BAV Assignment I | Group 12 (Sec A) | Hyderabad Industries

Anu Monal Minz | Rajat Kumar | Eby John | Pawan Kamal | Dheeraj

Company Brief
Updates
Incorporated in 1946, Hyderabad Industries Limited (HIL) is the flagship Key Data (As on Oct 11, 2010)
company of C. K. Birla group of company. CMP 613.45
Market Cap(INR bn) 4.57
Manufacturing units’ locations: Hyderabad, Faridabad, Jasidih, Dharuhera, 52 W H/L(Rs) 761.8/349.8
Thimmapur, Vijayawada, Chennai, Thrissur, Wada, Sathariya and Balasore. P/E 5.32
Book Value 343.97
HIL one of the leading manufacturers of Fibre Cement Sheets in India with Face Value 10.00
a market share of about 20.5%. Its key product range include Fibre Cement EPS 115.28
Roofing Sheets sold under the brand name CHARMINAR, AAC Blocks and
Panels called AEROCON, and Calcium Silicate Insulation Product (thermal SENSEX 20339
insulation) called HYSIL. HIL is the market leader in asbestos-based roofing NIFTY 6135
BSE Code 509675
industry under the brand name of CHARMINAR.
NSE Code HYDRBADIND

Performance Chart

Shareholding Pattern
Foreign 5.63%
Institutions 2.89%
Govt. Holding 4.10%
Non Promoter Hold. 11.04%
Promoters 43.10%
Public & Others 33.24%

Collaborations
 Nippon Gasket
Company   (Japan):
Technical 
 Building Technologies
Australia Pty
Ltd (Australia):
Technical 
 BAV Assignment I | Group 12 (Sec A) | Hyderabad Industries
Anu Monal Minz | Rajat Kumar | Eby John | Pawan Kamal | Dheeraj

Industry Outlook
 The International Monetary Fund (IMF) today revised upwards its
India growth projection for 2010 to 9.7 per cent, from the earlier
estimate of 9.4 per cent1.

There is a strong correlation between the demand for roofing and

GDP growth. The demand for roofing grows at about 1.3‐1.5x GDP
growth. Hence, with the Indian demand for roofing is expected to
grow in the 12.6‐14.55% range.

 The Fibre Cement Sheet business is poised for growth over next
few years on account of anticipated migration from thatched and
tiled roofing to more refined roofing. Fibre Cement Sheets are
gaining popularity as they are better insulator of heat, less‐
expensive, safer, need no maintenance and last longer when
compared to competing roofing material.

 The implementation of the UIN Programme is expected to boost

income for the rural poor thereby increasing the potential market
for usage of fibre cement sheets in rural areas.

 The Government of India, with an aim to provide adequate

shelter to the rural poor has introduced programmes like Indira

Awas Yojna (63% higher allocation in FY11 compared to last year), Golden Jubilee Rural Housing
Finance Scheme, Pradhan Mantri Adarsh Gram Yojana, Productive Housing in Rural Area and
Rural Housing Fund which is a positive development for the industries in the roofing sector.

 The demand for Green Building Products is increasing the world over on account of serious
concerns about the environment and the impact on energy consumption.

 Demand for insulation products will continue to remain robust due to fresh investments for
green field projects as well as replacement and modernization of plants in the cement, fertilizer,
petrochemical and other industries. All the user industries have huge industrial capex lined up
during next 2‐3 years. India’s total industrial capex over the FY09‐FY12 period will grow at
CAGR of 7%.2

1
Source: Business Standard, New Delhi, Dated-October 7,2010

2
Source: CRISIL
 BAV Assignment I | Group 12 (Sec A) | Hyderabad Industries
Anu Monal Minz | Rajat Kumar | Eby John | Pawan Kamal | Dheeraj

 The market for AAC Blocks is directly dependent on the construction of multistory apartments
and commercial buildings in particular. With the recovery in real estate sector we expect the
demand to start growing henceforth.

 Lately AAC blocks are gaining popularity compared to conventional clay bricks. Compared to clay
bricks, AAC blocks are one‐third lighter. Moreover usage of AAC blocks reduces ambience heat
inside the building in a great manner. Construction is also much faster. The annual demand for
AAC blocks is estimated at around 3‐4% of total clay brick demand and it is fast gaining
popularity among big builders. Hyderabad Industries being the only listed player is expected
to benefit immensely.

 Growth for Cement product industry depends on real estate and construction and infrastructure
related activity. With the initiatives made by the government in various infrastructure projects,
road networks and housing facilities, coupled with the housing sector boom and urban and rural
development, high growth in the cement product industry is expected in forthcoming years.

