Hindusthan National Glass & Industries Ltd (HNGIL) registered stable revenue growth of 10.8% y-o-y to Rs 3.6 bn in Q1FY11 primarily on account of volume growth. However, PAT dipped 45% y-o-y to Rs 313 mn primarily on account of lower EBITDA margins, which declined to 20.9% as against 28.3% in Q1FY10 due to higher fuel costs. Although the company has the bargaining power to pass on any increase in costs, there is a time lag in doing so and, hence, there is a temporary impact on margins.

CRISIL Equities expects margins to recover in the subsequent quarters since the company has raised prices by ~6% with effect from August 1, 2010. Increase in realisations will also have a positive impact on the overall revenue growth for the year. Although the y-o-y revenue growth of 10.8% in Q1FY11 was lower than our forecast of 15.8% for the full year, we believe that given the recent increase in realisations, the company will make up for this lower growth in the subsequent quarters. We continue to remain positive on the growth prospects of the company driven by its leadership position in the container glass industry and strong management capabilities. We maintain the fundamental grade of ‘4/5’, indicating that HNGIL’s fundamentals are ‘superior’ relative to other listed equity securities in India. We assign a valuation grade of ‘5/5’, indicating that the market price has a ‘strong upside’ from the current levels.

EBITDA margins revised downwards
HNGIL reported an EBITDA margin of 20.9% in Q1FY11, which was significantly lower than CRISIL Equities’ full-year estimate of 25.0% for FY11. The variation was mainly on account of higher power and fuel costs following the rise in international crude oil prices. Even though we expect margins to recover in the following quarters given that the company has raised its prices by ~6% with effect from August 1, 2010 the impact of lower margins in the first quarter will have some bearing on the margins for the full year. We are, therefore, revising our operating margins downwards by 150 bps to 23.5%. We also revise our EBITDA margins for FY12 to 24.1% as against our earlier estimate of 25.5% as there is some delay expected in shifting its two plants – Neemrana and Nasik from fuel oil to natural gas.

Lack of clarity on the float glass business
HNGIL recently entered the float glass business through HNG Float Glass Ltd, where it holds a 36% share. The production of float glass began in February 2010 and it reported revenues of Rs 500 mn and a loss of Rs 70 mn at the EBITDA level for the two months ended FY10. However, there is a lack of clarity on the performance of the float glass business in Q1FY11, as the company does not disclose the results of HNG Float Glass on a quarterly basis; only the consolidated results are available at the time of financial year ending.

Valuations – strong upside from the current levels
We initiated coverage on HNGIL (dated March 2, 2010) with a fair value of Rs 314. With the downwards revision in EBITDA margins for FY11, we have arrived at a fair value of Rs 292 per share. The implied PER at the revised fair value estimate is 13.0x FY11 and 11.4x FY12 earnings. This translates into a valuation grade of ‘5/5’, indicating ‘strong upside’ from the current levels.

To read the full report: HNGIL