Target : INR 554 KEY DATA Hyderabad Industries Ltd. (HIL)finquestgroup.com/wp-content/uploads/2012/08/HIL-IC-23-9-2009.pdffacility in Chennai for manufacture of Aerated concrete blocks

Hyderabad Industries Ltd. (HIL)

Shareholding % 3Q 4Q 1Q

Promoters 42.0 42.0 42.0

MF/Banks/Indian FIs 8.0 9.0 8.0

FII/ NRIs/ OCBs 3.0 3.0 2.0

Indian Public 47.0 46.0 48.0

KEY DATA

Market Cap (INR bn) 3.1

Market Cap (USD mn) 65.1

52 WK High / Low 439/89

Avg Daily Volume (BSE) 29801

Face Value (INR) 10

BSE Sensex 16720

Nifty 4970

BSE Code 509675

NSE Code HYDRBADIND

Reuters Code HYDI.BO

Bloomberg Code HYI IN

Financials F09 F10E F11E(INR Mn.)

Net Sales 6188.5 7374.8 8387.5

EBITDA 897.4 1221.7 1412.9

EPS 58.9 81.8 92.4

P/E 7.1 5.1 4.5

Performance Chart

CMP : INR 416Rating : BuyTarget : INR 554

Initiating Coverage

Investment Summary

We believe Hyderabad Industries will post handsome gains in profitability and margins throughFY09-FY11E. The company is largest producer of asbestos cement sheet in India and has graduallydiversified into other areas such as Autoclaved Aerated Concrete (AAC) blocks and ThermalInsulation products. The company's cement sheet division is the key beneficiary of rural demanddue to various government schemes for up-liftment of rural population. We also see strong demandin AAC blocks and thermal insulation products due to revival in realty sector as well as industrialcapex.

Expansion plans to drive topline: HIL has recently augmented its cement sheet manufacturingcapacity by 1.8 lakh tonne (90000 tonne each in Q3FY09 and Q1FY10) to 8.5 lakh tonne. Thecompany is also enhancing its AAC block capacity by 220% to 3,20,000 Cu M in 4QFY10.We expect HIL's cement sheet and AAC block sales volume to grow at healthy CAGR of 7.8 %and 83.5 % respectively through FY09-FY11E period. In addition to the above, we also expecttraction in sales volume of thermal insulation products due to enhanced capacity (6000 tonnein FY09 vs. 3500 tonne in FY08) to add to the topline.

Diversification to make business model robust: As of FY09, HIL derived 85%, 6% and 5% ofrevenue from Cement sheet, AAC blocks and Thermal Insulation respectively. In line withcurrent and future expansion plans, we expect revenue and PBT contribution from AAC blocksand insulation products to increase gradually. We also believe that margins in these segmentswill tend to be higher in longer term compared to flagship product (Cement Sheets).

Margins to improve: Given, current scenario of falling raw material price, esp. cement , due tohuge influx of cement capacity in 2HFY10E and FY11E. We expect cement prices to declineby 8-10% through FY09-FY11E period. Although, we expect asbestos prices to remain firm,due to regulatory hurdles in its global production. We expect margins to improve by 210 bpsand 20 bps in FY10E and FY11E respectively due to declining raw material cost and change inrevenue mix.

Cement sheet industry: The current market size of cement sheet industry in India is worth INR40 billion. The industry (sales) grew at the rate of 5% YoY in FY09 to 39.0 lakh tonnes and isexpected to grow at the rate of 5-6% in FY10E. Post FY10, we expect growth to increase to 7-8% on the back of increased income in rural areas coupled with various initiatives by governmentfor up-liftment of rural population. HIL being the market leader in the industry (commands21% market share), will be the key beneficiary of this trend.

AAC Blocks & Insulation market outlook: The market for AAC blocks is growing along withthe growth of construction industry. Though there has been a temporary set back in constructionand real estate activity, we are witnessing signs of pickup in activity and hence AAC block willreceive good traction from all the segment of construction area. As far as thermal insulationproducts are concern, we see demand to pickup due to recent order flows by industry majors.

Valuations: At CMP, HIL is trading at 5.1x and 4.5x FY10E and FY11E earnings respectively.We rate the stock BUY with target FY11E PE multiple of 6x and price target of INR 554 .

Key Concerns:

Ban/restriction on use of asbestos may force industry to look for other alternative

Steep decline in demand on the back of lower agri-income due to erratic monsoon

Increase in key raw material prices may impact marginsSunny AgrawalAnalystTel. : 4000 [email protected]

September 23, 2009

For Private Circulation OnlyFINQUEST research also available on BLOOMBERG FSPL <GO> and REUTERS.

