hydro s&s industries ltd
TRANSCRIPT
Hydro S&S Industries Ltd
Enhancing investment decisions
Q2FY11 Result Update
Explanation of CRISIL Fundamental and Valuation (CFV) matrix
The CFV Matrix (CRISIL Fundamental and Valuation Matrix) addresses the two important analysis of an investment making process –
Analysis of Fundamentals (addressed through Fundamental Grade) and Analysis of Returns (Valuation Grade) The fundamental
grade is assigned on a five-point scale from grade 5 (indicating Excellent fundamentals) to grade 1 (Poor fundamentals) The
valuation grade is assigned on a five-point scale from grade 5 (indicating strong upside from the current market price (CMP)) to
grade 1 (strong downside from the CMP).
CRISIL Fundamental Grade
Assessment CRISIL Valuation Grade
Assessment
5/5 Excellent fundamentals 5/5 Strong upside (>25% from CMP)
4/5 Superior fundamentals 4/5 Upside (10-25% from CMP)
3/5 Good fundamentals 3/5 Align (+-10% from CMP)
2/5 Moderate fundamentals 2/5 Downside (negative 10-25% from CMP)
1/5 Poor fundamentals 1/5 Strong downside (<-25% from CMP)
Analyst Disclosure Each member of the team involved in the preparation of the grading report, hereby affirms that there exists no conflict of interest
that can bias the grading recommendation of the company. Additional Disclosure This report has been sponsored by NSE - Investor Protection Fund Trust (NSEIPFT). Disclaimer: This Exchange-commissioned Report (Report) is based on data publicly available or from sources considered reliable. CRISIL Ltd.
(CRISIL) does not represent that it is accurate or complete and hence, it should not be relied upon as such. The data / Report are
subject to change without any prior notice. Opinions expressed herein are our current opinions as on the date of this Report. Nothing
in this Report constitutes investment, legal, accounting or tax advice or any solicitation, whatsoever. The subscriber / user assumes
the entire risk of any use made of this data / Report. CRISIL especially states that it has no financial liability, whatsoever, to the
subscribers / users of this Report. This Report is for the personal information only of the authorized recipient in India only. This
Report should not be reproduced or redistributed or communicated directly or indirectly in any form to any other person – especially
outside India or published or copied in whole or in part, for any purpose.
CRISIL EQUITIES | 1
Hydro S&S Industries Ltd Swinging back to profit
Fundamental Grade 3/5 (Good fundamentals)
Valuation Grade 4/5 (CMP has upside)
Industry Chemicals
Fair Value Rs 37 CMP Rs 33
November 2, 2010
Hydro S&S Industries Ltd’s (Hydro’s) Q2FY11 revenues were in line with
CRISIL Equities’ expectations buoyed by strong growth in the domestic
automobile industry, which supported demand for the company’s
polypropylene (PP) compounds. Our stance for the rest of the year remains
stable on the back of a) positive outlook for the automobile industry and b) ramp-up in production of Tata NANO car, for which Hydro is an exclusive
supplier of PP compounds. We expect these factors to continue to support
higher sales and profitability. Consequently, we maintain our earnings
estimates for FY11 and FY12, and our fundamental grade of ‘3/5’.
Q2FY11 result analysis
• Hydro’s Q2FY11 revenues increased 32.7% y-o-y to Rs 340 mn driven by
strong demand for PP compounds from the automobile industry.
• EBITDA was higher at Rs 24 mn in Q2FY11 (up 76.3%) from Rs 13.8 mn in
Q2FY10, primarily on account of higher sales and improved realisations.
Raw material cost as a percentage of sales declined to 81.73% in Q2FY11
from 82.19% in Q2FY10. The increased realisation and operating leverage
supported expansion in margins by 177 bps y-o-y to 7.1% in 2QFY11.
• The improved operating performance helped Hydro report positive earnings
of Rs 3.6 mn in Q2FY11 compared with a net loss of Rs 1.6 mn in Q2FY10.
