Hindusthan National Glass

CMP Rs.238
Target Price Rs. 335

The company plans to expand capacity by FY12 and should benefit from better efficiency and a hike in its stake in a float glass venture

Hindustan National Glass (HNG) is India's largest container glass solutions provider with a 65% market share. The company has a market cap of Rs 20 billion and the average traded volume over the past two weeks was at 4,000 shares. HNG has plants at Rishra (West Bengal), Bahadurgarh (Haryana), Rishikesh (Uttarakhand), Neemrana (Rajasthan), Nashik (Maharashtra) and Puducherry. The company has grown in the past 10 years through mergers and acquisitions and it has also succeeded in turning around some of the loss-making units that it acquired. It is in the container glass space which makes up about 7% of the Rs775 billion packaging industry. This business has been growing at 8% CAGR. (Compound annual growth rate is the year-over-year growth rate over a specified period of time.) HNG caters to the pharmaceuticals, liquor, beverages, cosmetics and processed foods industries. While 85% of its sales volumes are to the FMCG sector, 15% is in the pharmaceuticals sector. The volume breakup businesswise is liquor 52%, beer 13%, food and beverages 17% and personal care 4%. Among HNG's customers are United Spirits, Pernod Ricard, Diageo, Radico Khaitan, United Breweries, SAB Miller, Carlsberg, Pepsi, Coke, Nestle, Unilever, Heinz, Cipla, Pfizer and Glaxo. HNG plans to increase capacity by 40% in FY12 to accelerate growth. It had delayed capacity expansion because of volatile fuel costs. Capacity is to be increased from the current 2,825 tons per day (tpd) to 3,775tpd in CY12. This includes a 100tpd capacity at Nashik for the high-margin cosmetics glass segment.

The company is also setting up a unit with 650tpd capacity at Naidupeta in Andhra Pradesh at a cost of Rs4.9 billion, to cater to demand in South India. The unit is expected to begin production in January-March 2012.

Another positive aspect is the improving efficiency that should result in margin expansion. "Draw efficiency has improved from 64.5% in FY07 to 85% and pack efficiency has also got better.

HNG is working towards using LNG at its Neemrana unit beginning this year, as well as at the Nashik unit from FY12. The company has implemented technical improvements such as the narrow-neck-press-and-blow process that produces lighter and yet stronger bottles. This has brought higher realisations for the company while reducing costs for its customers. Higher capacity in the cosmetics business also is expected to add to margins. CRISIL Equities expects margins for HNG to recover in the ensuing quarters, after a not so good first quarter since the company raised prices by about 6% from August 1. "We continue to remain positive on the growth prospects for HNG, driven by its leadership position in the container glass industry and strong management capabilities. We maintain the fundamental grade of '4/5', indicating that HNG's fundamentals are superior relative to other listed equity securities," CRISIL said in a recent report.

It has a 12 months target price of Rs.335.00. CRISIL estimates the fair value for the stock at Rs.292.00 at 13x FY11 and 11x FY12 earnings.