Price Performance (%)

3 M 6 M 12 M

Absolute 17.9 79.2 20.7

Relative (64.0) (191.2) (165.3)

For Private Circulation OnlySeptember 23, 2009 2

Investment Rationale

Increased capacity in all key business area to boost topline

HIL is the largest producer of Asbestos cement sheet in India and has gradually diversified into otherareas such as Autoclaved Aerated Concrete (AAC) blocks, thermal insulation products and otherproducts like Prefabricated building panels, Hysil powder, spares and accessories etc. Asbestos cementsheet is used as a roofing material in rural and semi-urban areas and we believe demand to pickupdue to improved revenues, on the back of improving agriculture income, restoration of capital throughwaiver / one time settlement of bank loans and various social schemes run by UPA government. Inaddition to traditional flagship products, we believe that HIL will see good traction for AAC blocksand thermal insulation product due to ongoing infrastructure push and industrial capex.

Since FY09, HIL is aggressively expanding its capacity in all the key business areas. Following sectionsexplains each business area in detail.

Asbestos Cement Sheet: HIL has set-up a new 90,000 tonne cement sheet plant at Balasore, Orrisaand commercial production has started in 3QFY09. The company has also augmented its cementsheet capacity at Vijayawada plant by 90000 tonne (commercial production started in 1QFY10)taking total capacity to 8.5 lakh tonnes. We believe company to derive full year benefit of expandedcapacity in FY10E and FY11E.

Chart: Asbestos Cement Sheet Installed Capacity

Source: Company, FQ Research

We expect HIL's cement sheet sales to increase by 10.2% and 5.6% YoY to 7.7 lakh tonnes and 8.1lakh tonnes in FY10E and FY11E respectively. We expect gross cement sheet realizations in FY10E toincrease by 11.4% YoY to INR 9000 per tonne and then remain flat in FY11E. From the chart givenbelow, it can be seen that, since FY01, the asbestos cement sheet realisation for HIL has been abovethe realisation for other players. Thus HIL's cement sheet commands premium on the back of well-established brand name "Charminar".

Chart: Asbestos Cement Sheet Realisation - Companywise

Source: Capitaline, FQ Research

Since FY09, HIL is aggressively

expanding its capacity in all the key

business areas

We believe company to derive full

year benefit of expanded capacity in

FY10E and FY11E

Since FY01, the asbestos cement sheet

realisation for HIL has been above the

realisation for other players


Due to enhanced capacity and off take together with better realizations, we believe gross revenue

from cement sheet business to grow by 22.7% and 5.6% YoY to INR 6921.5 million and INR 7306.0

million in FY10E and FY11E respectively.

AAC Blocks: HIL currently has one AAC block manufacturing plant at Chennai with capacity of 1

lakh Cu M.. This plant caters to the need of Southern and Western market. Currently, HIL commands

38% of market share in South and West combined. To cater to the growing demand in Western

region, the company is augmenting its manufacturing capacity from 1 lakh Cu M to 3.2 lakh Cu M by

setting up a new plant of 2.2 lakh Cu M at Golan, Surat, Gujarat. The plant is expected to be operational

in 4QFY10.

Chart: AAC Block Installed Capacity


We expect AAC blocks sales volume to increase by 35.6% and 148.2% YoY to 1.2 lakh Cu M and

3.0 lakh Cu M in FY10E and FY11E respectively. We have assumed realisations to remain flat at INR

3750/Cu M in FY10E and FY11E each. We expect AAC block segment gross revenue to increase by

24.6% and 148.2% YoY at INR 459.4 million and INR 1140.0 million in FY10E and FY11E respectively.

At the same time, the contribution of AAC block business to total gross sales will increase from 5.5%

in FY09 to 12.5% in FY11E.

AAC Blocks

AAC is one of the lightest forms of Concrete and is the most technically advanced material used for

the manufacture of mass produced concrete blocks. Originally known as cellular concrete, (CELCON)

aircrete was first developed in Sweden in the 1920's, it use spread rapidly throughout Scandinavia in

30's & 40's as a roof and floor screed. Hyderabad Industries Ltd set up its state of the art manufacturing

facility in Chennai for manufacture of Aerated concrete blocks in technical collaboration with M/s

H+H Celcon of UK in the Year 1998

Autoclaved Aerated Concrete (AAC) is a precast structural product made with all natural raw materials.

It is primarily a mixture of cement, lime, and water and sand/fly ash that expands by adding aluminum

powder. The material is further developed under special kilns called autoclaves.

The company is augmenting AAC

block manufacturing capacity from 1

lakh Cu M to 3.2 lakh Cu M

The contribution of AAC block

business to total gross sales will

increase from 5.5% in FY09 to 12.5%

in FY11E


AAC Blocks v/s Conventional Bricks

Saving in cost of structure

AAC blocks are one third lighter than conventional clay bricks, thereby reducing the dead

weight of the structure drastically.

Light weight structure decreases construction cost due to reducing steel, Cement and

Excavation. Reduction in steel is 15% and reduction in cement is 10%.

Savings in Mortar

OC blocks are 7 times bigger than the size of the conventional bricks. Bigger size means less

number of joints.

Less joints results in lesser quantity of mortar for building. There is overall 60% reduction in

use of Mortar.

