EQUITY RESEARCH: Hindware Home Innovation Ltd

Somany Home Innovations Ltd. (SHIL) is a newly created Corporate Entity which become demerged from HSIL Ltd, vastly regarded with the aid of its Brand Hindware, a leading name inside the Indian marketplace. SHIL is centred on servicing end-consumers in the market and is concerned in branding, advertising, income, distribution, buying and selling, service etc. of Consumer Appliances under the Brand name ‘Hindware’, ‘Moonbow’ and Furniture Retail Business beneath the Brand call ‘Evok’.Wide product variety covers regions like Kitchen appliances, Water warmers, Air Coolers, Water Purifiers, Ceiling Fans to Home furnishing etc.It has a longtime community of 9,650+ retail and 750+ distribution points.

ABOUT

KEY POINTS

SHAREHOLDING PATTERN:

MANAGEMENT:

FINANCIALS:

Building Products Business Update

Bathware Business

• Inflationary concerns and rising interest rates have slightly impacted the demand for mid and lower-priced offerings.
• Margins improved on a Y-o-Y basis, owing to operating leverage, better product mix, and lower gas prices
• Integrated marketing spearheaded by a vibrant IPL campaign further boosted brand recognition and appeal
• Collaborated with Water Management & Plumbing Skill Council (WMPSC) to upskill 5,000 plumbers over the next two years
• Focus on launching brand shops to foray into untapped markets
• Continued to focus on optimizing our working capital days

Plastic Pipes & Fittings Business Update

• The company achieved higher market share despite slight headwinds in Q1 on account of lower demand and reduced input price.
• Efforts to secure volume growth through price rationalization and incentives amid a highly competitive environment
• Continued focus on increasing brand awareness to further improve market share
• Diversified into PTMT Faucets and Accessories to offer comprehensive plumbing solutions for customers' needs
• Exclusive collaboration up with RWC Reliance Worldwide Corporation to launch Truflo Sharkbite, a range of innovative multilayer composite pipes and fittings
• Establishing a new manufacturing facility in Roorkee, Uttarakhand, and construction of the facility is underway

Consumer Appliances Business Update

• Core Consumer Business built over last 6 years with a leading position in Kitchen appliances and growing presence in water heating and air coolers segments. Revenue stood at ₹105 crore
• Market sentiment facing challenges initially on account of increased input prices and recently on account of inflationary pressure and increased interest rates.
• The market expects a positive festive season, unlike last year.
• Maintained leading position in the kitchen appliances segment despite inflation and rising competition
• Unseasonal rains impacted air cooler demand
• Currently, the business has 1,400+ distributors and 14,000+ retailers in India
• The successful launch of the Hintastica Private Limited (JV) line of heating appliances at its state-of-the-art manufacturing facility in Jadcherla, Telangana, is delivering as per expectations.

CONCALL HIGHLIGHTS- AUG

Capex:

• On track to produce larger, more premium sanitaryware products in-house by Q3
• Diversifying into newer regions, the Roorkee Greenfield project on track
• The capacity of the PVC pipes business is 48,000 metric tons per annum, with plans to expand to 60,000 metric tons per annum in the future

New products:

• Foray into PTMT Faucets and other accessories, collaboration with Reliance Worldwide Corporation for TRUFLO SharkBite
• Focus on launching innovative products, building the Hindware brand, expanding distribution, and strengthening the premium and luxury category
• The company is focusing on reducing import dependence and increasing domestic procurement for sanitaryware and faucets

Guidance:

• Guidance of 1.25x to 1.5x market growth rate for revenue
• Performance instills confidence in exceeding sales targets of Rs. 1,000 crore before FY25
• No specific guidance was provided for FY24 and FY25
• The company expects growth in the CPVC segment from Q3 onwards and aims to achieve Rs. 1,000 crores in FY25

Financials:

