PNVF

PN Vijay Financial Services Pvt Ltd Hanung Toys and Textiles Limited July 13, 2010

BUY
13th July 2010
CMP Target Target Period Potential upside 52 week high/low Avg. daily volume Mcap/Sales I year change Rs 257 Rs 360 12 months 43% 265.45/56 350992 shares 0.73 255.15%

- An Evidence of Higher Yields

Company Overview India’s largest manufacturer and exporters of stuffed toys, Hanung Toys and Textiles, is also a key player in mid-high end home textile segment. Established in 1990, the company expanded to 11mn toy pieces in 1996, spread to home furnishing in 2002. Manufacturing facilities are located across 2 units in Noida SEZ, those for textiles are located across 2 units in Noida SEZ, one unit in Maharashtra and one in Uttaranchal. Set up in technical collaboration with South Korea, Hanung exports 75% of its production to retail giants all over US, UK, Latin America and Europe, its major customer being IKEA in Sweden, Walmart in Latin America and other retailers in 30 countries across the globe.

Relative Performance

Hanung

Nifty

Shareholding Pattern 0.4 11.8 1.8 5.4

The company also has 100+ distributors catering to 3000 retail outlets all over India. It is the owner of renowned toy brands: “Play ‘n’ Pets” and “Muskan”. In the textile segment, the company manufactures comforters, quilts, bed sheet sets, pillows, curtains, rugs, cushions, duvets, throws and neck rolls. The domestic brand is “Splash” and key customers include Macy’s, JC Penny’s, Sears, Bloomingdale’s, Elite, Britannica, Vishal etc.
65.3

15.3

Promoters Corporates

Public MF's/ UTI

FII's NRI

Gross Sales for the company stood at Rs 8369 mn, a growth of 31% YoY basis. The company is characterized by strong order book visibility, steady volume growth and stable margins.

1

Deeper pockets. The biggest threat to the Indian toy industry emanates from China. Also. The market is valued at INR Rs 40 bn. have set this industry on a natural trajectory. Indian products are seen as generic in nature so they lose out in a market where tastes and preferences change overnight. Hanung estimates and pre-orders most of its raw-material requirements and has hence its operating cycle takes minimal time. for introducing tax incentives and higher investments.inclination towards better quality products are adversely impacting demand for cheap Chinese products. preferences for high quality products and several Government initiatives like the National Programme For Development of Toy Industry. The Indian organized toy market is expected to grow more than 25% in the next two years. 2010 2 . 70-80% of its toys are generic in nature and it boasts of a library of over 5000 designs.5% to world’s toy production. The Indian consumer boom has benefited this industry directly. as large-scale dumping of toys jeopardizes domestic production.PNVF PN Vijay Financial Services Pvt Ltd Company Divisions Toys Division Industry Perspective The Indian toy market has been attracting investor curiosity for a while. July 13. It is a labour-intensive industry. increased brand consciousness and consumer. However. Parents understand the impact of educational and recreational toys on a child’s development and do not hesitate from paying a higher sum for a better product. increased sensitivity towards a growing child’s needs. Most toy manufacturers are located in the Delhi-NCR region of Noida/ Greater Noida and belts in Maharashtra as this is an SEZ for toy manufacturing. Funskool India (non-listed) and Hanung Toys and Textiles. Obsolete technology used in production processes is again detrimental to the health of this industry. a fact reflected in stable margins. characterized by small-scale industries. India also contributes 0. Domestic Players include Ok Play India. Chinese toys are cheaper hence are better placed in a competitive market. Position of Company Hanung has built a strong client base over the last 18 years. awareness about pre-schools. constituting both organized and unorganized sector.

India also allows 100% FDI in textiles. Government intervention and increased quality and competitiveness through higher investments can help India attain a significant market share in the global textile market. 4% to GDP and 16. Global home textile market is estimated at US$70 billion. 40% of the textiles produced in the country are exported and it is the biggest employment generator after agriculture. Hanung also aims to increase installed capacity in this division by 24%.7%. Indian textile players also expect to target companies in other sectors like automobiles. This strategy can help contain immediate fluctuations in demand. to be invested in green field units in textile machinery. intellectual rights protection along with 100% EOUs and SEZs.3 bn of which exports constituted 83% of Sales. targeted FDI by 2015 is US$ 6 billion.63% to export earnings. which is currently dominated by China. Recent studies in the global textile trade have revealed that China is losing its competitive strength in textiles. Market size of Home Textile in India is US$20 billion including branded and nonbranded turnover. The Indian Textile Industry contributes 14% to industrial production. EBITDA margin for the division stood at 20. Indian markets provide various incentives to foreign players like cheaper production and marketing costs. 3 . the baton is likely to be passed to other emerging markets like India and Brazil. Textiles Indian home furnishing market is one of the fastest growing markets in the world. Hanung also prefers to sell to wholesalers with a storage facility rather than retailers.PNVF PN Vijay Financial Services Pvt Ltd July 13. 2010 Revenues in Hanung Toy Division grew by 30% in FY10 YoY to Rs 3. pharmaceuticals etc who were meeting their textile requirements with now expensive Chinese imports. Sales in toy division constitute 40% of total sales. Yuan deregulation is expected to be another jolt. Around US$ 30 billion worth of home textile is imported by the EU and US every year. Position of Company Hanung exports 75% of its production to the US. garment manufacturing and technical textiles. According to the textile industry. In the future.

