HIL Ltd

Market Capitalization: 1,500 Cr	Current Price:  2,000 (26 Nov 2020)
Stock P/E: 8.5*	Debt to equity: 0.59
Sales Growth (3Yrs): 26.6%	Profit Growth (3Yrs): 9.3%
ROCE: 11.6%	ROE: 11.4%
Promoter holding: 40.83%	Cash Cycle: 27 days
Asset Turnover: 1.22	Net Profit Margin: 9.6%

*Includes one-time gain from sale of thermal insulation business resulting in gain of INR46 crore during the Sep 2020 quarter.

Company Overview

Hil Ltd is flagship company of the C K Birla Group, which is a growing US$2 billion conglomerate with diversified interests. HIL Limited is engaged in the production and distribution of building products, thermal insulation products (refractories) and generation of wind power. HIL manufactures a comprehensive range of products. Its Charminar brand is an established market leader in roofing solutions. Birla Aerocon, provides Green Building Solutions that includes Dry Walling and Wet Walling. Birla HIL focuses on Pipes and Wall Putty solutions for agriculture and construction activity. Parador, the category leader in design & innovations, covers wooden flooring solutions. These are easy to install, energy efficient along with being superior in quality. The Company has manufacturing facilities in Hyderabad, Faridabad, Jasidih, Dharuhera, Thimmapur, Jhajjar, Kondapalli, Chennai, Thrissur, Wada, Sathariya, Balasore and Golan

Business Analysis

Reduced Dependence on Asbestos Sheet Market

HIL is a market leader in fiber cement boards with almost 21% market share and traditionally was known as asbestos based roofing company.

Just three years back, 70% of its revenues came from asbestos based roofing solutions. This number has reduced to just 30% as on FY21 due to HIL’s constant endeavour to diversify into other building material solutions.

The company has turned the corner by developing non-asbestos product ranges. HIL’s brand ‘Charminar Fortune’ is next generation non-asbestos based corrugated roofing sheets which can be a substitute in case there is any regulation against use of asbestos in future.

Its flagship brand ‘Charminar’ uses white asbestos, which is one of the least harmful type of asbestos. Further, once the asbestos fibre is bound by cement during the production process, there is absolutely no risk of inhalation of asbestos during its usage. However, the possibility of a ban in the future cannot be completely ruled out. Hence, the company is preparing the ‘Charminar Fortune’ brand of non-asbestos sheets as a substitute for this kind of eventuality.

The technology presently used in ‘Charminar Fortune’ restricts the production to 150 MT per day. HIL is working on new technology which would produce non-asbestos sheet through non-autoclaved technology which can raise the daily production to around 450 MT per day. This can be scaled up with minimal capital investment and can be produced out of any of the company’s existing roofing factories.

 ‘Charminar Fortune’ would be priced at 25% premium to existing asbestos sheets but would be substantially cheaper compared to steel sheets. HIL is looking to capture the sheet sheets market which is twice the size of asbestos market in terms of volume. This bodes well for the company as rural demand has been strong due to factors like minimum support price, good monsoons, and agricultural reforms. Further, government’s thrust on manufacturing and various PLI schemes opens avenues for more construction activity in the future.

Diversified Product Portfolio in Building Materials

HIL operates under 4 divisions namely Roofing, Building Solution, Flooring and Polymer products with revenue split of 26%, 10%, 51%, and 13% respectively as on Q2 FY21. HIL operates across plethora of products ranging from asbestos and non-asbestos roofing sheets; engineered wood and laminate flooring under the Paragon brand; Dry Walling and Wet Walling products under Birla Aerocon brand; and Pipes and putty under Birla HIL.

HIL is looking to expand its addressale market size through Pipes and Fittings and Wall Putty. The company has recently expanded its capacity in Thimmapur facility to service the Southern markets demand in pipes and wall putty. HIL’s pipes facility at Golan, Gujarat has started operating at a moderate capacity and mainly servicing its customers in the Western markets. The company is confident of more than doubling its sales and reaching revenues of around INR 750 cr in Pipes and Wall Putty from the present capacities in the next 2-3 years.

Birla Aerocon is a dominant player and enjoys market share of around 60% and 20% in Dry Walling and Wet Walling respectively. Dry Walling consists of Panels and Boards and is the preferred choice among Architects and Designers. Wet Walling consists of ‘Fly Ash Blocks’ which is an eco-friendly building material and has better properties compared to normal clay bricks. HIL has recently launched its adhesives range with products like ‘Tile Adhesives’, ‘Smart Plaster’, and ‘Smart Fix’ which could help it to expand in Building Products market.

