How does Hindustan Sanitaryware & Industries Limited reconcile the existence of two diverse businesses in a world that is beginning to swear by core competence?

THIS IS A QUESTION THAT I AM OFTEN ASKED THESE DAYS BY ANALYSTS AND SHAREHOLDERS

I think the answer lies in the fact that we have run both these businesses with an unmistakable perspective to enhance value.

The result is that even though we were not the biggest when we entered each of these businesses, we are today one of the two largest sanitaryware manufacturers and one of the largest container glass manufacturers in India. Our Building Products Division is not only the most profitable in India, but also had the biggest growth rate in comparison to our competitors.

The result is evident: during the year under review, we reported record numbers for the company:

• Revenue at Rs. 331.56 cr

• EBIDTA at Rs. 60.68 cr

• Gross profit at Rs. 49.79 cr

• Profit before tax at Rs. 28.97 cr

Significance of value creation

It might be simplistic to ascribe the scale and quality of this performance simply to a rebound in the Indian economy. It would be realistic to trace their origin to India’s accelerating liberalisation and the integration into global economy, because these two developments changed a number of business realities in India. Primarily they:

• increased disposable incomes

• created a new generation of consumers

• created an aspiration for better lifestyles

• increased competition among product manufacturers

• evolved businesses from the cost-plus to the revenue-minus model

Achievements

In response to these paradigm-changing developments, HSIL enlarged its production scale, widened its product range, introduced value-added varieties and reduced costs

In Addition to this

• We leveraged the value of our quality by marketing products in the international markets, thereby helping us enhance the utilisation of our assets. Today, exports account for 14.27% of our company’s revenue

• We leveraged the strength in our distribution network by bringing the best international products into India, thereby providing a wider choice. Today, outsourced products account for 30.17% of our building products division’s revenue

• We extended the range of our products from the value-for-money to the value-added, thereby providing a product to suit every pocket. Today, our building products’ range extends from Rs. 125 to Rs. 100,000 per unit

• We enhanced the proportion of our high value-added products, thereby enhancing our return on invested capital. Today, the proportion of value-added products accounts for nearly 12% of our building products division’s revenue compared to 5% three years ago

• We acquired complementary plants and brands at modest costs, thereby strengthening the value of our business. Today, our capital cost across both businesses is one of the lowest in India

• We entered a complementary high margin and high growth sector of kitchen products, making it convenient for the consumer to buy both products from a single retail outlet. Over the coming years, revenue from these outsourced products is expected to account for about 10% of our building products division’s revenue

• We did all this at progressively lower cost of capital. Even though our debt-equity ratio increased from 1.08x to 1.53x (2004¬05), our interest cover strengthened from 4.36x to 5.57x (2004-05) and our weighted average cost of debt reduced by 154 basis points to 7.59%

Shareholder value creation

During the year under review, HSIL shareholders experienced a significant increase in their value of shareholdings. HSIL stock price increased from Rs. 63.30 (adjusted for 2:3 bonus) as on 31st March, 2004 to Rs. 118.05 as on 31st March, 2005, resulting in an appreciation of 86.49% (excluding Rs. 2.50 dividend per pre-bonus share). This compares extremely favourably to a 16.14% increase in Sensex during the same period

Outlook

We are optimistic about our prospects for a number of reasons:

• India’s GDP growth at 7% over the next two years is expected to make it the fastest growing economy, second only to China

• India’s existing housing shortage of over 22.5 million dwelling units is expected to be addressed more now than ever before

• An increase in the construction of malls and shopping complexes – an estimated 600 such malls, covering an estimated area of 100 mn sq ft over the next five years – will trigger a bigger demand for building products

• A booming tourism will increase the availability of hotel rooms, driving the demand for building products

• Closure of international sanitaryware capacity of around 5-6 million units is expected to be sourced from low-cost developing economies

HSIL expects to capitalise on these opportunities and grow its turnover and bottomline significantly over the coming years.

R.K. Somany