Savings in Plaster

AAC blocks have uniforms shape and texture, which gives even surfaced to the walls.

There is overall 35% reduction in the cost of plastering

Reduction in wasting due to less breakages

Unlike conventional clay brick which are prone to breakages, OC blocks have almost nil

breakages.

There is over all 65% reduction in cost due to practically no wastages the input cost.

Reduction in HVAC Load

AAC blocks are resistant to thermal variations. It reduces total load of refrigeration and air

conditioning.

Though initial installation cost may remain same but

AAC blocks reduces operation and maintenance cost drastically.

There is over all 25% saving in operation cost

Savings in power infrastructure

Due to lesser HVAC load, cost of power infrastructure i.e. lesser capacity of transformer, DG

set, and Cable etc. also reduces considerably which in form results in savings in electricity

charges.

Impact of AAC blocks at a glance

Description Saving Overall Impact

Saving in cost of structure (Steel, Cement, Excavation) 12% 5%

Saving in mortar 60% 1%

Saving in plaster 35% 0.5%

Reduction in breakages 65% 0.5%

Savings due to les HVAC load 25% 15%

Savings due to lighter power Infrastructure - 3%

(Transformer, Dg, Cable sizes, electricity charges)

Overall Savings 20%

Source: Case study from Optima Cube Infra Material Pvt Ltd.


Thermal Insulation Products: HIL manufactures calcium silicate based insulating materials and services

industries such as cement, power, petrochemicals, fertilizer plants etc. The insulating material

manufactured by HIL is of a special variety, which is use for specific high heat applications only. The

company commands 70-75% market share in this special variety of insulation product. In FY09, HIL

has expanded its insulation production capacity at Dharuhera plant by 71% to 6000 MT.

Chart: Thermal Insulation Installed Capacity


We believe HIL to benefit from expanded capacity as demand for thermal insulation products is

expected to be healthy in future. HIL insulation material will receive good uptick in demand as all the

industry segments (to which it caters to) are in expansion mode and have huge industrial capex lined

up during next 2-3 years. According to the Crisil, India's total industrial capex over the FY09-FY12

period will grow at CAGR of 7% at INR 10,500 billion. Following table shows industry wise capacity

expansion relevant to HIL insulation business:

Table: Industrial Capex

Industry Duration Capacity Addition

Cement FY09-FY11 80 million tonnes

Fertiliser FY09-FY11 1.66 million tonnes

Power (Thermal + Nuclear) FY09-FY11 63073 MW

Source: Industry, FQ Research

We expect thermal insulation sales volume to increase by 14.2% YoY to 5400 MT in FY10E and 5.6%

YoY to 5700 MT in FY11E. Since, the company commands more that 70% market share, we expect

realisations from insulation business to remain stable at INR 61000/tonne in FY10E and FY11E each.

Overall, we expect gross revenue from insulation segment to increase by 5.6% YoY in FY10E and

FY11E each to INR 329.4 million and INR 347.7 million respectively.

Chart: Realisation trend - Thermal Insulation Product


According to the Crisil, India's total

industrial capex over the FY09-FY12

period will grow at CAGR of 7% at

INR 10,500 billion

We expect thermal insulation sales

volume to increase by 14.2% YoY to

5400 MT in FY10E and 5.6% YoY to

5700 MT in FY11E


Overall, we expect net sales from building product division (Sheets,AAC & Insulation) to grow at

CAGR of 17.9% through FY09-FY11E period. We expect net sales to increase from INR 6188.5

million in FY09 to INR 7374.8 million (up 19.2% YoY) and INR 8387.5 million (up 13.7% YoY) in

FY10E and FY11E respectively.

Diversification to make business model robust

As of FY09, HIL derived 85% of its revenue from cement sheet business, 6% from AAC blocks business,

5% from Thermal insulation products and balance from other products. Due to ongoing expansion,

we believe the revenue mix to tilt more in favour of AAC block business. In FY11E, we believe, the

revenue mix would change to 80%, 13% and 4% from Cement sheet, AAC blocks, Thermal insulation

business respectively and rest from other products. The change in revenue mix will be beneficial to

HIL, as it decreases the risk of dependence on flagship product for topline growth. Moreover, demand

for AAC block comes from industrial segment and hence sole dependence on cyclicality of housing

segment (through cement sheet sales) is de-risked to a certain extent. AAC block business also

commands much better EBITDA margins of around 20%+ as compared to cement sheets, where

margins hover at 13-15% depending on cyclicality. We expect long term EBITDA margins to increase

due to change in revenue mix.

Chart: Revenue Breakup - Productwise


Raw material pressure to ease….

In FY09, around 48.5% of total expenditure was in the form of raw material cost. Major portion of raw

material cost (~85%) is cement and asbestos.

