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Hyderabad Industries: Stock Analysis for Long Term Investments

Hyderabad Industries Ltd (BSE:HYDIND) sells products in the building and construction industry. Its product range include Fibre Cement roofing sheets in the name of CHARMINAR, Autoclaved Aerated Concrete Blocks and Panels called AEROCON, Calcium Silicate insulation product called HYSIL, joining material for Gaskets, Plant and machinery for these products.

HYDIND is a part of C.K.Birla group of Companies. This group of Birla’s also owns the waning Hindustan Motors (i.e. Ambassador brand). My objective in this analysis to see if HYDIND is a good fit for my portfolio.

Trend Analysis

The whole reason for any business to exist is to generate sales revenue and make more profits. At a minimum, the parameters listed below should have continuously increasing trends. All the data below is based on last 10 years i.e. from 2000 to 2009.

  • Revenue: Increasing trend with average growth of 12% (SDev. 10%). It has volatility on higher side. Not a good observation.
  • Earnings per share: It was negative until 2004, since then it continued to increase. On last 10 year basis, average EPS growth rates have been negative. However, since 2005 it seems to be a turnaround story. It is not a type of company I am looking for my long term portfolio.
  • Net cash flow from operations: High variability in cash flow. Twice it has been negative in last 10 years. It could be due to cyclical business. Not a good observation.
  • Profit/Loss from operations: Before 2005 it was negative, 2005 onwards its positive but lacks consistency. This again indicates towards turnaround story.
  • Reported net profit: Same story; indicates some kind of turnaround message.
  • Gross margins: Fluctuates quite a bit in last 5 years, from 5.2% to 12.5%. Lacks consistency. Not a good observation.
  • Operating margins: Fluctuates quite a bit in last 5 years, from 7.5% to 16.2%. Lacks consistency. Not a good observation.

Hyderabad Industries: Trend Analysis
Hyderabad Industries: Trend Analysis

Quality of Dividends

In this part of my analysis, I am trying to understand dividend growth rate, consistency, and ability of the corporation to demonstrate sustainability. In is also an indirect way to gauging management’s policy vis-à-vis sharing the profits with common shareholders.

  • Dividend per share: Chart 3 shows dividend is more or less flat. Not a good observation.
  • Payout factor: This is ratio of dividends per share divided by EPS. This has been consistently less than 30%. Neutral observation.
  • Dividend growth rate: No sufficient dividend history. Very different than EPS growth rate, i.e. no correlation. Not a good observation.
  • Ratio of cash from operations to reported net profit: all over the place with no consistency. Not a good observation.
  • Ratio of profits from operations to reported net profit: all over the place with no consistency. Not a good observation.
  • Ratio of Cash from operations to total debt: Very high variability. Not a good observation.


Summary…

After going through this analysis so far, I do not believe HYDIND will fit into my long term portfolio.

  • Prior to year 2005, it was in complete mess with all negative indicators.
  • Since 2005, it does appear that company is on a turnaround path and has made some progress in that direction.
  • The company was saddled in debt until 2004, and reduced significantly in 2006. However, the debt is again creep up. The cash it generates can barely keep up with the debt on balance sheet.
  • Dividends and its growth is erratic and is not in-line with EPS growth rates.
  • Most of the parameters are very cyclical, indicating cyclical business environment.
  • In addition, my initial excitement turned into a concern after reading its 2008/2009 annual report. Enterprising investors who would still prefer to invest for long term should first read page 20 to page 23 of annual report. It shows the long list of dues and appeals it is in. If those appeals went against it, the company will have to pay a heft tax over time.

This is another example where, the current PE ratio, current dividend rupees, and current dividend yield appeared very attractive. But when we look holistically and then reflect it on company’s performance, one will find lack of good history and cyclical behavior. As I have said on many occasions on this blog, dividend investing is not about current yield. It is about sustainability and what future yield you can get.