• EPS was Rs 0.6 in Q2FY11 compared with negative Rs 0.3 in Q2FY10.
Key developments
• During 2QFY11, Hydro completed the second phase of capacity expansion
(6,000 MTPA) at its manufacturing facility in Pune, taking its total capacity
to 31,000 mtpa.
• Hydro started supplying PP compounds to Volkswagen India for its
compact Polo model.
Valuations: Upside from current levels
We continue to value Hydro based on the discounted cash flow (DCF) method.
Our fair value for Hydro is revised to Rs 37 due to rolling forward of our
estimates from FY11 to FY12. At this value, the implied P/Es are 37.5x FY11
earnings estimate and 9.6x FY12 earnings estimate.The valuation grade is
revised to ‘4/5’.
KEY FORECAST
Key forecast
(Rs mn) FY08 FY09 FY10 FY11E FY12E
Operating income 1,168 1,184 1,093 1,431 1,849
EBITDA 126 40 63 80 112
Adj PAT 54 (18) (0) 6 25
Adj EPS-Rs 8.2 (2.8) (0.0) 1.0 3.9
EPS growth (%) 82.6 (134.3) (99.6) N.M 291.4
Dividend yield (%) 2.3 - - 2.9 2.9
RoCE (%) 22.5 3.4 6.1 8.6 12.9
RoE (%) 22.0 (7.2) (0.0) 2.6 9.9
PE (x) 7.3 (11.5) N.M 35.1 9.0
P/BV (x) 1.5 0.9 0.9 0.9 0.9
EV/EBITDA (x) 5.1 13.4 7.7 7.0 5.5
Source: CRISIL Equities estimate
N.M: Not meaningful; CMP: Current Market Price
CFV MATRIX
KEY STOCK STATISTICS
NIFTY 6,027
NSE Ticker HYDROS&S
Face value (Rs per share) 10
Shares outstanding (mn) 6.5
Market cap (Rs mn)/( $ mn) 210/4.7
Enterprise value (Rs mn) /( $ mn) 483/10.8
52-week range (Rs) (H/L) 75.5/30.1
Beta 1.5
Free float (%) 33.6%
Avg daily volumes (30-days) 4,775
Avg daily value (30-days) (Rs mn) 0.2
SHAREHOLDING PATTERN
PERFORMANCE VIS-À-VIS MARKET
Returns
1-m 3-m 6-m 12-m
Hydro -0.6% -16% -16.6% N.A.*
NIFTY 4% 12% 15% 18%
* Hydro was listed on NSE on January 11, 2010
ANALYTICAL CONTACT Chetan Majithia (Head) [email protected]
Amit kawle [email protected]
Vishal Rampuria [email protected]
Client servicing desk +91 22 3342 3561 [email protected]
1
2
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4
5
1 2 3 4 5
Valuation Grade
Fu
nd
am
en
tal G
rad
e
Poor
Excellent
Str
on
gD
ow
ns
ide
Str
on
gU
psid
e
66.4% 66.4% 66.4% 66.43%
33.6% 33.6% 33.6% 34%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Dec-09 Mar-10 Jun-10 Sep-10
Promoter FII DII Others
CRISIL EQUITIES | 2
Hydro S&S Industries Ltd
Q2FY11 Result Summary
(Rs mn) Q2FY11 Q1FY11 Q2FY10 q-o-q(%) y-o-y(%)
Net sales 340 308 256 10.4 32.7
Raw materials cost 278 259 211 7.1 31.9