Raw Materials Analysis

The main raw materials required for building products of the company are:

 OPC Cement: It has been forecasted that the cement prices will decrease for the current
quarter. This can be attributed to high competition among cement manufacturers and excess
installed capacities.3
 Raw Chrysotile (white asbestos): There has been lots of misconception about asbestos cement
sheet business as it is decried as environmentally harmful product. But what is interesting is that
there are two varieties of asbestos. One is harmful amphibole type and another is harmless
chrysolite type. All over the world including USA and Canada, chrysolite type has been used in
construction purposes without any proven harmful effect.

Hyderabad industries is into chrysolite type asbestos cement sheets which contributes about
15% its topline

 Fly-ash: Fly-ash which is procured from the thermal power stations either free or at low cost
earlier is now available through the tender mechanism at higher cost, resulting in increased cost
for the Company.

3
Source: Daily News Analysis, Published: Saturday, Aug 21, 2010, 0:16 IST By Pooja Sarkar, Place: Mumbai
 BAV Assignment I | Group 12 (Sec A) | Hyderabad Industries
Anu Monal Minz | Rajat Kumar | Eby John | Pawan Kamal | Dheeraj

Diversified Business

The company today is well diversified into

areas such as thermal insulation products,
Autoclaved Aerated Concrete (AAC) blocks,
Prefabricated building panels, Hysil powder,
Spares and accessories.

With the concept of Green Building gaining

importance and growing acceptability for
cement boards and panels as a substitute
for plywood, HIL’s strategy to diversify into
allied products like cement blocks, boards,
panels etc should gain acceptance and
Fig: Product Categories4 market share going ahead.

This will help HIL de‐risk its business model and diversify its revenue stream. These value added (green)
products have much higher EBIT margins as compared to cement sheets (commoditized product),
thereby improving overall margins of the company.

Capacities
 HIL has recently acquired a Fibre cement sheets manufacturing facility situated at Punjab with a
capacity of 45,000MT/Annum.
Segments FY09 FY10 Current FY11E

Fibre Sheets(MT) 764500 854500 899500 980000

Thermal Insulation(MT) 6000 6000 8500 10000

AAC Blocks(CuM) 100000 100000 320000 340000

Aerocon Panels(MT) 460000 460000 460000 460000

 Fibre sheet facility commissioned at Balasore

 Company is in the process of increasing the capacity from 6000 MT to 8400 MT at its
Dharuhera plant
 New cement sheet plant coming up in Bihar with expected capacity of
90000tpa

Peer Comparison5

4
Source; Company Website: www.hil.in
5
Source: Religare Technologies http://insight.religaretechnova.com
 BAV Assignment I | Group 12 (Sec A) | Hyderabad Industries
Anu Monal Minz | Rajat Kumar | Eby John | Pawan Kamal | Dheeraj

Company OPM(%) NPM EPS Rep. RONW P/E P/BV

Hyderabad Ind 21.73% 12.87% 120.22 34.94 5.1 1.78
Sanghi Ind. 26.14% 13.37% 4.05 12.09 6.94 0.83
Everest Ind. 10% 4.59% 20.26 17.31 12.89 2.23
Visaka Ind. 18.96% 9.53% 36.03 24.27 4.36 1.06
Indian Hume 13.85% 5.09% 58.98 15.21 13.93 2.12
Pipe
 Better Earning Profile: HIL has provides the best EPS and RONW as compared to its peers. It has
a strong balance sheet with a Debt:Equity Ratio of 0.33 6.
 Better Operating Profit Margins of 21.73%
 Diversification into value added (green) products will lead to a de‐risking of the business
model. Moreover it would lead to further improvement in margins in long term as these
advanced building products and thermal insulation products enjoy better margins as compared
to cement sheets (commoditized product), thereby helping in improving overall margins of the
company.
 Unlike most other industry players that trade at higher multiples, on relative valuation basis, HIL
is better placed than most of its peers as the stock trade at a P/E of 5.1 & P/BV of 1.78.

Risks
 Chrysotile Asbestos has been scientifically proven to be safe both to the environment and the
workers. However some unethical lobbyists have been contracted to spread false rumors for
vested business interests. The lobbying for banning asbestos by some groups with vested
business interests has continued throughout the year. Further, any government initiative to
completely ban the usage of asbestos will force industry to look for alternative and may increase
the overall cost. However, with government thrust on affordable housing projects, there seems
to be remote chances of complete ban on usage of asbestos.

 Rural income is largely dependent on agriculture, which is a function of monsoon. A poor

monsoon could have adverse effect on the demand for roofing in rural India.