One could argue that its focus in construction materials industry abodes well for future growth, which is in-line with India’s continually growing economy. It very well could be true and is surely possible. It is also possible it could be one of the turnaround stories.

I buy stocks with a view of holding it for 10 years or more. I expect to see consistency and sustainability so that I can get my returns. Hyderabad Industries falls short of meeting those objectives. I will not be buying any shares in this company.

Disclaimer: This analysis and conclusion drawn are in the context of my long term investment philosophy. It is in line with my investment objectives and my personal risk profile. Individuals should do their own analysis with their own objectives in mind.

This article was written by TIP Guy of TIPBlog.in
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This entry was posted on Thursday, November 26th, 2009 at 9:17 pm and is filed under MoneyVidya Blogger Network. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.

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  • tipguy
    Hello Born Free,

    This is the kind of discussion and language of comment that helps move forward.

    Thank you for acknowledging that analysis shows both sides of the coin (to certain extent). Your comments are valid w.r.t. (1) putting to test your ideas; (2) HDIL vis-à-vis changed scenario of Indian economy; (3) looking towards future. There is nothing wrong in your observations and they make sense to me. But that’s one perspective.

    While I attempted/discussed on both sides of the coin, my conclusion was it fails consistency and sustainability (one of the key ingredients I look for). May be I did not explicitly state this, and probably that’s the mistake.

    Few other aspects that were not mentioned in this article on Moneyvidya blog, but have mentioned many times on my personal blog -- When I think holistically, I think there are better opportunities than HDIL where I would like to put my capital to work. Another hypothetical way I think about this is; if the owners are looking for large capital, and I was presented an opportunity to invest a large portion of my wealth, would I put my money? In this case, no, I would not put my money.

    Another way to think about this is, in essence, I am putting my analysis to test.

    Furthermore, in my viewpoint, performance of the share in stock market is not what I look for. I look for “what is in for me”. Over a period of time, do I expect xx% return from the investment? Markets will do what it has to do. I do not have any control over it. So why chase something that I cannot control. And, yes, there are many times I feel I may have missed those so-called multi baggers. That’s the negative side of my investment approach which I am willing to live by. I could very well be completely wrong for not buying HDIL.

    But what’s the implication of me being wrong? Stock zooms and becomes a multi bagger. I lose the opportunity for good returns. This is the risk I take because that’s under my control. It is my risk.

    But what if my observations are right, and HDIL does not provide me the xx% return I am looking for? I again lose the opportunity for good return. I could have bought something else instead of HDIL. This is under my own control. This is risk I am not willing to take.

    Regarding stock market being an ultimate teacher – I would tend to have a different viewpoint. But that’s a different discussion.

    Best Wishes,
  • Born Free
    Dear Tip Guy,

    You have a valid point in that you had indeed covered the "turnaround" issue and also the "attractive valuations:.

    You had all the data and the interpretation of the data absolutely spot on.

    I am left wondering then why the conclusion should not be a logical one of buying the share.

    Surely, you had mentioned that you are in it for the long term and also that the past does not show consistency. However, as you have correctly mentioned they are "the past".

    As I mentioned in my first comment, you will agree that India has changed dramatically in the last 5 years. Then why should that past be considered and not the future that is in front of the business?!!

    I believe that if we have our theories / analysis correct, then we should put the same to test. In fact, I should further state that the correct test of the analysis (whether yours or mine) will be the performance of the share in the stock market. That will be the litmus test.

    If I am wrong ( and I could very well be, as no one is perfect), I will be glad to learn and correct myself. And I hope and trust, so would you.

    The stock market is the ultimate teacher.
  • tipguy
    Born Free,

    The issue with your comments is, you want to keep harping about grapes. AND all this time I am talking about apples (and not grapes). I hope you understand this line. These are two different things.