Raw materials cost (% of net sales) 81.7% 84.2% 82.2% -248bps -46bps
Employees cost 16 14 13 7.6 16.6
Other expenses 22 17 19 29.1 20.3
EBITDA 24 17 14 43.5 76.3
EBITDA margin 7.1% 5.5% 5.4% 165 bps 177 bps
Depreciation 6.7 6.5 6.1 3.3 10.1
EBIT 17.6 10.5 7.7 68.3 128.4
Interest and finance charges 13.2 11.3 12.2 17.0 8.4
Operating PBT 4.4 (0.8) (4.4) nm nm
Other Income 0.1 0.1 0.2 nm nm
PBT 4.4 (0.7) (4.2) nm nm
Tax 0.9 0.0 (2.6) nm nm
Minority Interest 0 0 0 0 0
PAT 3.6 (0.7) (1.6) nm nm
Adj PAT 3.6 (0.7) (1.6)
Adj PAT margin 1.1% -0.2% -0.6% 128bps 169bps
No of equity shares (Mn) 6.5 6.5 6.5 6.5 0.0
Adj EPS (Rs) 0.6 -0.1 -0.3 nm nm
Source: Company, CRISIL Equ it ies
Cars and utility vehicles production on the rise Strong automobile industry drive revenues
Source: Company, CRISIL Equ it ies Source: Company, CRISIL Equ it ies
Revenues and EBITDA margins moving up Improvement in profitability
Source: Company, CRISIL Equ it ies
476 393 499 496 567 600 673 653 743
-20%
-10%
0%
10%
20%
30%
40%
50%
60%
-
200
400
600
800
Q2FY09
Q3FY09
Q4FY09
Q1FY10
Q2FY10
Q3FY10
Q4FY10
Q1FY11
Q2FY11
Units in Thousands
cars and utility vehicles production y-o-y growth (RHS)
395.9 219.4 217.4 228.1 256.5 291.9 317.6 308.2 340.0
-60%
-45%
-30%
-15%
0%
15%
30%
0
90
180
270
360
450
Q2FY09
Q3FY09
Q4FY09
Q1FY10
Q2FY10
Q3FY10
Q4FY10
Q1FY11
Q2FY11
Rs mn
Revenues [LHS] q-o-q growth [RHS]
395.9 219.4 217.4 228.1 256.5 291.9 317.6 308.2 340.0
12.45
-0.32
-9.31
4.215.46
7.41 7.55
5.577.1
-12
-10
-8
-6
-4
-2
0
2
4
6
8
10
12
14
0.0
75.0
150.0
225.0
300.0
375.0
450.0
Q2FY09
Q3FY09
Q4FY09
Q1FY10
Q2FY10
Q3FY10
Q4FY10
Q1FY11
Q2FY11
(%)Rs mn
Revenues EBITDA Margins (%) (RHS)
21.4
-13.6 -26.8 -6.6 -1.6
3.8 4.4
-0.7
3.6
5.4%
-6.2%
-12.3%
-2.9%
-0.6%
1.3% 1.4%-0.2%
1.1%
-20%
-10%
0%
10%
-30
-20
-10
0
10
20
30
Q2FY09
Q3FY09
Q4FY09
Q1FY10
Q2FY10
Q3FY10
Q4FY10
Q1FY11
Q2FY11
Rs mn
PAT PAT Margins (%) (RHS)
Improved sales realisation
support margin expansion
CRISIL EQUITIES | 3
Hydro S&S Industries Ltd
Share price movement Fair value movement since initiation
-Indexed to 100
Source: NSE
Source: NSE
VALUATION We continue to value Hydro based on the discounted cash flow method. Our fair
value for Hydro is revised to Rs 37 due to rolling forward of our estimates from
FY11 to FY12. At this value, the implied P/Es are 37.5x FY11 earnings estimate
and 9.6x FY12 earnings estimate.
