Friday, January 15, 2010


Asbestos Cement Fibre Sheet (CFS) is an oligopoly market with the top four players collectively controlling ~60% of the market. The industry has witnessed a volume CAGR of 12% in the last 10 years. CFS being predominantly a rural product has its fortunes closely linked with the rural economy. Branding and distribution reach are key parameters in the business. However, ability to pass on raw material inflation by increasing realizations is limited on account of the affordability constraint of rural India for the product. The players are exposed to forex risk as imports account for ~50% of total raw material cost. To leverage on existing brand and distribution reach coupled with an increased focus to diversify and de-risk the revenue stream, players have started focusing on allied products used in “Green Buildings” as well as non allied industrial products. The key players generally generate positive cash flows.

The industry underwent a phase of turbulence due to a demand supply disequilibrium which has been addressed and is now expected to maintain the top line growth of ~20% coupled with stabilization in the margins for next couple of years. CFS industry is cyclical in nature with June quarter is the best quarter for the industry historically. We believe, the industry should be re-rated on PER on account of improved visibility, diversification of revenue
stream, expansion in margins and cash flows positive status of the players.

Our preferred bet is Hyderabad Industries (BUY- 135% Upside) followed by Visaka Industries (BUY –55% Upside) and Everest Industries (BUY - 43% Upside).

Hyderabad Industries
Hyderabad Industries Ltd (HIL) is the market leader (Capacity - 764500 Tons) with a share of ~18% in the Roofing industry (Asbestos Cement Fibre Sheet-CFS) with an experience of over six decades. Large capacity, Brand superiority of “Charminar” and Strong distribution network places HIL in the pole position by garnering largest market share with price leadership and provides volume strength. It helps to capitalize on the strong thrust of Government on Rural Housing. Increased focus on allied building products and Thermal Insulation business are expected to further boost sales growth and margins. We expect the company to clock revenue CAGR of ~16% between FY09 and FY11E with stable margins and return ratios. At CMP, the stock trades 4.7x its FY10E earning of Rs.97.7 and 4.2x its FY11E earnings of Rs.109. We recommend a BUY on the stock with the price target of Rs.1091 at which it discounts its FY11E earnings by 10x.

Everest Industries
Everest Industries has been the pioneer and the 2nd largest player (Capacity - 710000 Tons) in the Asbestos Cement Fibre Sheet (CFS) Industry with a presence of over seven decades with a market share of ~13%. The company is one of the leading brands and has transformed into a complete “Building Solutions” Company with its roofing to flooring range of solutions. The new unit at Roorkee has boosted EIL’s presence in the lucrative Northern region. Everest has also forayed into the Steel Building business to cater to the industrial segment. We expect the company to clock a revenue CAGR of 24% between FY09 and FY11E with stable margins and return ratios. At CMP, the stock trades 9x its FY10E earning of Rs.18 and 6.3x its FY11E earnings of Rs.25.7. We recommend a BUY on the stock with the price target of Rs.231 at which it discounts its FY11E earnings by 9x.

Visaka Industries
Visaka Industries (VIL) is the 3rd largest player (Capacity - 544000 Tons) in the Asbestos Cement Fibre (CFS) industry with a 15% market share. It has a prominent presence in the Southern markets and has a well established brand. Visaka plans to increase its CFS capacity over the next couple of years and has also forayed into the value added cement products segment thereby moving up the value chain. VIL is also one of the leading yarn producers with a presence in the overseas markets as well. This segment contributes ~20% to the top line and enjoys EBIT margin of ~9%. We expect VIL to clock a revenue growth of 11% between FY09 and FY11E with EBIDTA margin estimated to stabilize at 15% and PAT margin at 8%. At CMP, the stock trades 4.2x its FY10E earning of Rs.31.3 and 3.9x its FY11E earnings of Rs.34. We recommend a BUY with a target price of Rs.204 which discounts its FY11E EPS by 6x.

To read the full report: ROOFING INDUSTRY