• Revenue for the quarter stood at Rs. 634 crore
• EBITDA and margins improved on a Y-o-Y basis to Rs. 68 crores and 10.7% respectively
• Margins improved due to better product mix and focus on premium products
• Working capital reduction of 7 days in Q1, aims to reduce by 15 days for the year
• The net debt as of June 2023 is Rs. 790 crores
• Sandeep Sikka discussed debt reduction plans, stating that they aim to clear off Rs. 100 crores of debt this year and another Rs. 100 crores next year
• The net debt is expected to be around Rs. 650 to 700 crores by FY25
• The company is working on margin expansion through initiatives such as reducing costs and focusing on premium products

Business performance:

• Revenues were flattish compared to the corresponding quarter last year
• Market demand was muted due to increased input and land prices, higher interest rates, and unpredictable weather
• Revenue for Q1 FY24 was impacted by sluggish demand and reduced raw material prices
• Volumes increased by 13% YoY, with growth in PVC and a decline in CPVC
• Consumer demand is impacted by inflation concerns, particularly in small towns and rural areas
• Strength in kitchen division, decline in cooling products due to delayed monsoon
• Margins have improved due to the elimination of costs from buying from other group companies
• The company expects growth in the consumer appliances business through rationalization and focus on specific segments

Other highlights:

• The focus in the near term is to identify and adopt business strategies to navigate inflationary challenges
• The long-term goal is to introduce a range of smart, connected products
• IPL sponsorship to enhance brand awareness
• The real estate market is doing well in the premium segment, but the mid and affordable segments are under stress
• The company is evaluating options for the retail business and expects to make a decision in the next three to six months
• The company is walking a path and is confident in achieving its long-term plans

KEY FEATURES:

Addressable market opportunity scaled 10x, eyeing leading positions across business verticals: In the previous ten years, HHIL has added consumer-facing companies including faucets, consumer appliances, and plastic pipes and fittings, increasing its addressable market size prospects by ten times to Rs. 50,000 crore. The business is already a market leader in air conditioners, water heaters, air coolers, kitchen chimneys, hoods and hobs, and sanitaryware. The business currently has plans to become a market leader in smart appliances and one of the top five companies in the CPVC market. In the first five years after entering that market, the company has a well-defined plan to be one of the top five players. In the same way, long-term revenue development would be facilitated.

Plastic piping – Fastest growing vertical with the aim of leadership positioning: Over the fiscal years 2019 through 2023, HHIL's plastic pipes and fittings income increased at a healthy rate of 57% CAGR to reach Rs. 785 crore. Following the previous brownfield expansion in Hyderabad, it is constructing a 12,500 mtpa greenfield expansion in Uttarakhand at a cost of Rs. 180 crore, which is anticipated to be finished by Q4FY2025 and increase its overall plastic pipe capacity from the existing 48,000 mtpa to 60,500 mtpa. We anticipate a 17% CAGR in its plastic pipes and fittings revenue from FY2023 to FY2026E, driven by robust demand and capacity expansions.

Strategic partnerships to gain a foothold in newer product segments: In January 2023, Hintastica Private Limited, a 50:50 joint venture between HHIL and Groupe Atlantic (a $3 million French company), began producing heating appliances for trial purposes in Telangana. The facility, which spans six acres, has a yearly production capacity of six lakh water heaters and other equipment. The business is considering launching new goods through the JV, particularly in the bathware area. HHIL provides kitchen and furniture fittings products through a cooperation with Formenti & Giovenzana Group (FGV), a well-known Italian brand in the furniture fittings industry. Such strategic alliances, in our opinion, would enable HHIL to expand its reach and market share in emerging product categories.

Market size opportunities scaled by 10x over a decade

In the last ten years, HHIL has evolved, moving from a market presence limited to the sanitaryware segment in 2012 with an addressable market size of Rs. 4,000 crore to a variety of additional customer-facing companies in 2022 with an addressable market size of Rs. 50,000 crore. The company expanded into industries such faucets, which had a market size of Rs. 11,000 crore in 2014, consumer appliances, which had a revenue of Rs. 25,000 crore in 2015, plastic pipes and fittings, which had a revenue of Rs. 35,000 crore in 2018, and fans and kitchen fixtures, which had a revenue of Rs. 40,000 crore in 2020. Within the first five years of entering the market, it was able to position itself among the top five players in each of its businesses by developing significant skills.