One-year forward P/E band One-year forward EV/EBITDA band
Source: CRISIL Equ it ies Source: CRISIL Equ it ies
P/E – premium/discount to NIFTY P/E movement
Source: CRISIL Equ it ies
Source: CRISIL Equ it ies
0
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Hydro S&S NIFTY
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(in '000)(Rs)
Total Traded Quantity(RHS) SharePrice(LHS) Fair Value
0
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(Rs)
Hydro S&S 5x 7x 9x 10x 11x
0
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(Rs)
EV 3x 4x 5x 6x
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350%
Jan-10
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Premium/Discount to NIFTY Median
0.0
10.0
20.0
30.0
40.0
50.0
60.0
70.0
Jan-10
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Feb-10
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(x)
1yr Fwd PE (x) Average PE +1 std dev -1 std dev
CRISIL EQUITIES | 4
Hydro S&S Industries Ltd
CRISIL IER reports released on Hydro S&S Industries Ltd Date Nature of report Fundamental grade Fair value Valuation grade CMP
(on the date of report)
13-May-10 Initiating coverage* 3/5 Rs 32.5 1/5 Rs 71.5
06-Sep-10 Q1FY11 result update 3/5 Rs 32.5 3/5 Rs 35.3
01-Nov-10 Q2FY11 result update 3/5 Rs 37 4/5 Rs 33
* For detailed initiating coverage report please visit: www.ier.co.in
CRISIL Equity research is also available on Bloomberg (CRI <go>) and Thomson Reuters.
CRISIL EQUITIES | 5
Hydro S&S Industries Ltd
FINANCIALS
Note: All ratios are computed on Adj PAT; nm= Not Meaningful
Source: Company, CRISIL Equities estimate
Income statement Balance Sheet
(Rs mn) FY 2008 FY 2009 FY 2010 FY 2011 FY 2012 (Rs mn) FY 2008 FY 2009 FY 2010 FY 2011 FY 2012
Operating income 1,167.6 1,184.0 1,093.2 1,431.2 1,848.7 Liabilities
EBITDA 126.5 40.2 62.6 80.1 112.0 Equity share capital 65 65 65 65 65
EBITDA margin 0.1 0.0 0.1 0.1 0.1 Reserves 200 182 182 180 198
Depreciation 15.6 20.6 26.1 28.3 28.6 Minorities - - - - -
EBIT 110.9 19.6 36.4 51.7 83.4 Net worth 266 247 247 245 263
Interest 32.5 48.3 47.6 47.9 53.3 Convertible debt - - - - -
Operating PBT 78.4 (28.7) (11.1) 3.9 30.2 Other debt 282 360 340 370 420
Other income 2.4 2.8 6.6 5.7 7.4 Total debt 282 360 340 370 420
Exceptional inc/(exp) - - - - - Deffered tax liability (net) 43
PBT 80.8 (25.9) (4.6) 9.6 37.5 Total liabilities 591 606 586 615 683
Tax provision 27.2 (7.6) (4.5) 3.2 12.4 Assets
Minority interest - - - - - Net f ixed assets 195 319 293 299 276
PAT (Reported) 53.6 (18.3) (0.1) 6.4 25.2 Capital WIP 39 9 9 9 9
Less: Exceptionals - - - - - Total fixed assets 234 328 302 309 285
Adjusted PAT 53.6 (18.3) (0.1) 6.4 25.2 Investments 0 0 0 0 0
Current assets
Ratios Inventory 210 159 150 196 253