We expect net sales from building

product division (Sheets,AAC &

Insulation) to grow at CAGR of 17.9%

through FY09-FY11E period

The change in revenue mix will be

beneficial to HIL, as it decreases the

risk of dependence on flagship

product for topline growth


Chart: Raw material cost - Breakup


As seen from the above chart, cement constitute ~35% of the total raw material cost and cement is

required for making Asbestos cement sheet and AAC blocks. Our understanding on fundamentals of

cement industry suggests that cement prices will decline by 8-10% through FY09-FY11E period. In

our assumptions, we have taken decline in cement prices by 2% and 5% YoY at INR 3490.1/tonne

and INR 3315.6/tonne for FY10E and FY11E respectively. Thus, we expect company to benefit from

decline in cement prices, however it will be offset by firmness in asbestos price.

Chart: WPI - Cement

Source: Bloomberg

Note: WPI-Cement is only indicative of trend of cement prices in India and not the actual cement price

Asbestos accounts for ~50% of the total raw material cost and asbestos price for HIL have increased

at CAGR of 9.7% through FY05-FY09 period. Due to regulatory hurdles in production of asbestos

globally and higher demand from India, we have taken into account 20% and 10% YoY increase in

asbestos prices at INR 36158 per tonne and INR 39773 per tonne in FY10E and FY11E respectively.

We have taken decline in cement

prices by 2% and 5% YoY at INR

3490.1/tonne and INR 3315.6/tonne

for FY10E and FY11E respectively

We have taken into account 20% and

10% YoY increase in asbestos prices

at INR 36158 per tonne and INR

39773 per tonne in FY10E and FY11E

respectively


Chart: HIL - Asbestos Price Trend


Overall, we expect raw material cost as a % of sales to increase from 48.5% in FY09 to 51.2% and

51.0% in FY10E and FY11E respectively. We expect employee cost (as a % of net sales) and other

expenditure (as a % of net sales) to decline from 8.0% and 17.3% in FY09 to 7.9% and 16.5% in

FY11E respectively. This will result in EBITDA margins to improve by 210 bps and 20 bps YoY to

16.6% and 16.8% in FY10E and FY11E respectively.

Chart: Raw material cost and EBITDA margin trend


Key Facts about Asbestos

Asbestos is the commercial name given to a group of fibrous hydrated silicates that occur naturally in

rock formations throughout the world. For commercial purposes, it is recovered by mining and rock

crushing. Asbestos which are used commercially are of three types:-Crocidolite (Blue type), Amosite

(Brown type) and Chrysotile (White type).

The import of Crocidolite (Blue type) and Amosite (Brown type) in India which is known to have

caused cancer in the West has been banned in 1993. Only Chrysotile (white) variety is being imported

and used for the manufacture of asbestos-cement products. White asbestos (chrysotile variety)

constitutes 98% of world production for its commercial use. Indian asbestos cement sheet manufacturers

import all their requirements of chrysotile fibres from Canada, Brazil, Russia, Zimbabwe and Kazakhstan

for production of asbestos cement sheets and pipes. Asbestos is also mined in India, but quantity and

quality-wise it is of no relevance to asbestos cement sheet production.

Decline in raw material cost,

employee cost & other expenditure as

a % of sales will lead to improvement

in EBITDA margins by 210 bps & 20

bps YoY in FY10E & FY11E

respectively


Asbestos - World Production, By Country

Country 2003 2004 2005 2006 2007 2008*

Brazil 231117 252067 236047 227304 230000 220000

Canada 200500 220000 185000 185000 185000 175000

China 500000 400000 400000 360000 380000 380000

Kazakhstan 354500 346500 300500 300000 300000 300000

Russia 878000 923000 925000 925000 925000 925000

Zimbabwe 147000 104000 122041 100000 100000 100000

India 19000 18000 19000 20000 21000 21000

Other Countries 69883 66433 62412 62696 59000 59000

World Total 2400000 2330000 2250000 2180000 2200000 2180000

* Estimated

Source: US Geological Survey, Jan 2009 & Mineral Year Book 2007

Cement sheet Industry

In the following section, we have explained in detail about asbestos cement sheet, industry structure,

opportunities and outlook on the cement sheet industry.

Asbestos cement sheet: Asbestos cement sheet is the sheet similar to corrugated galvanised iron

sheets and aluminium sheets. The main difference is only the raw material used in manufacturing

process and hence there is difference in characteristics of the end product. The main raw material

required in manufacturing asbestos cement sheet are cement, chrysotile fibre (asbestos), fly ash and

lime. Though asbestos requirement in weight terms is very less, it constitutes nearly 40-50% of total

raw material cost of making asbestos cement sheet.

Table: Raw material required for Asbestos cement sheet

Particulars Proportion of raw material by weight

Cement 42%

Asbestos 7-8%

Fly Ash 27%

Other 23-24%

TOTAL 100%

Source: Industry, FQ Research

Being weatherproof and corrosion resistant, these sheets are practically ageless and maintenance

free, whereas metal sheets corrode and deteriorate with age and exposure. Due to recent financial

turmoil, the price of steel has reduced drastically and hence the price of corrugated galvanised steel

sheets too, thereby giving tough competition (for price sensitive consumer). However, with the economy

on recovery path, steel prices has started moving up and so has galvanised steel sheets.

