Hyderabad: HSIL Ltd, which makes sanitaryware under the Hindware brand and is the flagship of the Somany Group, is evaluating two firms for a possible acquisition, seeking a four-fold jump in revenue in five years, joint managing director Sandip Somany said.
The company will use a mix of debt and internal accruals to finance the acquisition, Somany said in a phone interview from Gurgaon, the company’s corporate headquarters.
In 2010-11, HSIL earmarked Rs.650 crore for capital expenditure by 2015 out of which it has spent Rs.450 crore so far. The remaining Rs.200 crore would go towards expansion plans that are already in place.
With a 40% market share, HSIL is India’s largest maker of sanitaryware such as wash basins, water closets, cisterns and sinks, and is seeking to widen its lead over rivals, including Parryware Roca, Cera Sanitaryware, Toto and Kohler Co.
The company also has a presence in building products and packaging, and the kitchens and glass segments, and is looking at opportunities to manufacture “new building products that are starting to grow in India”, said Somany, declining to name the products on grounds of business confidentiality.
Lawyers and accountants are currently examining the books of the two companies HSIL is in talks with for a potential acquisition. Somany didn’t name the companies, citing regulatory norms, but said they had the same kind of product portfolio as HSIL.
The potential acquisition is part of the company’s objective of expanding into a Rs.5,000 crore entity in five years. HSIL earned Rs.1,339.33 crore of revenue in the 2011-12 financial year, posting an annual net profit of Rs.110.10 crore.
Even as it seeks expansion, HSIL plans to exit the low-end sanitaryware market because of the increasing cost of fuel and electricity that have reduced margins that are already low.
“Unfortunately, there comes a stage when certain types of products cannot be financially viable. So, we are exiting those segments,” Somany said.
Analysts say costs are hurting the margins of sanitaryware makers. Mohit Modi, director of equity research at CRISIL Research, observed that the Ebit (earnings before interest and tax) margin of HSIL’s sanitary business declined 180 basis points (bps) year-on-year and 40 bps quarter-on-quarter to 18.2% in the quarter ended 31 December.
Margins of HSIL’s rival Cera Sanitaryware Ltd declined by 60 bps to 16% in the same quarter. One basis point is one-hundredth of a percentage point.
HSIL’s December quarter revenue grew by 15.22% to Rs.394.41 crore while its net profit halved to Rs.12.26 crore from the year-ago period.
“With year-on-year revenue growth of 20% in the latest December quarter, the sanitaryware segment is faring well though the margins are under pressure due to hike in input prices,” Modi said.
But a “significant” portion of the input cost is being passed on to consumers, which has led to price increases in the range of 5%, according to Twinkle Gosar, an analyst at Angel Broking Ltd who tracks Cera Sanitaryware. The demand for sanitaryware has not been impacted because of the price hike, Gosar said.
“Costs are rising. To some extent we have been able to set off the cost increase with price increases. But that’s not always possible,” Somany said.
The retirement of Raasi, the low-end brand, will not however hamper the capacity utilization at HSIL’s facilities as there is growing demand for its other products, he said. “We believe it is better to cater to those product categories and those segments of the market,” Somany said.
Raasi contributed just 1.57% to the company’s revenue in the year ended March compared with the standard brand Hindware (46.20%) and the premium and super-premium brands—Queo, Hindware Italian Collection and Hindware Art. Queo is pitted against marquee international brands such as Kohler Co. and the world’s largest toilet accessory maker Toto Ltd that have made inroads into the Indian market over the last few years.
Somany said competition is increasing “quite severely” with the entry of multinationals into the market but said HSIL still continues to grow and maintain its leadership position.
The company is building Rs.100 crore faucet manufacturing plant in Kaharani, Rajasthan to manufacture 2.5 million pieces a year. Civil work is currently underway and machinery has been ordered for the plant that will go into trial production by September 2013, Somany said.
Another plant to manufacture 1.2 million pieces of sanitaryware per year in Dahej, Gujarat is in the planning stage and will ultimately be capitalised at Rs.150-160 crore by the time it goes on stream by December 2014-March 2015, Somany said. “These two initiatives will increase our turnover quite significantly,” he noted. Rival firms are also expanding capacity. Cera, the third largest sanitaryware maker, said it will invest Rs.150 crore over the next two-three years to ramp up production of sanitaryware and faucets. H&R Johnson (India), a division of Prism Cement Ltd, in May said it would invest Rs.400 crore to scale up production.