FY 2008 FY 2009 FY 2010 FY 2011 FY 2012 Sundry debtors 259 183 180 235 304
Growth Loans and advances 33 38 26 34 44
Operating income (%) 15.9 1.4 (7.7) 30.9 29.2 Cash & bank balance 9 12 59 8 8
EBITDA (%) 74.9 (68.2) 55.7 28.0 39.9 Marketable securities 14 23 23 23 23
Adj PAT (%) 82.6 nm nm nm 291.4 Total current assets 526 414 437 496 632
Adj EPS (%) 82.6 nm nm nm 291.4 Total current liabilities 169 101 119 155 200
Net current assets 357 313 319 341 432
Profitability Intangibles/Misc. expenditure 0 - - - -
EBITDA margin (%) 10.8 3.4 5.7 5.6 6.1 Total assets 591 642 621 650 718
Adj PAT Margin (%) 4.6 (1.5) (0.0) 0.4 1.4
RoE (%) 22.0 (7.2) (0.0) 2.6 9.9 Cash flow
RoCE (%) 22.5 3.4 6.1 8.6 12.9 (Rs Mn) FY 2008 FY 2009 FY 2010 FY 2011 FY 2012
RoIC (%) 18.4 5.8 9.6 10.6 13.4 Pre-tax profit 81 (26) (5) 10 38
Total tax paid (23) (1) 4 (3) (12)
Valuations Depreciation 16 21 26 28 29
Price-earnings (x) 7.3 (11.5) nm 35.1 9.0 Working capital changes (66) 54 41 (73) (91)
Price-book (x) 1.5 0.9 0.9 0.9 0.9 Net cash from operations 7 48 67 (38) (38)
EV/EBITDA (x) 5.1 13.4 7.7 7.0 5.5 Cash from investments
EV/Sales (x) 0.6 0.5 0.4 0.4 0.3 Capital expenditure (63) (115) (0) (35) (5)
Dividend payout ratio (%) 17.1 - - 101.3 25.9 Investments and others (0) (8) - - -
Dividend yield (%) 2.3 - - 2.9 2.9 Net cash from investments (64) (123) (0) (35) (5)
Cash from financing
B/S ratios Equity raised/(repaid) 0 (0) (0) 0 0
Inventory days 74.9 51.7 54.4 54.0 54.2 Debt raised/(repaid) 66 77 (20) 30 50
Creditors days 57.4 32.4 40.0 40.0 40.0 Dividend (incl. tax) (9) - - (8) (8)
Debtor days 72.3 51.6 54.0 54.1 54.2 Others (incl extraordinaries) - - - - -
Working capital days 93.7 94.2 86.1 69.8 70.3 Net cash from financing 56 77 (20) 22 42
Gross asset turnover (x) 3.6 2.9 2.3 2.9 3.6 Change in cash posiiton (0) 2 47 (51) (0)
Net asset turnover (x) 6.2 4.6 3.6 4.8 6.4 Closing cash 9 12 59 8 8
Sales/operating assets (x) 5.6 4.2 3.5 4.7 6.2
Current ratio (x) 3.1 4.1 3.7 3.2 3.2 Quarterly financials
Debt-equity (x) 1.1 1.5 1.4 1.5 1.6 (Rs Mn) Q2FY10 Q3FY10 Q4FY10 Q1FY11 Q2FY11
Net debt/equity (x) 1.0 1.3 1.0 1.4 1.5 Net Sales 256 292 318 308 340
Interest coverage 3.4 0.4 0.8 1.1 1.6 Change (q-o-q) 12% 14% 9% -3% 10%
EBITDA 14 22 24 17 24
Per share Change (q-o-q) 46% 55% 11% -28% 41.5%
FY 2008 FY 2009 FY 2010 FY 2011 FY 2012 EBITDA margin 5.5% 7.4% 7.5% 5.6% 7.1%
Adj EPS (Rs) 8.2 (2.8) (0.0) 1.0 3.9 PAT (1.6) 3.8 4.4 (0.7) 3.6
CEPS 10.6 0.3 4.0 5.3 8.3 Adj PAT (1.6) 3.8 4.4 (0.7) 3.6
Book value 40.7 37.9 37.9 37.7 40.4 Change (q-o-q) -104% nm 16% -116% nm
Dividend (Rs) 1.4 - - 1.0 1.0 Adj PAT margin -0.6% 1.3% 1.4% -0.2% 1.1%
Actual o/s shares (mn) 6.5 6.5 6.5 6.5 6.5 Adj EPS (0.3) 0.6 0.7 (0.1) 0.6
CRISIL Independent Equity Research Team
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