[T.S.R:16148] HSIL-Downgrade To Sell

2QFY11 Results. HSIL's profit marginally belied our estimates, mainly due to lower-than-expected performance by container glass division. We have factored in the earnings dilution from the recent QIP issue of Rs1.5bn (net of interest savings). We believe the stock is fairly valued at current levels and does not offer any near-term re-rating triggers. Downgrade to Sell. n       Sanitaryware segment. The sanitaryware division's revenue grew 44% yoy on the back of a better product mix and higher realizations. The division recorded an EBIT margin of 19.9% in 2QFY11 (down 15bp yoy and up 110bp qoq). The company plans to increase capacity of its AP/Haryana facility by 0.7/0.3m pieces. n       Container glass division. The division expanded the Hyderabad unit capacity by 50 tons per day for which it had to shut one of the furnaces for nine weeks. This led to its subdued performance. Revenue was up 14% yoy, though down 14% qoq. The 2QFY11 EBIT margin stood at 12.3%, up 200bp qoq and down 90bp yoy. n       QIP issue and change in estimates. HSIL raised Rs1.5bn in equity through a QIP (Rs136 a share) in 2QFY11. We lower our EPS estimates by 1%/4% for FY11/12 to factor in a 20% equity dilution, the benefit of interest savings from the QIP proceeds and lower tax rate. n       Valuations. We retain our target multiple at 11x one-year-forward earnings, in line with the stock's five-year average. Our revised target price stands at Rs134 (earlier Rs140). Downgrade to Sell. Safe Harbor Statement: Some forward looking statements on projections, estimates, expectations & outlook are included to enable a better comprehension of the Company prospects. Actual results may, however, differ materially from those stated on account of factors such as changes in government regulations, tax regimes, economic developments within India and the countries within which the Company conducts its business, exchange rate and interest rate movements, impact of competing products and their pricing, product demand and supply constraints.   Nothing in this article is, or should be construed as, investment advice.

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