>HINDUSTAN NATIONAL GLASS: Profitable Growth

■ Proxy to high growth segments in FMCG: Hindustan National Glass and Industries (HNGI) is the largest container glass manufacturer in India with 85% of sales volumes from the FMCG sector and 15% from the pharmaceuticals sector. We expect sustained volume growth of 12-15% in the segments to which HNGI supplies - IMFL (52% of volumes), Beer (13% of volumes), Food & Beverages (17% of volumes) and Personal Care (4% of volumes). We expect HNGI's growth to accelerate post FY12, following 40% capacity increase.

■ New capacities to enhance growth further: HNGI's growth has been lackluster in the past couple of years due to lack of capacity addition and volatile input costs of fuel (power and fuel costs constitute 27% of sales). The company will expand capacity from 2,780tpd currently to 3,775tpd in CY12, which also includes 100tpd capacity for the high margin cosmetics glass segment. This will lead to further acceleration in volume/revenue growth post FY12.

■ Production efficiencies, switchover to gas to boost margins: HNGI has consolidated the container glass industry through three acquisitions in the last decade. This has increased its pricing power and provided economies of scale in sourcing, production and customer service. The company has increased draw efficiency from 64.5% in FY07 to 85% while its pack efficiency has also increased to 87%. We expect 7% increase in draw efficiency and 5% increase in pack efficiency over FY10-12, lowering operational costs. It plans to shift to using LNG as fuel in its Neemrana unit from July 2010 and in its Nashik unit from FY12, which will lower costs. We estimate 250bp increase in gross margin and 440bp increase in EBITDA margin over
FY10-12.

■ A play on float glass, as well: HNGI has 65% share of the container glass market in India. It also has 37% stake in a 600tpd float glass venture. It intends to increase its stake in this venture to 51% by September 2010 and add a further 800tpd float glass capacity. The float glass venture will start contributing positively to the consolidated numbers from FY12. We value the stake at Rs32/share.

■ Initiating coverage with a Buy rating: We estimate 16% PAT CAGR over FY10-12. The stock trades at 7.5x FY11E EPS of Rs28.6 (adjusted for treasury stock) and 7.4x FY12E EPS of Rs29.2. We initiate coverage with a Buy rating and a target price of Rs325 - a 51% upside.

To read the full report: HNL