Stock Review: Hindustan National Glass (HNGL)

At the current premium valuations, Hindustan National Glass' stock is fairly valued with limited room for a major upside

 

KOLKATA-BASED Hindusthan National Glass (HNGL) is the largest producer of glass containers in the country. The company has seen rapid growth in the past three years. ET Intelligence Group had recommended HNGL in its issue dated December 7, 2009. Our recommendation has played out well on the bourses as the stock has witnessed a 77.5% rise since then — outperforming the Sensex that rose by 20% during the same period. The company announced double-digit revenue growth in its latest second quarterly results. At the current premium valuations, the company's stock is fairly valued with limited room for a major upside.

BUSINESS :

The company commands a share of 55% in the organised container glass market. It supplies 70% of its production to the fast-growing liquor and beer segment. The remaining is supplied to pharmaceutical and FMCG industries. The company has grown both organically and inorganically over the years making three acquisitions in the past eight years. It has six manufacturing plants in India, with work in progress in its seventh plant in Andhra Pradesh.

FINANCIALS:

The company's consolidated earnings have grown at a CAGR of 65% over the past three fiscals. Its annual revenues have grown at a CAGR of 38% during the same period. It has been generating positive cash flows year after year with high investments made in fixed assets in the past three years.

   Fluctuating raw material cost, particularly, soda ash, and power & fuel cost pose a challenge for the company. The company's earnings during the first quarter were dented on account of high raw material costs. The company has improved the situation by administering a price rise of 6-7% in its products since August.

   By steadily switching to natural gas in some of its plants, the company is partially overcoming its dependence on crude oil fuel.

GROWTH DRIVERS:

The beer industry in the country is expected to grow at a CAGR of 20% while the non-beer liquor by 15%. This demand-led growth is the major driver for the company in the coming years. The 1,400-crore company also has a presence in the fast-growing float glass segment, with uses in the real estate and automotive segment, through its associate company HNGFL, wherein it holds a 48% stake.

   HNG is also in the process of carving strategic alliances with foreign companies in the same line of business. Given its strong balance sheet and a low debt equity ratio of 0.5, it is also open to acquisitions in its line of businesses.

VALUATIONS:

At a market cap of 2,269 crore, the company, the largest in its sector, is valued at one-and-a-half times its revenues of the past 12 months. Its stock is trading at a price-to-earnings multiple of 20. These valuations are fair for a company like HNG with a sound financials and good management pedigree.

   Given the run-up in the stock price in the past one year, the market seems to have discounted the company's expansion plans and appetite for acquisitions. In the absence of any fresh triggers, the upside is likely to be limited.