Bathing in glory

In a story that has now taken on an almost mythical status, Henry Ford, the iconic founder of Ford Motor Company who revolutionised the world of manufacturing by introducing assembly line mass production of affordable automobiles, is believed to have addressed customer enquiries about cars in different colours by quipping, “You can have any colour — as long as it’s black.” For years, that was the default mode that HSIL — erstwhile Hindustan Sanitaryware & Industries, one of the oldest sanitaryware brands in the country — used to function in.

And much like Ford, HSIL had to give in to market demands and brighten up its world in the face of intense competition. “In the past, we were perceived as a traditional brand, with a fixed set of designs and the same white shade available across products. Customers were asking for more; they were bored with the same designs and colour choices that most sanitaryware companies offered. Consumer lifestyles and preferences were also changing; bathrooms and toilets, mostly neglected in the past, are now an integral part of our lifestyle and people are ready to pay for good products,” says HSIL joint MD, Sandip Somany.

Over the years, HSIL has stayed up to date with changing consumer contexts and has capitalised on its strengths. “A decade ago, we had four designers; today, we have 35. We had less than 100 product categories catering to the mass market; today, we have nearly 1,200 categories across price points,” Somany adds. According to him, the key to success in the sanitaryware category is having a wide product range at various prices supported by a widespread distribution and logistics network. HSIL has built advantages and strengths in these areas over the years, ensuring a durable competitive advantage. Somany informs, “Our distribution network is 50% larger than that of our nearest
local competitor.” 

Today, HSIL has nearly 2,900 dealers and 18,000 retailers across 600 districts in the country and not just enjoys brand loyalty but also commands a 30% market share in the organised sector. Its large in-house team of designers and researchers gives HSIL the advantage of offering a range of new products and designs. In fact, the company was the first to introduce a western-style commode called Nano that used just 1.5 litre of water per flush and to offer a range of kids’ products. With nearly 100 product launches each year, HSIL has the largest set of product offerings in the bathroom products space in India.

Servicing this wide range of products and their buyers is a dedicated customer call centre. This tangle of product offerings and their upkeep has in a way kept competition at bay, as the requirements of a huge brand and distribution network in this sector have restricted others from entering the market. HSIL’s major competition, then, is from small, regional sanitaryware manufacturers in the market. Being a national player, however, HSIL has scored over competitors in the minds of its consumers. It continues to spend on brand building, allowing it to capture market share in a growing sector. Besides, unlike competitors such as Parryware, which is a strong player in the south Indian market, and Cera, which is largely present in markets in the west, HSIL has reaped the benefits of its pan-India reach, servicing remote locations that may not be economically viable for smaller players.  

Creature comforts

Because of time, money and logistical challenges and capacity constraints, most sanitaryware manufacturers and international companies operating in India concentrate on certain key segments — such as luxury products — in a small number of markets. HSIL, on the other hand, has dominated the bottom of the pyramid, catering to the mass market with traditional products. Over time, this has proven to be its strength and opened up opportunities for it to climb up the value chain. With the help of its in-house design team and an evolving range of products, HSIL now operates across segments and categories. Among its brands are QUEO, catering to the super-premium segment, and Hindware Art and Hindware Italian, targeted at the premium segment.

Distribution edge

A high retail sales contribution reflects HSIL’s widespread network

In the middle is its core brand Hindware, and the low-end segment is serviced by brands such as Raasi and Benelave. This split was a huge challenge for HSIL in terms of perception, as it was difficult for the company to reposition itself from being a mass-market brand to a luxury or premium one. But thanks to the company’s efforts and its re-branding strategy, the premium and luxury segments today bring in almost 57% of revenue for HSIL, compared with a mere 27% in 2007. This has started to show positive results in terms of margins and return ratios as well. For instance, compared with competitor Cera, which commands a 13.4% Ebit margin, HSIL’s building products division enjoys a 20.7% Ebit margin. 

None of this, however, would have been possible without an uptick in demand and changing consumer perception and behaviour. More importantly, though, most of these behavioural changes have come to the fore in the last decade or so and have been fueled by a spiraling demand for housing, rising incomes, rapid urbanisation and a growing working class. “We realised that our customers were no longer the same. The average customer age has come down considerably from around 40-45 years to 25-35 years. Today’s decision-makers are young people who are buying their first homes in their twenties,” Somany explains.  

Constant pursuit

While HSIL has kept time with changing consumer tastes, it has taken great pains not to become complacent. It has been investing heavily in its businesses and exploring newer ways to reach consumers over the past four years. In order to tap new opportunities, it increased product capacity to five million pieces a year through brownfield and greenfield expansions, as against 3.5 million pieces three years back. It has also invested in its container glass and faucets businesses, which, though it enabled HSIL to ramp up scale and leverage its brand and distribution network, came with its share of problems.