Pipes – Industry-leading growth vertical

The bathware goods from HHIL (sanitaryware, faucets, and premium tile products) are complemented by plastic pipes and fittings, which are part of the construction products section.  The company offers lead-free UPVC pipes, SWR pipes, PVC pipes for potable water, column pipes, and above-water storage tanks in addition to CPVC pipes for hot and cold water plumbing applications. The company currently has over 280 active distributors and more than 25,000 retail locations. With Sekisui Chemicals ($10 billion Japanese corporation), the company's strategic collaboration for CPCV resins has given it easy access to raw materials and assisted in maintaining a continuous supply of goods. The company's TRUFLO brand is the domestically fastest-growing brand of plastic pipes and fittings. In three years, TRUFLO hopes to rank among the top five CPVC companies, having already added a large number of SKUs to its existing inventory of more than 2,000.

Revenue from plastic pipes and fittings increased at a healthy 57% CAGR to Rs. 785 crore between FY2019 and FY2023. With the start of commercial production at its second plant in Isnapur, Hyderabad, HHIL increased its annual output capacity from 37,000 to 48,000 tonnes. It is investing Rs. 180 crore in a greenfield 12,500 tonne per year capacity expansion project in Roorkee, Uttarakhand, which is anticipated to be finished by Q4FY2025. We anticipate robust demand to drive a 17% CAGR in its plastic pipes and fittings revenue during the period of FY2023–FY2025E.

Bathware – Maintaining a leadership position in sanitaryware and faucets

In the market for sanitaryware, HHIL is a market leader, and it is second in the market for faucets. The Indian sanitaryware business is projected to be worth more than Rs. 6,000 crore, with unorganized firms controlling about one-fourth of the market. While the Indian faucet industry is thought to be worth more than Rs. 12,000 crore and has been expanding by 18–19% each year for the past few years. To ensure strong after-sales support, its distribution network for sanitaryware and faucets is supported by 525+ brand stores and 31,000+ retail touchpoints countrywide. 390+ distributors and a service network of 660+ technicians in 710+ districts round out the network. Its competitive advantage stems from these crucial attributes, which have helped it keep a commanding market position in the sector. Under the Hindware Italian brand, the company offers a variety of ultra-premium and premium tiles in addition to sanitaryware and faucets. These tiles are made to accommodate a variety of uses, such as flooring and bathrooms in both commercial and residential settings. We anticipate a 12% CAGR in its bath ware revenue between FY2023 and FY2025E.

Consumer appliances business – Eyeing a leadership position in smart appliances

Under its consumer appliances division, HHIL offers a wide range of products, including kitchen appliances, sinks, water purifiers, water heaters, air conditioners, fans, and furniture fittings. The business is a major player in the kitchen chimney, hood, and hob market. In the extremely fragmented industry for air conditioners and water heaters, the firm is one of the top five manufacturers. The trial production of water heaters and other heating appliances by Hintastica Private Limited, a 50:50 joint venture between the company and Groupe Atlantic, began in January 2023 at a plant in Telangana. This plant has an annual capacity to produce six lakh units of these appliances. Next-generation products built on the Internet of Things (IoT) will continue to be the company's primary focus. The Department of Scientific and Industrial Research (DSIR) has praised HHIL's internal R&D. Also, 33 patent applications have been made. The company has created the Hindware Konnect, a smart and intelligent IoT platform, with the goal of becoming a market leader in smart appliances. The company currently has 13,000+ retail touchpoints spread among 1,300+ distributors. It is growing its dealer and retailer network in Tier III and IV cities to increase market penetration and awareness. Over the period of FY2023–FY2025E, we anticipate its consumer appliances revenue to grow by 8% CAGR.

Strategic partnerships to gain a foothold in newer product segments

In January 2023, Hintastica Private Limited, a 50:50 joint venture between HHIL and Groupe Atlantic (a $3 million French company), began producing heating appliances for trial purposes in Telangana. The facility, which spans six acres, has a yearly production capacity of six lakh water heaters and other equipment. The business is considering launching new goods through the JV, particularly in the bathware area. HHIL produces kitchen and furniture fittings products as a result of its relationship with Formenti & Giovenzana Group (FGV), a well-known Italian manufacturer of furniture fittings. Such strategic alliances, in our opinion, would enable HHIL to expand its reach and market share in emerging product categories.