The main raw material required in

manufacturing asbestos cement sheet

are cement, chrysotile fibre (asbestos),

fly ash and lime


Chart: Galvanised Sheet/Products Realisation - Uttam Galva


Demand Drivers: Asbestos cement sheets are used both in industrial sector and rural sector. About

70% of the consumption is from rural sector, with other users include industry (20%) and poultry

(10%). The significant portion of the demand comes from rural sector, which is witnessing improved

revenues, on the back of improving agriculture income, restoration of capital through waiver / one

time settlement of bank loans etc. Asbestos cement sheets have also proven to be the most cost

effective, easy-to-install, strong and durable roofing material for warehouses, factories, and practically,

any structure needing a roof. Apart from India, Russia, China, Indonesia, Thailand and Brazil are

some of the largest users of asbestos cement sheets.

Chart: Asbestos Cement Sheet - Demand Breakup

Source:- Industry, FQ Research

Asbestos Cement Sheet - Industry Structure: This industry is more than 70 years old in India. Asbestos

cement products continue to be in demand because its affordability, and other qualities such as

corrosion resistance, weather and fire proof nature. For upgrading from thatched and tiled roofing's

there is no other affordable and durable roofing material for the rural poor other than asbestos cement

sheets. Currently there are 17 entities in the industry with about 63 manufacturing plants through

out the country. The products are marketed under their respective brand names mainly through

dealers for the retail market and directly for projects and government departments. Hyderabad

Industries, Visaka Industries, Ramco Industries and Everest Industries are some of the major

manufacturers in the organized sector. Driven by steady demand from the rural markets, the industry

is growing at a healthy 8-10% a year. The industry employs about 300,000 people and its annual

turnover is around INR 40 billion.

About 70% of the consumption is

from rural sector, with other users

include industry (20%) and poultry

(10%)

Hyderabad Industries, Visaka

Industries, Ramco Industries and

Everest Industries are some of the

major manufacturers in the organized

sector


The industry is seasonal in nature with good demand seen during the first qtr (Apr - Jun) and fourth qtr

(Jan - Apr) of fiscal year. Second qtr (Jun - Sept) and third qtr (Oct - Dec) are considered to be off-

season and hence sales are lower by 25-35% as compared to that of in first qtr and fourth qtr. During

off-season (2Q and 3Q), the manufacturers build up inventory to cater to increased demand during

peak season (4Q and 1Q). Therefore, companies report negligible profit (or sometimes marginal loss)

during 2Q and 3Q of the fiscal year, however is compensated by healthy sales and profit during the

peak season.

Table: Cement Sheet (Organised Sector) Statistics

FY05 FY06 FY07 FY08 FY09 FY10E

Installed Capacity 15.0 18.6 21.0 21.7 25.1 27.3

YoY % - 23.9 13.0 3.0 15.9 8.4

Production 13.2 16.0 19.1 21.3 22.0 25.3

YoY % - 21.1 19.8 11.4 3.1 15.1

CU % 87.8 85.8 91.0 98.4 87.6 93.0

Avg Realisation (INR/tonne) 6130.2 6493.3 6741.2 6564.7 8038.0 9000.0

YoY % - 5.9 3.8 -2.6 22.4 12.0

Note: All the numbers are only for top 4 players, viz, Hyderabad Industries, Visaka Industries, Ramco Industries,

Everest Industries. Top 4 players constitute 60-65% of total manufacturing capacity in the industry


As of FY09, total industry capacity (organised + non-organised) is to the tune of 36.1 lakh tonnes and

total production was 38.6 lakh tonnes, implying 107% capacity utilisation. The industry growth rate

(represented by total sales of industry) was 5% YoY in FY09 at 39 lakh tonnes. As seen from the table

below, HIL is the largest player in the industry (as of FY09) with ~21% market share.

Table: Major Asbestos Cement Sheet players

Company Capacity (lakh tonnes) As a % of Total Industry Capacity Brand Name

Hyderabad Industries 7.6# 21.2% Charminar

Visaka Industries 5.4 15.1% Visaka

Ramco Industries 4.9 13.7% Ramco

Everest Industries 7.1* 19.7% Everest

TOTAL 36.1 69.6%

# Capacity as of 1QFY10 = 8.5 lakh tonnes

* Company has given total capacity of building products which includes roofing, ceiling, wall, floor solutions, Ltd


Taxes and Duties: The various taxes and duties required to be faced by asbestos cement sheet industry

is as follow:-

a) Import Duties on Asbestos Fibre:

Value & Duty Description Custom Formula

Duty Rates (%)

Assesable Value (AV) - FOB

Basic Duty of Custom (BD)(%) 12.5 (AV * BD rate)/100

Additional Duty of Customs (CVD) 16.3 [(AV+BD Amount) * CVD Rate] / 100

Special Addtl Duty of Customs (SAD) 4 [(AV+BD Amount + CVD Amount] * SAD Rate / 100