Show spoiler

The glass business has been a laggard compared to sanitaryware

Thanks to the significant investment that went into powering this change, HSIL’s gross block has doubled from around ₹1,036 crore in FY10 to ₹2,070 crore now. Since a large portion of this investment was funded by debt (which jumped from ₹493 crore in FY10 to ₹1,153 crore in FY14), HSIL has navigated through three choppy years, when demand for both sanitaryware and container glass dipped. The container glass division, which accounts for more than 50% of its revenue, was severely hit in the last two years because of tepid demand and increased capacity. (Capacity in the glass division was recently augmented by 475 tonne a day to 1,600 tonne a day through brownfield expansion and freeing up existing capacities, with an overall capex of ₹300 crore).

With an 18% market share, HSIL is the second largest player in the container glass segment, catering to manufacturers of beverages, liquor, beer, soft drinks and pharmaceuticals. This division, which operated at 75% capacity utilisation in FY14, suffered in terms of growth in revenue as well as profitability as the company was unable to pass on mounting costs. The operating margin for container glass dipped from a peak of 15% in FY12 to 1% in FY14. This, along with debt on the books, had a huge impact on the financial performance of the company.

Despite marginal growth in sales, net profit nearly halved, dipping from ₹149 crore in FY12 to ₹75 crore in FY14, thanks to the negligible proportion coming from the glassware division and high interest costs, which jumped from ₹42 crore in FY12 to ₹72 crore in FY14. Lower earnings, contracting return ratios and greater debt on the books were warning signals to the market, leading to a significant correction in the stock price, which fell from around ₹240 in July 2011 to a low of about ₹73 in August 2013.    

From that low, however, the stock has bounced back almost fivefold, hitting a high of ₹424 on October 10, 2014. Investors are now eyeing a recovery and a possible turnaround in the business. Though the low return on equity (6%) generated by the glassware division cast a shadow on the high-margin and high-RoE (19%) sanitaryware division, this is now changing. Demand in the glassware division’s user industries has begun to perk up, and with about 5% volume growth and another 6-7% realisation growth, thanks to value-added products, investors expect sales in this division to grow 8-10% over the next two years.

Full of fizz 

Liquor and soft drinks companies are the biggest clients for the glass division

Importantly, the benefits of economies of scale, higher realisations and cost-cutting measures have begun to show; power and fuel costs are expected to slide by about 6%. Besides, the Ebit margin is also expected to improve drastically from 1% in FY14 to about 7-8% by end-FY16. All these factors combined, in addition to the higher margins in the glassware division, are expected to have a huge impact on earnings. 

Analysts are also confident about long-term growth in the sanitaryware business, particularly in the light of the current government pushing for housing and ‘Swachh Bharat’. “India’s sanitaryware and bathroom fittings sector is estimated to be ₹800 crore in size and is expected to register a 12% CAGR between 2013 and 2018. Only 40% of the Indian population has access to sanitation facilities, which, combined with PM Modi’s Swachh Bharat campaign, is expected to be a huge boon for the sector. We are confident that HSIL will be a key beneficiary because of its leading position and continuing innovations in the lifestyle segment,” says Chintan Modi, who tracks the company at Reliance Securities.

Spreading its wings 

At the moment, though, the company is not only moving up the value chain in its core businesses but is also expanding horizontally, moving into several related segments, one of the most promising and significant of which is its faucets business. The Indian faucet segment is estimated to be ₹4,500 crore in size, growing at a rate of 18-20% annually, and manufacturers in the formal sector are now gaining momentum. 

Not keeping up

Addition of premium offerings are yet to reflect in a high overall RoCE

“Jaquar has top-of-the-mind recall, controlling over 60% of the formal market and one-third of the overall market. HSIL, Parryware and Cera have recently made forays into manufacturing faucets to leverage their strong brand and distribution networks. These brands are aiming at the mid-market segment, where Jaquar is not as well established,” says Nehal Shah, who tracks HSIL at Antique Stock Broking.Shah adds that compared with the sanitaryware segment, scalability in faucets is much better, especially given the volume potential of faucets vis-à-vis sanitaryware in bathrooms and kitchens.

“With demand shifting from non-brand name products to branded ones, we expect operators in the formal market to register a 20-25% CAGR, with the sector estimated to grow by 18% in the next few years,” Shah says. Considering its wide distribution network and brand recall, this could prove to be a winning proposition for HSIL. Importantly, this growth would add to its margins and require very low capex, thus strengthening the company’s balance sheet. 

Based on its strong foundation and a series of prudent financial decisions, HSIL is poised for growth, unless a demand shock sends its stock price plummeting down the drain.