Hindustan Tin Works.............Can it execute properly

I had talked about Hind Tin Works few weeks ago on my blog as an arbitrage play. The value of its stock (approx 44/-) was lower than the book value per share (57/-). After that post the stock has already appreciated more than 10% and is currently trading at 48.75/-. I also did some further research to understand the company's business and have documented the same in the blog below for everybody to review.

The company is in the business of metal cans based packaging for all kinds of FMCG products. Recently they have also added 2 piece beverage can to its product portfolio after tying up with Rexam Plc of UK. Rexam is among the top producers of 2 piece beverage cans globally. The regular tin based metal container business of Hind Tin is nothing to talk about. It is pretty generic and I believe the company does not have any moat in that business.However, the 2 piece beverage can business gives Hind Tin some temporary moat as it is the only manufacturer in India. The nearest competitor is still 12 months away from starting domestic manufacturing. Further details about the company's products, their manufacturing infrastructure, basic financials and recognitions received can be obtained from the website directly.

http://www.hindustantin.biz/about_us.asp

The growth in modern retail and changing consumer demographics in India will further drive the demand for attractive packaging of FMCG products in India. Packaging is the biggest cost component for any FMCG company and increase in consumption will directly increase the overall market for packaging solutions in India. Hind Tin with it's integrated facilities from metal can manufacturing to printing and labeling is in a good position to capitalize on this increasing demand for packaging solutions. The addition of 2 piece beverage can to its product portfolio will be the biggest revenue and margin driver for Hind Tin Works Ltd in future.

Valuation:

The company has grown it's topline at a CAGR of 10.52% and bottomline at approx CAGR of 40% from FY 03 to FY 07. Correspondingly the net margins have been improving steadily from 1.33% t0 3.4%. With the introduction of 2 piece beverage can these figures should improve in FY09. The company already paid 15% dividend on a face value of 10 in FY07. With current share price of 48.75/- the dividend yield comes close to 3%.

The company is trading at a P/E ratio of 8.15 and 14.5% discount to its book value based on FY07 financials. This is cheap when compared to its peers in Indian markets. It is very difficult for me to estimate the future earnings potential of Hind Tin Works since I am not clear how successfully they will be able to execute their future growth plans. However a profitable manufacturer with a niche product can be valued at 1.5 times its book value. That means the value of Hind Tin works should be close to 57 x 1.5 = 85.5/.

Risks:

The biggest risk with Hind Tin Works Ltd lies in the management's ability to execute their plans for future growth. The current market for beverage cans is estimated at 20 crore cans per annum while Hind Tin has a capacity to make 45 crore cans annually. Besides new players will come in market next year which will add another 60 crore cans to the domestic capacity. Oversupply could be an issue if the offtake of cans is not as fast as Hind Tin has anticipated. They also carry significant commodity risks. I am not sure whether Hind Tin is adequately hedging it's commodity risks. I believe there is limited long term moat in Hind Tin's business. It is a pure volume play and margins are pretty low. Any severe downturn in Indian markets will be a true test for their business model. Their 2 piece beverage can project is pretty new. Specific details are not available in public domain to assess the earnings potential of that business. If you come across any specific details in public domain please forward that to me and I will be more than happy to analyze the impact on Hind Tin's business.

In spite of all these risks I found Hind Tin Works current position in Indian markets and share price very attractive and hence added it to my personal portfolio. As I have always said with my previous post; please do your own homework and only buy Hind Tin if you are convinced. If it is not suitable for you please avoid it as there are more than 5000 companies listed on India bourses to choose from. If you have any questions or comments feel free to contact me at secmoney@gmail.com

Regards,
Bargain Hunter

Disclaimer: Investing in stocks is very risky and an individual can loose all the money invested in equity markets. Please consult your financial advisor before investing in any stocks.

Disclosure: I have this stock in my personal portfolio at the time of writing this blog