Hydro S&S Industries Ltd

Enhancing investment decisions

Q2FY11 Result Update

Explanation of CRISIL Fundamental and Valuation (CFV) matrix

The CFV Matrix (CRISIL Fundamental and Valuation Matrix) addresses the two important analysis of an investment making process –

Analysis of Fundamentals (addressed through Fundamental Grade) and Analysis of Returns (Valuation Grade) The fundamental

grade is assigned on a five-point scale from grade 5 (indicating Excellent fundamentals) to grade 1 (Poor fundamentals) The

valuation grade is assigned on a five-point scale from grade 5 (indicating strong upside from the current market price (CMP)) to

grade 1 (strong downside from the CMP).

CRISIL Fundamental Grade

Assessment CRISIL Valuation Grade

Assessment

5/5 Excellent fundamentals 5/5 Strong upside (>25% from CMP)

4/5 Superior fundamentals 4/5 Upside (10-25% from CMP)

3/5 Good fundamentals 3/5 Align (+-10% from CMP)

2/5 Moderate fundamentals 2/5 Downside (negative 10-25% from CMP)

1/5 Poor fundamentals 1/5 Strong downside (<-25% from CMP)

Analyst Disclosure Each member of the team involved in the preparation of the grading report, hereby affirms that there exists no conflict of interest

that can bias the grading recommendation of the company. Additional Disclosure This report has been sponsored by NSE - Investor Protection Fund Trust (NSEIPFT). Disclaimer: This Exchange-commissioned Report (Report) is based on data publicly available or from sources considered reliable. CRISIL Ltd.

(CRISIL) does not represent that it is accurate or complete and hence, it should not be relied upon as such. The data / Report are

subject to change without any prior notice. Opinions expressed herein are our current opinions as on the date of this Report. Nothing

in this Report constitutes investment, legal, accounting or tax advice or any solicitation, whatsoever. The subscriber / user assumes

the entire risk of any use made of this data / Report. CRISIL especially states that it has no financial liability, whatsoever, to the

subscribers / users of this Report. This Report is for the personal information only of the authorized recipient in India only. This

Report should not be reproduced or redistributed or communicated directly or indirectly in any form to any other person – especially

outside India or published or copied in whole or in part, for any purpose.

CRISIL EQUITIES | 1

Hydro S&S Industries Ltd Swinging back to profit

Fundamental Grade 3/5 (Good fundamentals)

Valuation Grade 4/5 (CMP has upside)

Industry Chemicals

Fair Value Rs 37 CMP Rs 33

November 2, 2010

Hydro S&S Industries Ltd’s (Hydro’s) Q2FY11 revenues were in line with

CRISIL Equities’ expectations buoyed by strong growth in the domestic

automobile industry, which supported demand for the company’s

polypropylene (PP) compounds. Our stance for the rest of the year remains

stable on the back of a) positive outlook for the automobile industry and b) ramp-up in production of Tata NANO car, for which Hydro is an exclusive

supplier of PP compounds. We expect these factors to continue to support

higher sales and profitability. Consequently, we maintain our earnings

estimates for FY11 and FY12, and our fundamental grade of ‘3/5’.

Q2FY11 result analysis

• Hydro’s Q2FY11 revenues increased 32.7% y-o-y to Rs 340 mn driven by

strong demand for PP compounds from the automobile industry.

• EBITDA was higher at Rs 24 mn in Q2FY11 (up 76.3%) from Rs 13.8 mn in

Q2FY10, primarily on account of higher sales and improved realisations.

Raw material cost as a percentage of sales declined to 81.73% in Q2FY11

from 82.19% in Q2FY10. The increased realisation and operating leverage

supported expansion in margins by 177 bps y-o-y to 7.1% in 2QFY11.

• The improved operating performance helped Hydro report positive earnings

of Rs 3.6 mn in Q2FY11 compared with a net loss of Rs 1.6 mn in Q2FY10.

• EPS was Rs 0.6 in Q2FY11 compared with negative Rs 0.3 in Q2FY10.

Key developments

• During 2QFY11, Hydro completed the second phase of capacity expansion

(6,000 MTPA) at its manufacturing facility in Pune, taking its total capacity

to 31,000 mtpa.

• Hydro started supplying PP compounds to Volkswagen India for its

compact Polo model.

Valuations: Upside from current levels

We continue to value Hydro based on the discounted cash flow (DCF) method.

Our fair value for Hydro is revised to Rs 37 due to rolling forward of our

estimates from FY11 to FY12. At this value, the implied P/Es are 37.5x FY11

earnings estimate and 9.6x FY12 earnings estimate.The valuation grade is

revised to ‘4/5’.