 Any change or decrease in spending by the government through rural schemes like NREGA,
Indira Awas Yojna etc. could reduce the purchasing power of rural people.

 Increase in raw material prices higher than our expectations will negatively impact HIL’s
margins.

6
Source: Capitaline Database
 BAV Assignment I | Group 12 (Sec A) | Hyderabad Industries
Anu Monal Minz | Rajat Kumar | Eby John | Pawan Kamal | Dheeraj

Earnings forecast for the 2nd Quarter 2010:

The sales figures have increased
2nd Qtr 2nd Qtr 1st Qtr quarter on quarter due to the
Year Sep-10 Sep-09 Var(%) Jun-10 increased government spending on
rural infrastructure and higher
Gross Sales 173.03 143.41 21% 216.29
earning in rural market.
Excise Duty 0.00 0.00 0% 0.00
Net Sales 173.03 143.41 21% 216.29 The sales however have decreased
Other Operating Income 1.07 0.31 246% 1.34 when compared to last quarter (1 st
quarter 2010-11) is due to the
Other Income 0.72 0.74 -3% 0.90
seasonal factor.
Total Income 174.82 144.46 21% 218.53
Total Expenditure 138.29 113.36 22% 172.86
PBIDT 36.54 31.1 17% 45.67
Interest expenditure has decreased
Interest 1.00 1.27 -21% 0.93 due to repayment of the debt to the
PBDT 35.54 29.83 19% 44.74 tune of 153.8 million.
Depreciation 3.70 3.57 4% 3.69
Tax 10.51 8.77 20% 13.34
Deferred Tax 0.00 0.00 0% 0.00
Reported Profit After Tax 21.33 17.49 22% 27.71
Extra-ordinary Items 0.00 0.00 0% 0.00
Adjusted Profit After Extra- EPS has increased in accordance with
ordinary item 21.33 17.49 22% 27.71
the higher overall earning.
EPS (Unit Curr.) 28.59 23.44   37.13

Impact of Forex:
Total raw material cost= 173.03*49%= 84.79 cr Indian currency has appreciating in
the last quarter which has positive
Total raw material imported= 84.79* 50.6%= 42.90 cr impact on the import whereas they
have very less export therefore
overall the impact is positive.
Capital Structure:
   Year Mar 10  Mar 09 
  Share Capital 7.49 7.49
  Reserves Total 254.29 178.71
  Total Shareholders Funds 261.78 186.2 Debt/Equity ratio= 24.69% which has
  Secured Loans 32.02 46.84 decreased from 43.13% in 2009. This
  Unsecured Loans 32.61 33.48 is due to the repayment of loans
   Total Debt 64.63 80.32 during the year.
  Total Liabilities 326.41 266.52
 BAV Assignment I | Group 12 (Sec A) | Hyderabad Industries
Anu Monal Minz | Rajat Kumar | Eby John | Pawan Kamal | Dheeraj

NOPLAT:
Year 2nd Qtr Since most of their income comes
 (In Cr.) Sep-10 from the core operation the NOPLAT
Gross Sales 173.03 and actual income has little difference.
Excise Duty 0.00
Net Sales 173.03 ROIC= NOPLAT/ Invested capital
Other Operating Income 0.00
= 86.43/266.52= 32.43% return in the
Other Income 0.00
year ending March 2010.
Total Income 173.03
Total Expenditure 138.29 WACC= 0.198*0.08(1-.33) +0.802*.12
PBIDT 34.74
Interest 1.00 =10.69 %
PBDT 33.74
Depreciation 3.70 Economic Profit= 86.43(32.43-
Maintenance Expenditure 5.00 10.69)/100
Tax 9.91
= 18.79 cr
Deferred Tax 0.00
NOPLAT 22.53

NOPLAT for the year ending March 2010= 86.43 Cr.

Operating Variables
The net operating cash flow has been
Net Operating Cash flow two last two years:
increasing due to the increasing sales
2009 2010 and it has increased by around 38%
76.67 106.14 whereas revenue growth is only 14%.
This year we are expecting revenue
growth of 13% so operating cash flow
requirement will also increase by
large amount.

Assumptions made:

1. The return on equity is assumed to be 12% per annum.

2. The return on debt is assumed at risk free rate i.e. 8%.
3. The sales figure will decrease by 20% due to seasonal factors as observed in the past.
4. Overall growth for the company is expected to be 13% with majority of growth coming from
fourth quarter (around 30% increase in sales compared to 3 rd quarter).
5. 13% growth expected this year is less than the growth last year which is due to the price
competition and /due to added capacity in the market. This is evident from the first quarter
result which showed growth of just 4% compared to 13.1% growth in the corresponding period
last year.