    In your first comment you tried to teach me “reasonable knowledge of basic business characteristics”. That’s how you start you comment, AND ignored that I did make an observation about turnaround vis-à-vis growth of construction industry and Indian economy. Which is same as yours? Isn’t it?

    Now in your second comment you are trying to teach me “how to eat my pudding” and challenging me for 6 months. AND ignored last two paragraphs explaining why I am not buying.

    I will request you to read last two paragraphs (including the disclaimer). And after you understand its meaning, may be than we can discuss pros or cons, or fair valuations, like two decent human beings, and not throw challenges like two dogs on the street.

    Best Wishes,
  • Name
    Dear TIP Guy,

    You are imputing things which I had never said.

    I never mentioned the two points which you had referred to.

    The main point which I have made is that the business has had a tremendous change in its business characteristic. This coupled with the low debt, very low equity, very healthy free cash flow at the current valuation is a great opportunity.

    In fact, you yourself in your analysis had mentioned the same development as "turnaround".

    What I am saying is that this turnaround, might be a long term trend and we are just at the beginning of this trend. Leaving this now, might not be a good decision.

    The proof of the pudding is in the eating. Now Dec 11th 2009 the price is 427. Let us review the price after 6 months.

    Regards,

    Born Free
  • tipguy
    Hello BornFree,

    Like your name suggests, you are free to interpret any analysis as you may wish. We do not have to agree on same thing. And thanks for the giving me tutorial about basic business characteristics.

    I do not think you understand my objectives and hence you are not able to understand this in proper context. How can I argue when you think (1) operating cash flow below debt is fantastic; (2) margins in high single digits-to-low double digits is great; (3) the last five years you mentioned, EPS were 13.63, 52.73, 18.73, 18.86, 59.08. You think these are consistent and great.

    For my hard earned money to invest, I can surely find better companies that these numbers.

    Thanks for your comments, I enjoyed reading your perspective.

    Best Wishes,
  • Bornfree
    Dear TIP Guy,

    Any analysis of a company should be done with reasonable knowledge of basic business characteristics.

    Whatever you are saying WAS correct till 3- 4 years back. All of us will testify to the fact that in the last 5/6 years time, there has been a wholesome change in India, both in the urban and rural areas.

    People have got more disposable income. This has led to increase in a great increase in rural penetration of TVs, Cell Phones, regional newspapers, biscuits, breads, shampoos etc.

    The above is not a news item anymore. All of us are aware of that.

    However, a significant change has happened w.r.t Hyderabad Industries product consumption. Originally, in this industry, the institutional purchases ( like Government / NGOs / Corporates etc) where 80% of the business. Balance 20% were retail.

    Now, there has been an absolute U turn. The retail business is 80% and the institutional business is 20%. As everyone knows, retail business is high margin for the manufacturer, as the customer purchases based on his brand comfort level. Whereas the institutional business is low margin as the big buyers squeeze the vendors.

    This has benefitted both Hyderabad Industries and Visaka Industries. Between them, I think they have almost 50% of the entire industry capacity.

    What you are mentioning as "turnaround" is the result of this phenomenon. Now, when you consider this aspect, you can view the entire analysis in a new light. The entire business model now is end customer based. The margins are better. Customer goes for good brands. The product must be easily available. Thus they need a good distribution network. It should have a high credibility and must have been around for a long time.

    If you look at all these, you will find that Hyderabad and Visaka, both will qualify on all these fronts. Hence, what you are dismissing as a turnaround case, is a genuine business phenomenon.

    Now coming to the valuations.

    Hyderabad industries is available at a very low PE of approx 5.0; Debts are very low; Equity is very low; Their cash flow is fantastic. Thus you are seeing a great opportunity to enter a high growth business at very low prices.

    It will not be surprising if this industry starts quoting at an average PE of 12-15 very shortly. That gives almost 100% upside from the current levels.

    And even then, the counter will not be overvalued.

    And we have not even considered the India growth story yet. If that happens, that will be the icing on the cake.
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