KEY FORECAST

Key forecast

(Rs mn) FY08 FY09 FY10 FY11E FY12E

Operating income 1,168 1,184 1,093 1,431 1,849

EBITDA 126 40 63 80 112

Adj PAT 54 (18) (0) 6 25

Adj EPS-Rs 8.2 (2.8) (0.0) 1.0 3.9

EPS growth (%) 82.6 (134.3) (99.6) N.M 291.4

Dividend yield (%) 2.3 - - 2.9 2.9

RoCE (%) 22.5 3.4 6.1 8.6 12.9

RoE (%) 22.0 (7.2) (0.0) 2.6 9.9

PE (x) 7.3 (11.5) N.M 35.1 9.0

P/BV (x) 1.5 0.9 0.9 0.9 0.9

EV/EBITDA (x) 5.1 13.4 7.7 7.0 5.5

Source: CRISIL Equities estimate

N.M: Not meaningful; CMP: Current Market Price

CFV MATRIX

KEY STOCK STATISTICS

NIFTY 6,027

NSE Ticker HYDROS&S

Face value (Rs per share) 10

Shares outstanding (mn) 6.5

Market cap (Rs mn)/( $ mn) 210/4.7

Enterprise value (Rs mn) /( $ mn) 483/10.8

52-week range (Rs) (H/L) 75.5/30.1

Beta 1.5

Free float (%) 33.6%

Avg daily volumes (30-days) 4,775

Avg daily value (30-days) (Rs mn) 0.2

SHAREHOLDING PATTERN

PERFORMANCE VIS-À-VIS MARKET

Returns

1-m 3-m 6-m 12-m

Hydro -0.6% -16% -16.6% N.A.*

NIFTY 4% 12% 15% 18%

* Hydro was listed on NSE on January 11, 2010

ANALYTICAL CONTACT Chetan Majithia (Head) chetanmajithia@crisil.com

Amit kawle akawle@crisil.com

Vishal Rampuria vrampuria@crisil.com

Client servicing desk +91 22 3342 3561 clientservicing@crisil.com

1

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5

1 2 3 4 5

Valuation Grade

Fu

nd

am

en

tal G

rad

e

Poor

Excellent

Str

on

gD

ow

ns

ide

Str

on

gU

psid

e

66.4% 66.4% 66.4% 66.43%

33.6% 33.6% 33.6% 34%

0%

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60%

70%

80%

90%

100%

Dec-09 Mar-10 Jun-10 Sep-10

Promoter FII DII Others

CRISIL EQUITIES | 2

Hydro S&S Industries Ltd

Q2FY11 Result Summary

(Rs mn) Q2FY11 Q1FY11 Q2FY10 q-o-q(%) y-o-y(%)

Net sales 340 308 256 10.4 32.7

Raw materials cost 278 259 211 7.1 31.9

Raw materials cost (% of net sales) 81.7% 84.2% 82.2% -248bps -46bps

Employees cost 16 14 13 7.6 16.6

Other expenses 22 17 19 29.1 20.3

EBITDA 24 17 14 43.5 76.3

EBITDA margin 7.1% 5.5% 5.4% 165 bps 177 bps

Depreciation 6.7 6.5 6.1 3.3 10.1

EBIT 17.6 10.5 7.7 68.3 128.4

Interest and finance charges 13.2 11.3 12.2 17.0 8.4

Operating PBT 4.4 (0.8) (4.4) nm nm

Other Income 0.1 0.1 0.2 nm nm

PBT 4.4 (0.7) (4.2) nm nm

Tax 0.9 0.0 (2.6) nm nm

Minority Interest 0 0 0 0 0

PAT 3.6 (0.7) (1.6) nm nm

Adj PAT 3.6 (0.7) (1.6)

Adj PAT margin 1.1% -0.2% -0.6% 128bps 169bps

No of equity shares (Mn) 6.5 6.5 6.5 6.5 0.0

Adj EPS (Rs) 0.6 -0.1 -0.3 nm nm

Source: Company, CRISIL Equ it ies

Cars and utility vehicles production on the rise Strong automobile industry drive revenues

Source: Company, CRISIL Equ it ies Source: Company, CRISIL Equ it ies

Revenues and EBITDA margins moving up Improvement in profitability

Source: Company, CRISIL Equ it ies

476 393 499 496 567 600 673 653 743

-20%

-10%

0%

10%

20%

30%

40%

50%

60%

-

200

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600

800

Q2FY09

Q3FY09

Q4FY09

Q1FY10

Q2FY10

Q3FY10

Q4FY10

Q1FY11

Q2FY11

Units in Thousands

cars and utility vehicles production y-o-y growth (RHS)

395.9 219.4 217.4 228.1 256.5 291.9 317.6 308.2 340.0

-60%

-45%

-30%

-15%

0%

15%

30%

0

90

180

270

360

450

Q2FY09

Q3FY09

Q4FY09

Q1FY10

Q2FY10

Q3FY10

Q4FY10

Q1FY11

Q2FY11

Rs mn

Revenues [LHS] q-o-q growth [RHS]

