers. The initial round of capex for new segments (pipes & closures) is likely to commence from FY17. We maintain BUY with SOTP target price of Rs 370/share (Building products 17x FY18 earnings and packaging products +others 0.5x capital employed). Financial Snapshot (Consolidated) (Rs mn) FY14 FY15 FY16E FY17E FY18E Net Sales 18,279 19,421 20,606 23,101 26,178 EBITDA 2,581 3,390 3,589 4,181 4,925 EBITDA Margin (%) APAT ,196 1,470 1,817 EPS (Rs) EPS (% chg) (2.4) ROE (%) P/E (x) EV/EBITDA (x) P/BV (x) Emkay Research is also available on Bloomberg EMKAY<GO>, Reuters and DOWJONES. Stock Details Bloomberg Code HSI IN Face Value (Rs) 2 Shares outstanding (mn) Week H/L 477 / 236 M Cap (Rs bn/usd bn) 20 / 0.29 Daily Avg Volume (nos.) 62,703 Daily Avg Turnover (US$ mn) 0.3 Shareholding Pattern Sep '15 Promoters 47.1% FIIs 10.4% DIIs 23.3% Public and Others 19.2% Price Performance (%) 1M 3M 6M 12M Absolute (9) (3) (13) (33) Rel. to Nifty (20) Relative price chart 475 Rs % Feb-15 Apr-15 Jun-15 Aug-15 Oct-15 Dec-15 Feb-16 HSIL (LHS) Rel to Nifty (RHS) Source: Bloomberg Prashant Kutty prashant.kutty@emkayglobal.com Dhaval Mehta dhaval.mehta@emkayglobal.com Emkay Global Financial Services Ltd.

2 Consumer appliances new growth avenue One of the key drivers for growth in the quarter was aggression in the new segment, consumer appliances. Newly launched water geysers has seen healthy traction and now has 5% of organized geyser market share. Company expects to launch new range of products in consumer segment through technological tie-ups and joint ventures. The new categories entered is in kitchen appliances, focused on premium product with gross margin of ~ 30-35%. Company expects a revenue run rate of Rs mn every quarter from this segment and expect it to double in next 18 months. An investment of Rs mn is likely to be incurred towards sales, marketing, branding & distribution costs in next 18 months. Company believes this segment can breakeven at revenues of Rs bn. Company has launched a new brand Moonbow for air and water purifier products. Company is likely to launch new products in the kitchen appliances space. Greenfield expansion in Gujarat on backburner; New ventures commissioning by March 17 HSIL had approved capex of Rs 2.17bn for setting up CPVC/UPVC pipes facility for Rs 1.05bn and Rs 1.12bn for producing security Caps and Closures for protection of products from counterfeiting. Both the capex will be incurred at Telangana (land available), which the company expects should aid in synergies, cost savings, lower power tariffs and other sops. Total approved capex for FY17-18 is Rs 3.2bn with Rs 2.2bn (new facility), Rs 0.4bn (sanitary & faucets brownfield expansion) and Rs 0.6bn (maintenance capex). Greenfield expansion of sanitaryware in Gujarat is on backburner due to tepid market condition. Exhibit 1: Building products growth healthy aided by consumer segment and faucets; Packaging products steady despite high base Revenue EBIT Revenue Growth EBIT Growth (Rs mn) (%) (Rs mn) (%) EBIT Margins (%) Change in EBIT margins (bps) Comments Growth aided by consumer products led by new product addition. Sanitaryware growth steady at 8% yoy, while faucets Building Products grew at a healthy pace at ~35% yoy driven by penetration. Share of sanitaryware declined to 63%, while faucets stood at 23% and new segment consumer appliances accounted for 7% share of revenues. Growth steady despite a high base, with higher demand for specialty colour glass business aiding Packaging Products superior mix, while volumes were flat. EBITDA healthy aided by lower fuel cost. Lower fuel cost will continue to aid margins, while demand uptick is another trigger. Exhibit 2: Earnings Revision Estimates FY16E FY17E FY18E Y/E, Mar (Rs. mn) Earlier Revised % Chg. Earlier Revised % Chg. Revised Revenues 20,711 20, ,611 23, ,827 EBITDA 3,647 3, ,346 4, ,925 EBITDA Margin (%) bps bps 18.4 APAT EPS Emkay Research February 3,