Covid-19 and the resultant depression in real estate market has impacted volume growth in the building products segment. HIL has focused on cost rationalization through lean management principles and process efficiency combined with focus on tier-2 and tier-3 cities to compensate for the demand slowdown in tier-1 cities.

International Player in Flooring through Parador

HIL acquired Parador in August 2018 for EUR83 million and within 2 years’ Parador Floorings forms half of HIL’s revenues. Parador is German based, vertically integrated, full-range supplier which designs, manufactures, and distributes a wide range of flooring solutions including laminate and engineered wood flooring, skirtings, and wall and ceiling panels. The Company has long standing relationships with all major customers and exports more than 50% of its sales to over 80 countries.

The strong demand from DIY market has propelled sales during the Covid-19 period with Parador showing strong sales momentum. A major opportunity for HIL is to expand Parador sales in the Rest of the world market as almost 50% of Parador sales currently is from just 2 countries, namely Germany and Austria. To this effect, Parador inked a joint venture in China with 40+ outlets selling its products in China. Parador is also looking to increase its sales from neighbouring countries like UK, Spain, France, Italy as well as USA.

Within India, HIL is using its pan-India dealer network to establish the brand and make in-roads through architects and designers. With integrated design-manufacture-sales set up, HIL is confident of expanding Parador sales in bigger markets like the United States, Europe, and China.

HIL has helped Parador adopt Lean manufacturing practices in its manufacturing locations in Germany and Austria and thus aims to increase the EBITDA margins from 7% to 10% over the medium term. Parador is currently operating at 70% capacity utilization and thus has significant spare capacity to address new markets in the near term.

Key Risks

• Any future ban on usage of asbestos can temporarily impact the business. However, HIL is prepared for this eventuality with non-asbestos based ‘Charminar Fortune’ brand.
• HIL’s Wall putty, Pipes and Fittings, and Flooring business is heavily reliant on the real estate market and economic activity which is cyclical in nature.
• Exposure of margins to fluctuations of raw material prices and exchange rates. This indicates possibility of variability of EBITDA margins.
• Disruption in supply of asbestos can impact the business. Recently, there was a ban on asbestos mining in Brazil for a brief period which adversely impacted the supply to HIL.

Key Positives

• Leading Building Solutions Provider with pan-india presence – HIL is a global player with presence in 80+ countries, 39 sales depots, 6000+ dealers and 23 state-of-the-art manufacturing units around the world.
• Diversified product portfolio – HIL is one of the leading Companies in the building materials and construction industry with robust product pipeline and wide range.
• In-house R&D capability – HIL’s strong R&D capabilities and constantly evolving product pipeline is helping it to capture a larger pie of the construction industry with newer and industry leading products. The company’s technology centre in Germany continues to innovate newer products and solutions to bring new products into the market.
• HIL is generating free cash flows which has enabled it to pay down debt by INR212 crore and reduced its liability from INR741 crore to INR529 crore over the last 6 months to Sep 2020.

Outlook and Valuation

HIL is a diversified player which protects it from possible underperformance of any of its sub-product lines. The company is strongly placed to increase its margin profile across product lines due to economies of scales and other process improvements like digital shop floor, IOT 4.0 across its plants along with integrated robotic process automation and institutionalization of lean six sigma manufacturing. Margin profile of Roofing business is expected to improve as fibre content is reduced and the company makes the transition to non-asbestos non autoclaved roofing sheets. The EBITDA margins in Flooring and Building products are expected to trend upward as HIL attains economies of scale along with lean manufacturing solutions. Despite being impacted by the ongoing Covid-19 situation, HIL has performed strongly and managed to pare debt by INR212 crore. HIL is currently quoting at TTM PE of 8.5 which includes a one-time gain. HIL looks a good medium term bet to play the boom in the construction and building materials industry as economy revives from the Covid led slowdown and government’s new thrust on manufacturing and agricultural reforms.

Disclaimer: Have personal investments in HIL Ltd at the time of writing this note. Information in this blog is for educational purposes only. The articles  may contain external links , references and compilation of various publicly available articles. All copyrights and trademarks of images belong to their respective owners and are used for Fair Educational Purpose only.