RISK:

Linkages to the cyclical real estate sector and presence in a competitive industry:

The demand for HHIL’s products is linked to the cyclical real estate sector. In the post-COVID scenario, the Indian residential market staged a stellar recovery in FY22, with industry sales volumes recovering back to the FY20 level and unsold inventory reducing from 46 months to 36 months over FY20-22. However, the recent rise in interest rates globally and in India along with a rise in construction costs has led to concerns over the sustainability of residential demand.

Susceptibility of the company to volatility in raw material prices: The volatility in fuel prices (primarily natural gas) and other key raw materials (various types of clay, brass, and chrome plating) directly impacts the cost of production for the company. During FY22, the company witnessed a significant surge in the prices of raw materials, with the prices of brass increasing by 32% between FY21 to FY22. The inflationary pressure was further aggravated in H1FY23, with the prices of LPG witnessing a surge of 38% and the prices of natural gas increasing by 75%.

Working capital-intensive nature of operations: The operations of the company are working capital-intensive in nature on account of the high inventory-holding requirements and high collection period. The company has to hold and maintain sufficient inventory of its large portfolio of products across its retail outlets, which results in high inventory to be held by the company. The total inventory of the company stood at around ₹675.31 as of March 31, 2022, as compared with ₹280.18 crore as of March 31, 2021. The substantial increase in the inventory is on account of the acquisition of the manufacturing division of AGI Greenpac Ltd with effect from March 31, 2022 (as a part of the slump sale inventory of ₹234 crore was acquired) and higher inventory stock up due to the expected robust demand on the back of the real estate upcycle. However, with the recent hikes in interest rates by the Reserve Bank of India (RBI), the interest rate on home loans has increased substantially, which has led to a reduction in demand from the builders who were adopting a wait-and-watch approach with respect to new launches.

VALUATION:

Sector view - Healthy growth tailwinds across end-user industries

According to estimates, the Indian sanitaryware market will be worth 6,000 crore rupees in FY2023, up 15% from the previous three years. The market for faucets in India is anticipated to reach Rs. 12,000 crore in FY2023, increasing by 18–20% over the previous several years. The bathwater market is anticipated to continue to have high demand, driven by increased investments in commercial and residential construction. The market for pipes is projected to be about $22,000 billion in FY2023 and to grow to $55,000 to $60,000 billion by FY2025. The building industry's increasing use of CPVC pipes in plumbing and piping applications is likely to drive demand in the piping sector to continue growing strongly. Furthermore, the government's "Jal Jeevan Mission" is anticipated to support strong demand for the piping sector. By 2027, the market for home automation goods will be worth US$ 8.6 billion thanks to rising internet usage and the popularity of linked home appliances.

Company outlook - Healthy demand and capacity expansions to drive growth

Over the past ten years, the company has evolved from a sanitaryware manufacturer with a Rs. 4,000 crore addressable market to a multi-segment consumer-facing manufacturer with a Rs. 50,000 crore addressable market.  The company's strategy is to develop strong capabilities to place it among the top five competitors (leader in sanitaryware, second in faucets, fastest-growing brand of plastic pipes and fittings with a goal of being among the top five CPVC players in three years, second largest in kitchen chimneys, hoods, and hobs, among the top five in water heaters and air coolers). Growth is anticipated to be fueled for a longer length of time by HHIL's leading position in bathwater, strong growth in plastic pipes (driven by continual capacity expansions), and outstanding technology-driven consumer goods (aiming leadership in smart appliances)

HHIL is on a solid long-term growth trajectory, driven by its leadership in bathwater, a pipe segment that is expanding quickly, and new product introductions in the consumer appliance sector that are driven by innovation. robust brand memory, distinctive distribution channels across business categories, a robust portfolio of innovative products, and strategic alliances with partners in the trade and suppliers give the company the necessary competitive edge to promote long-term success. We expect a 40 - 50% upside with a target price of  610 in the upcoming quarters.

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