3 Exhibit 3: Quarterly Summary - Standalone Y/E, Mar (Rs. m) Q315 Q415 Q116 Q216 Q316 YoY (%) QoQ (%) 9MFY16 9MFY15 Gr (%) Revenue 4,621 5,589 4,129 4,294 5, ,484 12, Expenditure 3,678 4,530 3,489 3,538 4, ,134 10, Consumption of RM 1,504 2,272 1,469 1,301 1, ,580 4, as % of sales Employee Cost ,680 1, as % of sales Other expenditure 1,652 1,717 1,505 1,677 1, ,874 4, as % of sales EBITDA 943 1, ,350 2, Depreciation EBIT ,490 1, Other Income Interest PBT , Total Tax Adjusted PAT (Profit)/loss from JV's/Ass/MI NA APAT after MI Extra ordinary items NA NA 0 0 NA Reported PAT Adjusted EPS Margins (%) (bps) (bps) (bps) EBIDTA EBIT EBT PAT Effective Tax rate Exhibit 4: Segmental Performance - Standalone Y/E, Mar (Rs. m) Q315 Q415 Q116 Q216 Q316 YoY (%) QoQ (%) 9MFY16 9MFY15 Gr (%) Segment Revenues Building Products 2,282 2,883 2,054 2,469 2, ,198 6, Glassware 2,339 2,705 2,070 1,817 2, ,272 6,496 (3.4) Others Total 4,621 5,589 4,129 4,294 5, ,484 12, Segment PBIT Building Products ,097 1,247 (12.0) Glassware Others (2.8) Total ,809 1, Add- Unall Income / (Exp) Less- Interest Exp (47.4) PBT , Segment Capital Employed Building Products 9,535 9,499 9,179 9,270 9, ,516 9,535 (0.2) Glassware 12,706 12,312 11,768 11,729 11, ,728 12,706 (7.7) Others 1,768 1,266 1,548 1,968 1, ,797 1, Total 24,009 23,077 22,495 22,966 23, ,041 24,009 (4.0) Segment Margins (%) (bps) (bps) (bps) Building Products Glassware Others (225.0) (61.5) (214.3) PBIT Margins% Emkay Research February 3,

4 Key Financials (Consolidated) Income Statement Y/E Mar (Rs mn) FY14 FY15 FY16E FY17E FY18E Net Sales 18,279 19,421 20,606 23,101 26,178 Expenditure 16,001 16,416 17,558 19,513 21,901 EBITDA 2,581 3,390 3,589 4,181 4,925 Depreciation 1,101 1,250 1,227 1,349 1,463 EBIT 1,479 2,140 2,361 2,832 3,462 Other Income (9) (29) Interest expenses PBT 752 1,335 1,951 2,368 2,896 Tax ,079 Extraordinary Items Minority Int./Income from Assoc Reported Net Income ,196 1,470 1,817 Adjusted PAT ,196 1,470 1,817 Balance Sheet Y/E Mar (Rs mn) FY14 FY15 FY16E FY17E FY18E Equity share capital Reserves & surplus 10,151 13,086 13,979 15,085 16,465 Net worth 10,283 13,231 14,124 15,229 16,609 Minority Interest Loan Funds 9,645 5,942 4,518 6,068 6,718 Net deferred tax liability 1,154 1,045 1,045 1,045 1,045 Total Liabilities 21,082 20,217 19,687 22,343 24,373 Net block 15,194 15,881 14,904 15,755 15,292 Investment Current Assets 10,225 9,969 10,643 13,177 16,560 Cash & bank balance ,029 4,173 Other Current Assets Current liabilities & Provision 5,660 6,092 6,304 7,033 7,924 Net current assets 4,565 3,877 4,339 6,143 8,637 Misc. exp Total Assets 21,082 20,217 19,687 22,343 24,373 Cash Flow Y/E Mar (Rs mn) FY14 FY15 FY16E FY17E FY18E PBT (Ex-Other income) (NI+Dep) 762 1,365 1,911 2,327 2,855 Other Non-Cash items Chg in working cap (204) (284) (350) Operating Cashflow 1,624 2,644 2,219 2,535 2,931 Capital expenditure (1,623) (884) (250) (2,200) (1,000) Free Cash Flow 1 1,760 1, ,931 Investments (1) Other Investing Cash Flow (252) (804) (40) (41) (41) Investing Cashflow (1,886) (1,712) (235) (2,200) (1,000) Equity Capital Raised 0 2, Loans Taken / (Repaid) 172 (3,703) (1,423) 1, Dividend paid (incl tax) (231) (233) (304) (364) (437) Other Financing Cash Flow Financing Cashflow 45 (1,287) (1,727) 1, Net chg in cash (217) (355) 257 1,521 2,143 Opening cash position ,029 Closing cash position ,029 4,173 Emkay Research February 3,

