This Co. Reducing Debt, Planning To Become $1 Bn Revenue Co., Buy For 36% Potential Gains

HIL Limited (HIL) is a part of the C.K. Birla Group, headquartered in Hyderabad. With Rs 26 Bn of market cap, the company is one of the leading player in the building materials and construction industry. The company manufactures asbestos FC sheets, coloured steel sheets, non-asbestos corrugated roofing sheets, new generation building products like autoclaved aerated concrete (AAC) blocks (light bricks) that are used for walls in building constructions and aerocon panels and boards that are used as partition in residential and commercial buildings. Currently, the shares are trading at Rs 3459.15, IST 13:40. The brokerage firm, Anand Rathi has recommended buying for a potential gain of 36% for a target price of Rs. 4798.

India operations to grow with margin pressure

Roofing/building/plumbing revenue grew 4.8%/19.8%/12.7% y/y in Q4, but margins fell on high input costs. Market-share gains and price hikes in the roofing division (Q4 FY22 6%, Q1 FY23 8-10%), capacity expansion in the buildings division and higher SKUs of the plumbing division would keep revenue growing. The inflationary context, however, would pile further pressure on margins.

According to the brokerage, Geopolitical issues, and high-cost impact on flooring business in the near term. The brokerage has stated, "While the availability of HDF/MDF boards improved, high-cost pressures persist. And, the Russia-Ukraine war is resulting in fewer oak trees, curbing engineered board sales (30% of Parador's revenue). In Q4, the division's revenue grew 15.6% y/y to Rs4.5bn whereas its PBT margin slipped 134bps to 5.8%. While near-term pressure continues, various measures (price hikes, R&D on wood substitution, long-term supplier agreements, etc.) would help."

 

The company's outlook is intact

In FY22, the company reduced debt by Rs1.2bn (consol. debt at 31st Mar'22 was Rs2.88bn). The long term plan to become a $1bn revenue company by FY26 is intact. "The Odisha expansion (boards ~30,000 tonnes, panels ~36,000 tonnes, blocks ~150,000 cu.mtrs.) will help diversify regional operations and improving operating efficiencies," Anand Rathi has said.

Brokerage recommends buy for a 36% potential gain for a target price of Rs 4,798

The brokerage has said, "We expect revenue/EBITDA to clock 8.4%/9% CAGRs over FY22-24. We maintain our Buy rating with a lower target of Rs.4,798 (13x FY24e PE)." According to the brokerage, the risk would be a rise in input costs, and a demand slowdown.

Investment Rationale

With price hikes boosting revenue (12.5% y/y) and the inflationary situation squeezing EBITDA (16.5% y/y), HIL's Q4 was a mixed bag. The East expansion is on track with some delays for block capacity. Price hikes in roofing and flooring solutions would aid revenue, but higher costs (geopolitical issues/inflation, etc.) would curb near-term operating margins.

Disclaimer: The stock has been picked from the brokerage report of Anand Rathi. Greynium Information Technologies, the author, and the brokerage house are not liable for any losses caused as a result of decisions based on the article. Goodreturns.in advises users to check with certified experts before taking any investment decisions.