Total Custom Duty 36%

Source: Union Budget 2009-10

The industry is seasonal in nature with

good demand seen during the first qtr

(Apr - Jun) and fourth qtr (Jan - Apr) of

fiscal year. Second qtr (Jun - Sept) and

third qtr (Oct - Dec) are considered to

be off-season

HIL is the largest player in the industry

(as of FY09) with ~21% market share


b) Excise Duty on Asbestos Cement Sheet: 8%

c) Excise Duty on AAC Blocks: 8%

d) Apart of excise duty, all the products are also subjected to VAT/Sales Tax depending on different

states

Regulatory Aspect: In India, asbestos is regulated under the Factories Act (1948), Air and Water Act

and Hazardous Wastes (Handling and Management) Rules 1989 under the Environment Protection

Act (1986). Besides these, Indian Standards Institution (ISI) has brought out a number of national

standards and specification relating to asbestos mining, manufacturing and handling. India has very

relaxed standards for asbestos emission in the environment, compared with most European countries

and the USA.

ILO/WHO Guidelines: ILO in 1986 unanimously adopted the Convention on the Safe Use of Asbestos.

India is a signatory to this convention and the entire organized sector of the industry follows the

recommendations/guidelines of ILO. ILO guidelines have been suitably incorporated in the 15 standards

laid down by the Bureau of Indian Standards (BIS) for the asbestos industry and also in the relevant

section of Factories Act covering Occupational health of workers engaged in this Industry. WHO has

recommended the control measures, including engineering controls and work practices, that should

be used in circumstances where occupational exposure to Chrysotile (asbestos) can occur.

Opportunities & Outlook: In India, almost 80-85% of rural people use thatched roof/tiles for the

shelter. Thatched roof need regular replacement and tiled roof needs continued maintenance. Therefore

whenever the economic conditions improve the first choice of the rural poor to replace the roof over

their head is the affordable and relatively durable product - asbestos cement sheets.

India is still an agrarian economy and 75% of the total population resides in rural area. Therefore, we

see increased potential for usage of asbestos cement sheets in rural areas. The Central and State

Governments have been giving lot of thrust for housing for rural poor and asbestos cement sheets are

widely used for this purpose. It can reflected from the increased allocation to the following two social

schemes in Union Budget 2009-10:

a) Indira Awaas Yojana (IAY): Allocation under Indira Awaas Yojana (IAY) was increased by 63%

to INR 88 billion. Adding to this, allocation of INR 20 billion was also made for Rural Housing

Fund (RFH) in National Housing Bank (NHB) to boost the resource base for refinancing operations

in rural sector.

b) Pradhan Mantri Adarsh Gram Yojana (PMAGY): New scheme called Pradhan Mantri Adarsh

Gram Yojana (PMAGY) with an allocation of INR 1 billion was launched on pilot basis for

integrated development of 1000 vilages having population of Scheduled caste above 50%.

We believe the industry to grow at the rate of 5-6% in FY10E. Post FY10, we expect growth to

increase to 7-8% on the back of increased income in rural areas coupled with various initiatives by

government for up-liftment of rural population.

Return ratios to remain stable

HIL has lined up capex of INR 1000 million (INR 800 million for new AAC block plant at Golan, Surat

and INR 200 million for cement sheet plant at Vijayawada) and INR 600 million in FY10E and FY11E

respectively. Due to increase in capitalization of assets, we expect depreciation expense to increase

by 30.0% and 25.1% YoY to INR 181.8 million and INR 227.4 million in FY10E and FY11E respectively.

At the same time, we expect company to raise debt (post repayment obligation) of INR 480 million

and INR 180 million in FY10E and FY11E respectively. We expect interest expense to increase by

35.0% YoY in FY10E and 17.6% YoY in FY11E. Due to increase in depreciation and interest expense,

we expect net profit margin to remain subdued at 8.3% in FY10E and FY11E each. However, we

believe, net profit to grow at CAGR of 25.3% through FY09-FY11E period.


Despite of robust capex plan, HIL's balance sheet will remain healthy with debt-equity ratio of 0.5x

in FY10E and FY11E each. At the same time, we believe interest coverage ratio to decline marginally

from 8.8x in FY09 to 8.5x in FY11E. RoE and RoCE will remain flat at 23.1% (23.7% in FY09) and

19.2% (20.4% in FY09) in FY11E respectively.

Chart: RoE and RoCE trend


Valuation

At CMP, HIL is trading at 5.2x and 4.6x FY10E and FY11E earnings respectively. We believe HIL is

well placed to take advantage of expanded capacity in the key business areas coupled with subdued

cement pricing scenario till FY11. Historically, the company has mostly traded in 1 yr forward PE

band of 8x - 13x and 1 yr forward EV/EBITDA band of 5.3x - 7.1x. We rate the stock BUY with target

FY11E PE multiple of 6x and price target of INR 554.