5 Key Ratios Profitability (%) FY14 FY15 FY16E FY17E FY18E EBITDA Margin EBIT Margin Effective Tax Rate Net Margin ROCE ROE RoIC Per Share Data (Rs) FY14 FY15 FY16E FY17E FY18E EPS CEPS BVPS DPS Valuations (x) FY14 FY15 FY16E FY17E FY18E PER P/CEPS P/BV EV / Sales EV / EBITDA Dividend Yield (%) Gearing Ratio (x) FY14 FY15 FY16E FY17E FY18E Net Debt/ Equity Net Debt/EBIDTA Working Cap Cycle (days) Growth (%) FY14 FY15 FY16E FY17E FY18E Revenue EBITDA (1.0) EBIT (11.7) PAT Quarterly (Rs mn) Q3FY15 Q4FY15 Q1FY16 Q2FY16 Q3FY16 Revenue 4,621 5,589 4,129 4,294 5,061 EBITDA 943 1, EBITDA Margin (%) PAT EPS (Rs) Shareholding Pattern (%) Dec-14 Mar-15 Mar-15 Jun-15 Sep-15 Promoters FIIs DIIs Public and Others Emkay Research February 3,

6 Emkay Rating Distribution BUY Expected total return (%) (Stock price appreciation and dividend yield) of over 25% within the next months. ACCUMULATE Expected total return (%) (Stock price appreciation and dividend yield) of over 10% within the next months. HOLD Expected total return (%) (Stock price appreciation and dividend yield) of upto 10% within the next months. REDUCE Expected total return (%) (Stock price depreciation) of upto (-) 10% within the next months. SELL The stock is believed to underperform the broad market indices or its related universe within the next months. Emkay Global Financial Services Ltd. CIN - L67120MH1995PLC th Floor, The Ruby, Senapati Bapat Marg, Dadar - West, Mumbai India Tel: Fax: Web: DISCLAIMERS AND DISCLOSURES: Emkay Global Financial Services Limited (CIN-L67120MH1995PLC084899) and its affiliates are a full-service, brokerage, investment banking, investment management and financing group. Emkay Global Financial Services Limited (EGFSL) along with its affiliates are participants in virtually all securities trading markets in India. EGFSL was established in 1995 and is one of India's leading brokerage and distribution house.egfsl is a corporate trading member of Bombay Stock Exchange Limited (BSE), National Stock Exchange of India Limited(NSE), MCX Stock Exchange Limited (MCX-SX).EGFSL along with its subsidiaries offers the most comprehensive avenues for investments and is engaged in the businesses including stock broking (Institutional and retail), merchant banking, commodity broking, depository participant, portfolio management, insurance broking and services rendered in connection with distribution of primary market issues and financial products like mutual funds, fixed deposits. 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