395.9 219.4 217.4 228.1 256.5 291.9 317.6 308.2 340.0

12.45

-0.32

-9.31

4.215.46

7.41 7.55

5.577.1

-12

-10

-8

-6

-4

-2

0

2

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14

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Q4FY10

Q1FY11

Q2FY11

(%)Rs mn

Revenues EBITDA Margins (%) (RHS)

21.4

-13.6 -26.8 -6.6 -1.6

3.8 4.4

-0.7

3.6

5.4%

-6.2%

-12.3%

-2.9%

-0.6%

1.3% 1.4%-0.2%

1.1%

-20%

-10%

0%

10%

-30

-20

-10

0

10

20

30

Q2FY09

Q3FY09

Q4FY09

Q1FY10

Q2FY10

Q3FY10

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Q2FY11

Rs mn

PAT PAT Margins (%) (RHS)

Improved sales realisation

support margin expansion

CRISIL EQUITIES | 3

Hydro S&S Industries Ltd

Share price movement Fair value movement since initiation

-Indexed to 100

Source: NSE

Source: NSE

VALUATION We continue to value Hydro based on the discounted cash flow method. Our fair

value for Hydro is revised to Rs 37 due to rolling forward of our estimates from

FY11 to FY12. At this value, the implied P/Es are 37.5x FY11 earnings estimate

and 9.6x FY12 earnings estimate.

One-year forward P/E band One-year forward EV/EBITDA band

Source: CRISIL Equ it ies Source: CRISIL Equ it ies

P/E – premium/discount to NIFTY P/E movement

Source: CRISIL Equ it ies

Source: CRISIL Equ it ies

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Hydro S&S 5x 7x 9x 10x 11x

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(x)

1yr Fwd PE (x) Average PE +1 std dev -1 std dev

CRISIL EQUITIES | 4

Hydro S&S Industries Ltd

CRISIL IER reports released on Hydro S&S Industries Ltd Date Nature of report Fundamental grade Fair value Valuation grade CMP

(on the date of report)

13-May-10 Initiating coverage* 3/5 Rs 32.5 1/5 Rs 71.5

06-Sep-10 Q1FY11 result update 3/5 Rs 32.5 3/5 Rs 35.3

01-Nov-10 Q2FY11 result update 3/5 Rs 37 4/5 Rs 33

* For detailed initiating coverage report please visit: www.ier.co.in

CRISIL Equity research is also available on Bloomberg (CRI <go>) and Thomson Reuters.

CRISIL EQUITIES | 5

Hydro S&S Industries Ltd

FINANCIALS

Note: All ratios are computed on Adj PAT; nm= Not Meaningful

Source: Company, CRISIL Equities estimate

Income statement Balance Sheet

(Rs mn) FY 2008 FY 2009 FY 2010 FY 2011 FY 2012 (Rs mn) FY 2008 FY 2009 FY 2010 FY 2011 FY 2012

