Flushed With Profits

Hindustan Sanitaryware has managed to post a decent jump in profits despite stagnant sales this year.

Coming before a planned expansion and a GDR issue, this could augur well for the company.

Given the pathetic state of the corporate performa-nce for the last financial, what would you say to this result: On a meagre sales growth of 4.3 per cent, operating profits have grown 24 per cent and net profit has risen by 29 per cent. More importantly for the investor, the company has raised its dividend payout from 27.5 per cent last year to 40 per cent this year.

 

Interesting? We are talking about Hindustan Sanitaryware Industries (HSI), the low-profile Calcutta-based firm, which is one of the largest manufacturers, and the biggest exporter of sanitaryware in the country. The flagship of the Somany group, the company has been performing well over the last three years. And this year too, it has shown a significant rise in net profits.

And that's not all. Spurred by this achievement, HSI is planning to go in for a Rs 100 crore expansion. The idea is to double its double its production capacity to 4.05 million pieces per ann-um of sanitaryware and 1,58,730 million tpa of glass containers by the turn of the century. For this purpose, it plans to tap the GDR markets with a $25 million issue. "The government clearance for the issue is expected within th-ree or four weeks," says Sandip Somany, the 34-year old joint managing director with HSI.

HSI is essentially into sanitaryware and container glass. In 1995-96, the share of sanitaryware (domestic and exports) in sales was about 46 per cent. And this near 50-50 ratio between sanitaryware and glassware should continue in the future.

As of now, the company sells whatever it can produce. The reason is simple: demand for sanitation is far more than supply. This excess demand is not a recent feature. In fact, the sanitation industry in India has been growing at about 15 per cent, but access to sanitation in India is a meagre 13 per cent against 68 per cent for Philippines and 90 per cent in the case of Argentina. So, domestic sanitation requirements have no way to go but up.

Also, the housing statistics, that The shelter problem shows, reveals a clear source of the rising demand due to increase in the demand for new houses. Fr-om a housing shortage of 31 million homes today, the figure is expected to rise to 41 million by the year 2001. Needless to say, the sector can easily expect 15-20 per cent growth in the coming years. And HSI being the leader, stands to benefit in a major way.

Though excess demand has been a constant feature of the market, the nineties brought in an important change in the market. From simple, low-technology "whiteware" (sanitaryware in white), the sector saw a shift to higher end products which related themselves more with lifestyles than needs. Colours became important, and the indicator to that was "colourware sales, which made up 20 per cent of total sales in 1986-87, shot up to 40 per cent in 1992-93 and now, it is at about 50-55 per cent," says V Krishnamurthy, product manager, HSI.

Unlike existing houses, where it is difficult to change over to a new bathroom with new fittings, people in new houses want to get their sanitation styles right first time, and they are willing to spend a little more for it. And given the demand for new housing, colourware sales obviously have a bright future.

The basic change in the sector has been that unlike earlier, when the market was production-led, companies have to focus on advertising and look at customer requirements to optimise production capacities. And that's what HSI has been precisely doing.

HSI has the largest product range on offer, says Krishnam-urthy. There are more than 150 models in various sizes. Each product is available in 15 colours, leading to a combination of 2,250 options for the consumer. And that's not all. For the last two years, it has been concentrating on new product launches. Recently, it launched the super constellation Euro-pean- style water closets (EWC) flushes which uses just 3.5 litres of water. This model leads to a saving of 65 per cent of the required water (compared with other brands). It also incorporates the pnuematic flushing mechanism, brought to India for the first time.

It will launch yet another product in August 1997, says Somany. The product will be a new design in EWC, to be called the EWC Michelangelo. "The response to the design displayed in various exhibitions has been tremendous," says Somany.

Combine number and variety of products with a strong marketing network, and you know why HSI is the leader today. The company has an exclusive dealer network, and its products are available with 300 authorised dealers and 7,000 retailers across the country.

Though the company is the biggest exporter, that's one front which is not doing too well. HSI exports to the UAE, Saudi Arabia and in small quantities to the US. But recession in all these has led exports of sanitaryware (in value), for 1995-96 to fall by 35 per cent to touch Rs 6.06 crore. But at the same time, glassware grew 136 per cent to stand at Rs 71.5 lakh. But this year, both sanitaryware and glassware have not seen good exports. But with high domestic demand, this is not a cause for worry.

This excess demand is putting pressure on the companies to expand capacities. The aggregate capacity in this sector is expected to go up from 65,000 tpa now 1,50,000 tpa by the turn of the century. But for now, as The market leader shows, HSI leads the pack, with 20,000 tpa (1.75 million pieces) in capacity.

"The coming capacity expansion is to keep in line with the increase in demand," says Som-any. The expansion will come in two phases in the next three years. In the first phase, HSI is doubling capacity in its Bibinagar plant in Andhra, at Rs 45 crore. This should be complete by October-November 1997. This would take HSI's capacity to 26,000 tpa (2.3 million pieces per year). The second phase of the expansion will incl-ude setting up of a new 10,000 tpa plant at an expected outlay of Rs 60 crore. The plant should co-me up in the south or the north.

This expansion will be part-financed by the GDR issue HSI is planning sometime towards the latter part of this calendar. Company sources say the company has been talking to various investors from England, the US, Singapore and Switzerland.

In container glass, the company makes flint, amber and green coloured glass and has the largest market in south India. The glass comes in various shapes and designs to suit all user segments like pharmaceuticals, liquor industry, aerated beverages and processed foods. HSIs clientele includes Smith-kline Beecham Consumer Prod-ucts, BBLIL, Glaxo India and Co-ca Cola (through franchisees).

Financially, the company has been a steady performer over the last few years. Between 1995 and 1997, net sales grew 19.5 per cent in 1995-96 to reach Rs 113.12 crore and about three per cent in 1996-97 to touch Rs 116.64 crore (see The financial summary). Net profits, over the same period have risen by roughly 30 per cent to stand at Rs 12.32 crore now.

But an interesting part is total reserves (excluding revaluation reserves), which has grown from Rs 57.14 crore in 1995-96 to Rs 67.29 crore in 1996-97. The rising profits even under conditions of slow sales growth has been achieved by strict cost control over the last two years, says Somany. Also, value-addition in sanitaryware and higher volumes in container glass helped increase the bottomline.

For the future, the company is looking at sales of about Rs 150 crore and net profits of Rs 19.5 crore for 1997-98. These figures should look something like Rs 327 crore of sales and Rs 56 crore in net profits by the turn of the century, says Somany.

Perhaps the most important feature of the latest results from the company is the steep hike in dividends -- from 27.5 per cent to 40 per cent this year. Marke-tmen say that the step may have been taken to keep the investors happy and reflect an investor friendly image now that the company is going the GDR way. If that is so, then it makes sense, because the scrip of HSI has been languishing at between Rs 160 and Rs 190 ever since it fell from Rs 230 in September 1994. Trading volumes have typically remained quite low.

But brokers quickly point out that once construction comes under the limelight once again, investor interest in the scrip is bound to rise. So, given these factors, HSI has all the plus points playing up for it. Investors looking for decent returns in the medium to long term can take a serious look at this scrip.

And before deciding whether to invest or not, some food for thought. Given the strong reser-ves position and assuming that HSI wants to keep its investors happy, can we think of a bonus issue? Any answers?