Brand at a bargain price…

Brands and bargain prices rarely go together in Main Street  . But Dalal street can be more generous . In its hard-to-decipher dynamics ( mood swings)  , it sometimes puts power brands on discount sale . In a market that is hardly finding time  to catch its breath , this might seem odd at first glance . But on closer look , it is not that hard  to spot some striking opportunities underneath .                

Here is  one such case  i.e Hindware . It is a sanitary brand ( owned by HSIL (Hindustan Sanitaryware & Industries Ltd )) that has a dominant market share , price setter in the Industry , wide distribution moat built over 4 decades , unbeatable pricing power  and growing at industry beating rates . But for the markets , it is an untouchable   quoting at half the valuation of peer group companies that have much less to offer on operating metrics and return ratios . Where is the disconnect . Is it genuine case of undervaluation or a value trap .

Market’s dislike has its roots on the glass division of the company which has been a drag on  overall profitability . Glass container business constitutes over 50% of HSIL revenues and it suffers from surplus capacity , slowing demand and rising operating costs . It is a capital intensive business with average economics . In contrast , the building products business ( sanitaryware) which constitutes the balance 50% is a business with superior economics with durable competitive advantage  , high return ratios and solid moat . It is a classic case  of value destruction by mix of differing profiles of businesses . If it were an independent business , building products business would have commanded a valuation that is twice the current mcap of the company at the least , going by peer group valuation . Since the operating metrics and return ratios are well ahead of the peer group ( see table below) , valuation would be much more demanding (viz-a-viz peers) for the building products .     

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All is not lost yet . With glass business showing signs of recovery , market’s dislike for the stock will soon become untenable . With demand slowly catching up with the supply , pricing power is returning to the Glass container industry . HSIL has recently increased the selling price of glass containers after almost two years of pause . 

With visible turnaround on cards for glass business , it is a matter of time before market starts giving premium valuation to its sanitary business , given its superior brand , leadership , distribution strength and mouth-watering financials  . Such recognition from market ( rerating) could bring strong upside to investors in HSIL . Not to forget the potential unlocking from demerger of these two businesses which the company has plans to do over medium term. That will be a real  icing on cake for investors !!!.

Happy Value Investing …

ArunaGiri . N

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