Peer Comparision (FY09)

Companies P/E P/B EV/EBITDA Mcap/Sales

Hyderabad Industries 7.1 1.7 4.2 0.5

Visaka Industries 5.7 1.0 4.1 0.3

Everest Industries 12.4 1.1 6.6 0.3

Ramco Industries 15.1 1.9 11.0 1.2



Chart: 1yr fwd P/E


Chart: 1yr fwd EV/EBITDA


Chart: 1yr fwd P/ABV



Sensitivity Analysis

FY10E EBITDA Sensitivity FY10E EPS Sensitivity

Asbestos Cost (INR/tonne) Asbestos Cost (INR/tonne)

32542 34350 36158 37966 39773 32542 34350 36158 37966 39773

Asbestos 8100 788 686 585 483 382 Asbestos 8100 45 36 27 19 10

Cement 8550 1106 1005 903 802 700 Cement 8550 72 63 55 46 37

Sheet 9000 1425 1323 1222 1120 1019 Sheet 9000 99 90 82 73 64

Realisation 9450 1743 1642 1540 1439 1337 Realisation 9450 126 118 109 100 92

(INR/tonne) 9900 2061 1960 1859 1757 1656 (INR/tonne) 9900 154 145 136 128 119

Keeping all other variables same, for every 5% rise in asbestos price above our assumption, EBITDA declines by 8.3% & EPS declines by

10.6%, and vice versa.

For every 5% decline in asbestos cement sheet realisation below our assumption, EBITDA declines by 26.1% & EPS declines by 33.3%, and

vice versa.

FY11E EBITDA Sensitivity FY11E EPS Sensitivity

Asbestos Cost (INR/tonne) Asbestos Cost (INR/tonne)

35796 37785 39773 41762 43751 35796 37785 39773 41762 43751

Asbestos 8100 1087 969 852 734 616 Asbestos 8100 65 54 44 34 24

Cement 8550 1368 1250 1132 1014 897 Cement 8550 89 78 68 58 48

Sheet 9000 1649 1531 1413 1295 1177 Sheet 9000 113 103 92 82 72

Realisation 9450 1929 1811 1693 1576 1458 Realisation 9450 137 127 116 106 96

(INR/tonne) 9900 2210 2092 1974 1856 1738 (INR/tonne) 9900 161 151 140 130 120

Keeping all other variables same, for every 5% rise in asbestos price above our assumption, EBITDA declines by 8.3% & EPS declines by

10.9%, and vice versa.

For every 5% decline in asbestos cement sheet realisation below our assumption, EBITDA declines by 19.8% & EPS declines by 25.9%, and

vice versa.

Key Risk/ Concerns for Industry and HIL

Ban/restriction on use of asbestos may force industry to look for other alternative

In the past, in Western countries, due to uncontrolled usage of asbestos, there were cases of people suffering from diseases like Asbestosis, Lung

cancer and Mesothelioma. This health issues recorded in the Western countries in the past and which are being highlighted and debated by the

anti-asbestos lobbies relate to extensive and uncontrolled usage of the Blue and Brown varieties of Asbestos fibre. In India, there is ban on the usage

of Blue and Brown varieties of asbestos. Any government initiative (based some NGO protests) to completely ban or restrict the use of asbestos will

force industry to look for alternative and may increase its overall cost. However, with government thrust on affordable housing projects, there

seems to be remote chances of complete ban on usage of asbestos.

Steep decline in demand on the back of lower agri-income due to erratic monsoon

Asbestos cement sheet industry depends on rural and semi-rural areas for there sales. Any decline in demand on the back of drought like situation

or lower agri-income in the country will impact HIL's revenue directly.

Increase in key raw material prices may impact margins

HIL along with all the industry players totally depends on import for its requirement of asbestos. In case, any mines are shut down, due to any

untoward incident, then asbestos price may increase above over assumption. In addition, our assumption of decline in cement prices is based on

the fact of demand-supply mismatch in cement industry till FY11. If cement prices doesn't decline as per our expectation, then HIL's margins will

be impacted directly.


Company Description

Hyderabad Industries Limited is a flagship Company of the C.K.Birla group of Companies, incorporated

on 17th June 1946. HIL's key product range include Fibre Cement roofing sheets in the name of

CHARMINAR, Autoclaved Aerated Concrete Blocks and Panels called AEROCON, and Calcium

Silicate insulation product called HYSIL. The Company is one of the leading manufacturers of Fibre

Cement Sheets in India with an market share of about 21%. From a roofing manufacturing company,

Hyderabad Industries Limited has evolved into a multi product, green building products organization.