2%.PNVF PN Vijay Financial Services Pvt Ltd July 13. of which exports constitute 68%. To meet higher working capital and capex requirements the company is expected to raise fresh equity. Sales in the textile division constitute 60% of Gross Sales. Higher depreciation results from increase in capacity. EBITDA margin stood at 18. from FY10. Financial Analysis Financial statement analysis and projections FY09 Sales (Rs mn) Toys Growth (%) Textiles Growth (%) EBITDA EBITDA margin (%) Depreciation Interest Tax Provisions PAT % Of Sales 6376 2585 3946 1170 16 113 329 93 635 10 FY10 8369 3372 30 5154 30 1635 17 172 496 67 900 11 FY11E 10461. Gross Sales in textiles are expected to remain stable. 4 .56 5268 25 8710 30 2354 18 268 592 120 1374 11 As the company embarks upon a strong period of maturity. The company’s tax requirements too are stable due to 100% tax exemption. Expected Gross Sales for FY11 and FY12 in the toys division are a conservative figure. EBITDA and PAT margins stabilize at 18% and 11% respectively. excise duty exemption.25 4215 25 6700 29 1883 18 198 580 87 1018 10 FY12E 13076. Company keeps high inventory in order to reduce operating cycle time. however the company is taking steps to reduce inventory turnover. taking into effect threats faced by the company by low-cost Chinese products and erratic economic situation in developed markets where most products are exported. 2010 Revenues in the Textile Division grew 30% in FY10 YoY to Rs 5154 mn. low power tariffs and duty free import of raw material.

o There is also an order backlog of Rs6 billion in the toys segment that needs to be executed within the next 2 years. o Hanung also aims to expand into newer toy categories. o The company boasts of an order book visibility of Rs18 billion. o The company is interested in inorganic growth. 5 . electronic toys etc. Hanung plans expand manufacturing facilities by 37% for toys and 24% for home furnishing respectively over the next 2 years.PNVF PN Vijay Financial Services Pvt Ltd July 13. Rs 12 billion for toys and Rs 6 billion for home furnishing. dolls. For textiles. The order is worth USD$ 90 million and expected to be completed by Dec 2012. Any such association will further improve margins due to enhanced synergy.5 mn pieces. Hanung aims to reduce its exports in order to tap potential in the domestic market and strengthen its existing share. o Hanung’s annual capacity for toys is 27. processing is 41 mn meters. 2010 Future Agenda o Hanung has entered into an export order with US buyer to export company’s home furnishing products. capacity for weaving is 6. o Over the next few years.5mn meters. namely plastic toys. o The company is also focusing on geographic expansion.

Hanung is aggressively pursuing new frontiers and strengthening its domestic base. the company’s main offshore client bases. Only dissuading factor is their questionable quality. With growth and demand facing a slight slump in the EU and US. 6 .PNVF PN Vijay Financial Services Pvt Ltd July 13. For a company which excessively exports. Cheap currency and economies of scale make an assortment of Chinese toys available at a bargain. currency rate fluctuations present a huge challenge. Hanung aims to hedge its positions through forward contracts and dealer payments in INR. 2010 Deterrents China continues to dominate 70% of world’s toy production.

11% The DCF valuation yields a value per share of Rs 360 Valuation multiples FY09 EPS EPS growth (%) EBITDA growth (%) ROCE (%) ROE (%) Debt/ Equity Ratio EV/EBITDA Dividend Payout Ratio (%) PEG ratio P/E Cash EPS 25. The company boasts of very attractive valuations.14.PNVF PN Vijay Financial Services Pvt Ltd July 13. PEG and P/E suggest that the company may be undervalued.3 0.4 34 25 15.9 42 FY11E 39 12 20.6 25 15. However. 2010 Valuation and Recommendation DCF Valuations For estimating the price target.15 5.35 3.65%. terminal value of Rs9050 mn was calculated using Gordon Growth Model.9 3.75% Beta: .8 40 40 16 23 1. The key assumptions are listed below Risk free return: .21% WACC: .3 6 70 FY12E 52.4 30 FY10 35.8 0.5 14 22 1. Low EV/EBITDA.7.75 Cost of equity: .8.4 21 1.6 23 1 3 3. undervaluation is matched with a terrific growth in earnings and cash availability as demonstrated by high EPS and Cash EPS ratios. 7 .5 4.0.336 8.65 6 0.4 3.24 6 88 All valuations are based on historical trends. EBITDA growth is expected to be stable as the company enters a mature phase FY10 onwards.8 0. 10 year bond yield Market risk premium: .2 3.

2010 Hanung is an excellent mid-cap exposure and is attractively priced. We recommend it for investors who like high growth opportunities with a 12 month target price of Rs 360 Disclaimer: We welcome your comments and feedback at contact@askpnvijay. While the information contained therein has been obtained from sources believed to be reliable. Investors are advised to satisfy themselves before making any investments. Under no circumstances does the information in this newsletter represent a recommendation to buy or sell stocks. The report has been prepared solely for information purposes and does not constitute a solicitation to any person to buy or sell security. no responsibility (or ability) is accepted for the accuracy of its contents. 8 .com.PNVF PN Vijay Financial Services Pvt Ltd July 13.

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