Operating income 1,167.6 1,184.0 1,093.2 1,431.2 1,848.7 Liabilities

EBITDA 126.5 40.2 62.6 80.1 112.0 Equity share capital 65 65 65 65 65

EBITDA margin 0.1 0.0 0.1 0.1 0.1 Reserves 200 182 182 180 198

Depreciation 15.6 20.6 26.1 28.3 28.6 Minorities - - - - -

EBIT 110.9 19.6 36.4 51.7 83.4 Net worth 266 247 247 245 263

Interest 32.5 48.3 47.6 47.9 53.3 Convertible debt - - - - -

Operating PBT 78.4 (28.7) (11.1) 3.9 30.2 Other debt 282 360 340 370 420

Other income 2.4 2.8 6.6 5.7 7.4 Total debt 282 360 340 370 420

Exceptional inc/(exp) - - - - - Deffered tax liability (net) 43

PBT 80.8 (25.9) (4.6) 9.6 37.5 Total liabilities 591 606 586 615 683

Tax provision 27.2 (7.6) (4.5) 3.2 12.4 Assets

Minority interest - - - - - Net f ixed assets 195 319 293 299 276

PAT (Reported) 53.6 (18.3) (0.1) 6.4 25.2 Capital WIP 39 9 9 9 9

Less: Exceptionals - - - - - Total fixed assets 234 328 302 309 285

Adjusted PAT 53.6 (18.3) (0.1) 6.4 25.2 Investments 0 0 0 0 0

Current assets

Ratios Inventory 210 159 150 196 253

FY 2008 FY 2009 FY 2010 FY 2011 FY 2012 Sundry debtors 259 183 180 235 304

Growth Loans and advances 33 38 26 34 44

Operating income (%) 15.9 1.4 (7.7) 30.9 29.2 Cash & bank balance 9 12 59 8 8

EBITDA (%) 74.9 (68.2) 55.7 28.0 39.9 Marketable securities 14 23 23 23 23

Adj PAT (%) 82.6 nm nm nm 291.4 Total current assets 526 414 437 496 632

Adj EPS (%) 82.6 nm nm nm 291.4 Total current liabilities 169 101 119 155 200

Net current assets 357 313 319 341 432

Profitability Intangibles/Misc. expenditure 0 - - - -

EBITDA margin (%) 10.8 3.4 5.7 5.6 6.1 Total assets 591 642 621 650 718

Adj PAT Margin (%) 4.6 (1.5) (0.0) 0.4 1.4

RoE (%) 22.0 (7.2) (0.0) 2.6 9.9 Cash flow

RoCE (%) 22.5 3.4 6.1 8.6 12.9 (Rs Mn) FY 2008 FY 2009 FY 2010 FY 2011 FY 2012

RoIC (%) 18.4 5.8 9.6 10.6 13.4 Pre-tax profit 81 (26) (5) 10 38

Total tax paid (23) (1) 4 (3) (12)

Valuations Depreciation 16 21 26 28 29

Price-earnings (x) 7.3 (11.5) nm 35.1 9.0 Working capital changes (66) 54 41 (73) (91)

Price-book (x) 1.5 0.9 0.9 0.9 0.9 Net cash from operations 7 48 67 (38) (38)

EV/EBITDA (x) 5.1 13.4 7.7 7.0 5.5 Cash from investments

EV/Sales (x) 0.6 0.5 0.4 0.4 0.3 Capital expenditure (63) (115) (0) (35) (5)

Dividend payout ratio (%) 17.1 - - 101.3 25.9 Investments and others (0) (8) - - -

Dividend yield (%) 2.3 - - 2.9 2.9 Net cash from investments (64) (123) (0) (35) (5)

Cash from financing

B/S ratios Equity raised/(repaid) 0 (0) (0) 0 0

Inventory days 74.9 51.7 54.4 54.0 54.2 Debt raised/(repaid) 66 77 (20) 30 50

Creditors days 57.4 32.4 40.0 40.0 40.0 Dividend (incl. tax) (9) - - (8) (8)

Debtor days 72.3 51.6 54.0 54.1 54.2 Others (incl extraordinaries) - - - - -

Working capital days 93.7 94.2 86.1 69.8 70.3 Net cash from financing 56 77 (20) 22 42

Gross asset turnover (x) 3.6 2.9 2.3 2.9 3.6 Change in cash posiiton (0) 2 47 (51) (0)

Net asset turnover (x) 6.2 4.6 3.6 4.8 6.4 Closing cash 9 12 59 8 8

Sales/operating assets (x) 5.6 4.2 3.5 4.7 6.2

Current ratio (x) 3.1 4.1 3.7 3.2 3.2 Quarterly financials

Debt-equity (x) 1.1 1.5 1.4 1.5 1.6 (Rs Mn) Q2FY10 Q3FY10 Q4FY10 Q1FY11 Q2FY11

Net debt/equity (x) 1.0 1.3 1.0 1.4 1.5 Net Sales 256 292 318 308 340

Interest coverage 3.4 0.4 0.8 1.1 1.6 Change (q-o-q) 12% 14% 9% -3% 10%

EBITDA 14 22 24 17 24

Per share Change (q-o-q) 46% 55% 11% -28% 41.5%

FY 2008 FY 2009 FY 2010 FY 2011 FY 2012 EBITDA margin 5.5% 7.4% 7.5% 5.6% 7.1%

Adj EPS (Rs) 8.2 (2.8) (0.0) 1.0 3.9 PAT (1.6) 3.8 4.4 (0.7) 3.6

CEPS 10.6 0.3 4.0 5.3 8.3 Adj PAT (1.6) 3.8 4.4 (0.7) 3.6

Book value 40.7 37.9 37.9 37.7 40.4 Change (q-o-q) -104% nm 16% -116% nm

Dividend (Rs) 1.4 - - 1.0 1.0 Adj PAT margin -0.6% 1.3% 1.4% -0.2% 1.1%

Actual o/s shares (mn) 6.5 6.5 6.5 6.5 6.5 Adj EPS (0.3) 0.6 0.7 (0.1) 0.6

CRISIL Independent Equity Research Team

Mukesh Agarwal Director +91 (22) 3342 3035 magarwal@crisil.com

Tarun Bhatia Director, Capital Markets +91 (22) 3342 3226 tbhatia@crisil.com

Chetan Majithia Head, Equities +91 (22) 3342 4148 chetanmajithia@crisil.com

Sudhir Nair Head, Equities +91 (22) 3342 3526 snair@crisil.com

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