IIM Kozhikode

Hindusthan National
Glass and Industries
Limited
Fundamental Analysis
CHANDRAHASAN S (PGP 13/141)
Indian Economy- An overview
Indian economy is the 11th largest economy in the world and fourth in Purchasing
power parity. India’s growth increased significantly from the economic reforms in 1991
because of the investor-friendly environment and a liberalised policy framework spanning the
whole economy. Currently, it is the second fastest growing economy in the world behind
China. The nominal GDP of India has grown at a CAGR of 9.17% from 2001 to 2009. India's
large service industry accounts for 55% of the country's Gross Domestic Product while the
manufacturing and agricultural sectors contribute 28% and 17% respectively. India is an
emerging economic power with a very large pool of human and natural resources, and a
growing large pool of skilled professionals

According to AT Kearney FDI Confidence index (2010), India is the third most
attractive destination for business and investment opportunities, due to huge man power base,
diversified resources and favourable macroeconomic fundamentals. Approximately 162
billion US dollars flows through Foreign Direct investment from April to June 2010 and 276
billion US dollars through foreign exchange reserves. India’s merchandise exports were
around 176 billion US dollar in 2009. According to the WTO, India currently accounts for
1.5% of World trade as of 2007

India is the largest democracy in the world with the workforce of 467 million.
Around 61%of the population are literate and 29% constitute urban population. India's per
capita income (nominal) is $1,030, ranked 139th in the world, while its per capita (PPP) of
US$2,940 is ranked 128th.India is a large consumer destination growing out of higher per
capita income. Education and healthcare segments are continuously improving and
Government is taking lot of actions to improve literacy rate in rural areas.

Challenges before Indian economy:

Population explosion: India is the second most populated country in the world.
According to 2001 census, India’s population in 2001 was 1,028,610,322, growing at a rate
of 2.17% approximately. Such a huge population put lots of stress on economic conditions of
India. Thus India has to control its ever increasing population.
Poverty: As per reports of National Planning Commission, 38% of the India’s population
was living below Poverty Line in 1993-94.Eventhough this figure has decreased recently
some major steps should be taken to eliminate poverty from India.
Unemployment: The increasing population is pressing hard on economic resources as
well as job opportunities. Indian government has started various schemes such as Jawahar
Rozgar Yojna, and Self Employment Scheme for Educated Unemployed Youth (SEEUY).
Rural urban divide: 70% of the population of India still lives in villages even after lot
of migration to cities. The standard of living is very poor in rural areas when compared to
urban cities.. . Unless there isn't a balanced development Indian economy cannot grow.
 Indian government is trying to eliminate the above problems by bringing policies for
economical reforms, increasing expenditure for health sector and education, etc

Industry Analysis
The packaging industry in India has been valued at around 14 Billion US dollars in
2009 and has registered a growth rate of more than 15% annually over the last few years.
Glass containers dominates the packaging industry with a market share of 8-10% even
though the packaging industry has invented a lot of alternative options for glass such as
flexible packaging laminates, paper and board, plastic containers, and aluminium cans.
Beverages and soft drinks have started coming in aluminium cans and polyethylene
terephthalate (PET) bottles. However, because of many unique and inherent features, Glass
still remains the most suitable packing medium for beverages, soft drinks, liquor,
pharmaceuticals, etc. The only packaging material which is chemically inert for foods and
beverages is glass.
The market for glass containers in India is very high because of its inherent features
and it has been growing at an average of more than 10% during the last few years. Despite
this huge growth, per capita consumption of glass containers in India is very low at 1.4 kg
when compared to 4.8 kg in Brazil and 27.5 kg in the US, thus showcasing the huge untapped
potential of the glass container market in India.
The major reason for the growth in demand for glass containers in India is the growth
in the end user segments such as beverages, soft drinks, alcohol, pharmaceutical and
healthcare, food processing , etc. Out of the above, the liquor and beer industries alone
contributes around 60% of India’s glass container production and is closely followed by
pharmaceuticals 20%, food processing 10%, beverages 5% and remaining others.
Liquor and beer industry
India is emerging as one of the fastest growing liquor and beer markets in the world,
with a total consumption reaching around 160 Million cases a year. Especially the IMFL
segment of the Indian alcohol market alone showed a strong cumulative growth rate of 12%
over the past 2 years. The major reasons for the growth are the increasing westernisation and
socialisation trend and increasing temperature which drives the beer market. Despite this
strong growth, alcohol consumption is still considered low in India. As per research, per
capita consumption in India is around 2 litres per adult per year. This is very low compared to
other developing countries. However, with rising employment levels amongst urban women
and new pub culture, there is a significant increase in alcohol consumption amongst urban
Indian women. As per industry estimates, 25% of total alcohol sales in India during 2010-
2015 would be driven by women as against the current 10% of alcohol consumption.
Food and beverages industry
There is a high probability for retail food sector in India to grow from around 70
Billion US dollars in 2008 to 150 Billion Us dollars by 2020, resulting in the increase in the
demand for packaging alternatives, especially glass containers. Right now around 11% of all
food items and beverages are packed in glass containers compared to 40-50% in developed
countries.
Pharmaceutical industry
In the pharmaceutical sector, glass bottles and moulded vials are preferred packaging
medium for syrups, tonics, dry powder, liquid injectable and paediatric suspensions. Because
of the healthy growth rate of the Indian pharmaceuticals market, the market for glass
containers is expected to grow. As per report, the pharmaceuticals market in India is expected
to grow to nearly 37 Billion US dollars by 2013 from an estimated 17 Billion US dollars in
2008 - a cumulative growth rate of 16.8% - driven primarily by exports.

