• Date: October 24, 2011
• CMP: Rs 109; Small Cap
• Advice: High Risk, High Gain stock at attractive entry point
• Target: 9 month – 200; 24 month – 290

Hanung Toys and Textiles is a small but fast growing manufacturer of textile furnishings and toys. The business performance has been robust. A series of news disappointments has depressed prices. But today it is an attractive contrarian pick.

Hanung – Description and Profile

• HANUNG Toys & Textiles Ltd is a niche player in Soft Toys, Decorative Cushions & Children’s Room Furnishings. Turnover is Rs 1160 crores (last 4 quarters). The Market Cap is Rs 274 crores.
• The revenue breakup by category is 65% textile furnishing and 35% soft toys.
• The CMD of HTTL, Mr. Ashok Kumar Bansal, is a Chartered Accountant who started this company in the 80s.
• The financial management of this company appears to be conservative and understated; while the business plans are aggressive.
• HTTL had exports of 75% of sales. See Sales break-up by geography in Fig 1.

• The key facilities consist of toys manufacturing facility, home furnishing production facility and textile processing facility, 3 located in Noida and one in Uttaranchal. The toys manufacturing unit is established in the Noida SEZ wherein the benefits of duty free imports and single window clearance for imports/exports are available.
• Internationally, products made by HTTL are available on the shelves of Bloomingdales, William-Sonoma Group, Macy’s, JC Penney, Target Stores, Home Depot, Wal-Mart, Anna’s Linens, Ikea, Homebase, Argos, etc
• In India, HTTL owns ‘Play-n-Pets’ and ‘Muskan’ brands in stuffed toys and ‘Splash’ in Home Furnishings. They have more than 100 distributors for the stuffed toys across the country, including multi-brand outlets like Lifestyle, Shopper’s Stop, Westside, Big Bazar (Pantaloon group), Pyramid, Globus, Landmark, etc. Its ‘Splash’ range of home furnishings is available at 600 stores across the country.
• The current order book is estimated at Rs 1500-1900 crore, which is about 1.5 years of Sales.
• Shareholding pattern is: Promoters 65%; FIIs 1%; Bodies Corporate 12 %; Individuals – retail 19%; Other 3%
• HTTL exports are positioned in the Mid-Market range, making the business less sensitive to Chinese exports.
• Business potential is very high. In toys, the demand is large in current markets. Quality and price matter here. Competition is mostly from China. In home furnishings, the demand, particularly abroad is very high.
• In effect, the addressable market for HTTL is 100s of times its current Sales.

Stock evaluation, performance and returns

• The IPO in Sept 2005 was 8.6 times oversubscribed. Pricing was at Rs 95
• HTTL has been paying Dividend for last 4 years, which increased from 15% to 20% of late.
• The price has fallen from Nov 2010 highs of 410, to a CMP today of 109. The volatility is high, see fig 2.

• Sales and Profit have however grown very steadily (Fig 3)
• Sales have grown at 42% CAGR over the last 5 years
• Profits have grown faster at 44% in this period

Price Action and Events

• Price of HTTL peaked in Oct 2010, and then dropped sharply. There was some negative news and bad publicity:

1. The high interest rates regime has taken a toll on HTTL. Costs have risen, as there is debt on the books of Rs 1000 crores. Debt equity ratio currently is 1.74
2. Overall the Sensex fell sharply. The Small Cap shares fell faster than large cap shares. HTTL due to it’s volatile nature suffered even more.
3. A GDR plan – to raise capital and fund growth plans – was dropped due to low share prices.
4. Textiles sector has not done very well in the last year. Cotton prices have risen sharply.

• However, HTTL has made several smart moves that are improving prospects

1. In March 2011, HTTL acquired a controlling stake in the US-based Cody Direct Corp. This firm deals in marketing and distribution of home furnishings. This acquisition will not contribute to topline, but to profitability and operating margins, as some of the middlemen will be removed from the sales cycle.
2. Plans are on to ramp up capacity, and also a backward integration by setting up spinning plants. A capex plan for the next 2-3 years is in place of Rs 720 crores. This will be raised from cash from operations as well as loans from banks.
3. The firm is rationalizing interest costs by switching over from the existing Indian Rupee loans to ECB (European Central Bank) or similar, where they can save 3-4% of interest.

• Another near term trigger is the recent appreciation in the US$ – INR rates. This will boost USD earnings for HTTL, and should reflect in quarterly earnings for Q3 and Q4.

Graphics:

• The Price and PE graph Fig 4 – shows that valuations are bottoming out and are near all time lows of 2008.
• The Price and EPS graph Fig 5 – shows that EPS is at all time highs.
• Put together, we can see that this is a very attractive time to enter the stock as a long-term investor.

Valuations and Financial metrics

• EPS (adjusted) growth has been 44% CAGR over the last 5 years. The EPS quarterly graph (fig 4) shows a steady rise. This is a small but stable company in a good market that is establishing base and will achieve critical mass of size, brand and reach over the next 5 years.
• PEG is at 0.05 – indicates underpriced status, a very good investment opportunity
• RoE is at around 17-20% – healthy statistic.
• Price/Book is 0.54, this is very attractive.
• Management has projected 20% revenue growth for the next 2 years.

Opinion, Outlook and Recommendation

• This is a volatile small cap stock. There has been a large fall in share price since Oct 2010, by 75%. There is of course a possibility that this falling trend will continue.
• However, business performance has been excellent. After this recent fall, HTTL now has a PE of 2.26. This is an opportunity for investors to average down their cost of holdings, or enter afresh.
• The stock may be waiting for a trigger to reverse the price downtrend. Once this happens, the upside is high.
• Our projection is a Rs 200 price level in 9 months (Aug 2012) and a Rs 290 price level in 24 months (Nov 2013).
• Retail investors with a risk appetite can start a systematic investment (monthly) at current levels.

Risks:

• Small size; it is a volatile stock. It falls hard in poor sentiment periods and rises rapidly in good.
• Current price fall may continue for an unpredictable period, till investor sentiment recovers.
• Being a small firm, can be affected badly by a single accident, strike or untoward incident
• Recent GDR was cancelled due to unfavorable market conditions, causing a further fall in price
• Debt equity is rising, and is at 1.74 as of now.

 Notes

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