Key Management Personnel:

C K Birla, Chairman

Krishnagopal Maheshwari, Director

Abhaya Shankar, Managing Director

Ashok Soni, Chief Financial Officer

K C S Naidu, Company Secretary

Shyam Modi, VP - Marketing


Profit and Loss StatementParticulars (INR mn) F08 F09 F10E F11ENet Sales 4,827 6,188 7,375 8,388% chg 9.8 28.2 19.2 13.7Total Expenditure 4,474 5,291 6,153 6,975Operating profit 354 897 1,222 1,413(% of Net Sales) 7.3 14.5 16.6 16.8Other Income 47 39 39 39Depreciation& Amortisation 111 140 182 227Interest 73 91 123 144PBT 216 705 956 1,080(% of Net Sales) 4.5 11.4 13.0 12.9Tax 78 253 343 388(% of PBT) 36.2 35.9 35.9 35.9PAT 138 452 613 692Add/(Less): Extarordinary Items 3.1 (11.1) - -Adj PAT 141 441 613 692% chg 0.8 213.1 39.0 13.0

RatiosParticulars F08 F09 F10E F11EValuation Ratio (x)P/E 22.1 7.1 5.1 4.5P/E (Cash EPS) 12.4 5.4 3.9 3.4P/BV 2.1 1.7 1.3 1.0EV / Sales 0.8 0.6 0.6 0.5EV / EBITDA 10.9 4.2 3.5 2.9MCap/Sales 0.6 0.5 0.4 0.4

Leverage RatioDebt-Equity 0.6 0.4 0.5 0.5Interest Coverage -on EBIT 3.9 8.8 8.8 8.5

Per Share Data (Rs)Diluted EPS 18.8 58.9 81.8 92.4Diluted Cash EPS 33.6 77.5 106.1 122.8DPS 5.0 10.0 10.0 10.0Book Value 201.6 248.6 318.8 399.5

Returns %ROE 9.3 23.7 25.7 23.1ROCE 6.4 20.4 21.6 19.2Dividend Payout (%) 26.5 16.9 12.2 10.8

Du-Pont Analysis (%)Operating margin (EBIT/Sales) 6.0 12.9 14.6 14.6Interest Burden (PBT/EBIT) 74.7 88.6 88.6 88.2Tax Burden (PAT/PBT) 63.8 64.1 64.1 64.1Asset Turnover (Sales/assets) 202.5 219.3 194.7 184.4Gearing (Assets/Equity) 160.1 142.8 149.0 145.1

Margin Ratios(%)EBITDA margin 7.3 14.5 16.6 16.8PBT margin 4.5 11.4 13.0 12.9PAT margin 2.9 7.3 8.3 8.3

Growth Ratios (%)Net Sales 9.8 28.2 19.2 13.7EBITDA (0.5) 153.8 36.1 15.6EBIT (3.6) 175.2 35.5 13.5PAT (20.2) 228.1 35.6 13.0APAT 0.8 213.1 39.0 13.0

Operating CycleDebtors Days 36 30 30 30Inventory Days 86 66 65 65Creditors Days 49 38 38 38

Balance SheetParticulars (INR mn) F08 F09 F10E F11E

SOURCES OF FUNDS

Equity Share Capital 75 75 75 75

Reserves& Surplus 1,435 1,787 2,313 2,917

Shareholders Funds 1,510 1,862 2,387 2,992

Total Loans 908 797 1,171 1,351

Deffered Tax Liability 173 193 193 193

Total Liabilities 2,591 2,852 3,752 4,537

APPLICATION OF FUNDS

Gross Block 2,384 2,822 3,787 4,547

Less: Acc. Depreciation 1,091 1,224 1,406 1,633

Net Block 1,292 1,598 2,382 2,914

Capital Work-in-Progress 230 365 400 240

Investments 95 93 93 93

Current Assets 1,997 1,916 2,174 2,745

Current liabilities 1,023 1,121 1,297 1,456

Net Current Assets 974 795 877 1,289

Miscellaneous Expenses - - - -

Total Assets 2,591 2,852 3,752 4,537

Cash Flow StatementParticulars (INR mn) F08 F09 F10E F11E

PAT 141 441 613 692

Depreciation 111 140 182 227

Chg in working capital 0 (121) 122 105

Other Current Assets (9) (12) - -

CF from operations 260 713 673 814

Capital expenses 274 574 1,000 600

Chg in investments (1) (1) - -

CF from investing (273) (573) (1,000) (600)

Free cash flow (14) 139 (327) 214

Equity raised/(repaid) - - - 0

Debt raised/(repaid) 155 (111) 374 180

Dividend(Incl tax) (44) (87) (87) (87)

CF from financing© 111 (199) 287 93

Net change in cash 98 (58) (40) 307

Opening cash bal 65 163 105 64

Closing cash bal 163 105 64 371


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Outperformer Marketperformer Underperformer

More than 10% to Index Within 0-10% to Index Less than 0-10% to Index

RESEARCH

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DEALING

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Documents

Target : INR 554 KEY DATA Hyderabad Industries Ltd. (HIL)finquestgroup.com/wp-content/uploads/2012/08/HIL-IC-23-9-2009.pdffacility in Chennai for manufacture of Aerated concrete blocks