Hindusthan National glass and Industries

limited
HNGIL is the dominant player in manufacturing and supplying of glass bottles
containers in India, with a market of around 65%. Currently, the company has a total
capacity of around 2,760 tonnes per day against the industry norm of 4.0 tpd. It is currently
having six manufacturing locations, spread across India enabling distribution of its products
throughout India. HNGIL is also planning to diversify into other foreign markets. The
company is also looking to acquire manufacturing facilities in Middle East and South-East
Asia. The reason for this move is to improve existing relationships with global clients having
presence in these markets and also these markets are expected to grow at a healthy rate.
HNGIL enjoys strong mutual relationship with its diverse clients base which include big
global players like United Spirits, Pernod Ricard, Diageo, SAB Miller, HUL, Nestle,
GlaxoSmith Kline, Ranbaxy, Heinz, Coca-Cola, Pepsi etc.

Competitive advantage of HNGIL

Economies of scale
The cost of production is low for HNGIL compared to other big players in the
industry because of economies of scale. This gives them the bargaining power with the
suppliers as well as customers thus ensuring uninterrupted production. Because of high initial
cost, it is very difficult for new players to enter and penetrate.
Multiple locations
It is located at six different locations in India which is more than its competitors and
hence enables it to serve customers better both in terms of deliver lead time as well as lower
cost because of low transportation cost. This is the only glass container manufacturer
available in the eastern region
Successful Acquisitions
HNGIL has been very successful in growing through various acquisitions known as
inorganical growth. The company has a history of buying glass manufacturing plants which is
making losses and turning them around in a short span of time. Till now, HNGIL has
acquired the glass container business from Owens Brockway in2002, glass container
manufacturing unit at Nashik from L&T in 2005, Neemrana plant from Haryana Sheet Glass
in 2007, ACE Glass Containers which had three plants situated at Rishikesh, Pondicherry and
Pune. These acquisitions helped the company to grow at a faster pace and add capacities in a
short span of time compared to setting up a new plant.
Innovations in Technology
Innovation is the key factor for the success for HNGIL. It has continuously
implemented new systems, processes, and technology to increase its efficiency, decrease cost
and improve product quality. The company successfully implemented NNPB technology in
2009, which helped the company to reduce the bottle weight by 25-40% and also increase the
strength of the bottles. Since the weight of the bottles is reduced, the number of bottles
produced per tonne of capacity has increased, thereby reducing the overall raw material cost..

Financial Analysis
Revenue
The consolidated revenue of HNGIL has increased at a cumulative growth rate of
46.8%, from Rs 4.23 Billion in 2006 to Rs 13.5 Billion in 2009. Apart from organic growth,
considerable growth in revenues during this period was also due to inorganic growth with
many acquisitions like Neemrana plant, Nashik from L&T in 2005.
EBITDA
The operating margin of HNGIL is expected to increase from 20.5% in 2009 to 24.6%
in 2010 due to the savings on raw materials costs because of the introduction of Narrow Neck
Press and Blow technology. The company has already reported an EBITDA margin of 24.5%
for the last quarter ending December 10. The company is moving to usage of natural gas in
some of its plant locations in order to reduce the cost of power thereby leading to increase in
margins.
PAT
The consolidated profit after tax of HNGIL is estimated to grow from Rs 1. Billion in
2009 to Rs 2.0 Billion in 2012 at a CAGR of 18.4%. The increase is driven primarily by a
healthy revenue growth as well as improvement in margins. Revenue is estimated to improve
to a CAGR of 13.1% during 2009-2012, while margins (PAT) are estimated to grow from
8.9% in 2009 to 10.3% in 2012. According to the company’s research report Consolidated
Earnings per share is estimated to increase from Rs 17.2 in 2009 to Rs 28.7 in 2012, in line
with the PAT growth since there is no requirement for equity funding, hence no dilution.
Return on Equity
Return on equity of the company is expected to be around 16.4% in 2010 and 16.6%
in 2011 and remain at these levels going ahead. Although a Return on equity of 16-17% is
quiet healthy especially given the capital intensive nature of the business, its upside potential
is tempered by the fact that the balance Sheet is unlevered. HNGIL’s net debt- equity ratio at
the end of December 09 stood at 0.58 which is low especially given the stable nature of
business.
Valuation of HNGIL stock
Using the DCF method, I have valuated HNGIL stock using following assumptions
1. Estimation of future cash flows using a CAGR of 13.1% and PAT growth
of 18.6% which is shown in the table above.
2. Cost of debt = 10%, Cost of equity = 15%. Terminal growth rate = 5%

Value of the firm = Free cash flows discounted using cost of equity till
2015+ Terminal value with 5% growth of RS.2500 million(Average of cash
flows for 2009 – 2015)

Calculations
Cash flow with estimated cash flows of
HNGIL
Particulars (Rs
Mn) FY09 FY10E FY11E FY12E FY13E FY14E FY15E

EBIT * (1-Tax) 1365 2224 2150 2472 2781 3288 3766

Depreciation 754 889 1006 1296 1476 1556 1754
Capital
Expenditure 1710 1995 1952 5965 3154 1401 1452
Increase in WC 714 807 629 709 748 393 971
Free Cash Flow 305 311 575 -2906 355 3047 3097
Discounting 0.869565 0.7561 0.6575 0.5717 0.4971
factor 1 217 44 16 53 77
-
Discounted 2197.3 233.41 1742.1 26539.
cash flows 305 311 500 5 83 32 76
Total value of 27128.
the stock 95
Total no. of 873386
shares 46
Book Value of 310.61
HNGIL 8

Market value of HNGIL = Rs.216.35 (On

31.07.2010)
Recommendations
The industry and country analysis is very favourable to the company. The market
value of the stock is lesser than the book value. Hence it is recommended to BUY THE
STOCK