Kacche Raaste,Pucca Iradey – Hyderabad Industries.

I was an investor in Visaka Industries Ltd as i was a big believer in the changing trends in the building products market. The typical unorganised to organised shoo-shaa. After a minor bull run, I booked out of Visaka, but still wanted to participate in the Building Products Industry. I checked out Shankara Building Products (thank Lord Shiva i sold early 😉 ) and placed my bets on Hyderabad Industries Ltd (HIL). I primarily did it due to a simple quote from the legendary Radha Krishna Damani “Make your money in stray dogs, and store them in pedigree.” Well over the last few years, HIL has done well and very recently, it has changed gears yet again. Here is an insight into what is happening now.

History: HIL was one of the market leaders in asbestos sheets in South India. It was a sleepy company of the sleepy CK Birla group. Respected and all that, but sleepy! From asbestos roofs which sold under the Charminar brand, they moved to Fly Ash bricks and called them Aerocon, and also moved into walls and boards. A typical slow-and-steady wins the race kinda company. The kismat of the company was probably best reflected by a nondescript bank manager. The company was debt-free and always threw up cash, c-o-n-s-i-s-t-e-n-t-l-y, and then, they hired this ROCKET-OF-A-MAN called Dhirup Chaudhary.

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First things first, Dhirup went about making HIL’s strengths stronger and their weaknesses weaker. He fixed the working capital problem. Rejuvenated the loyal dealership network and spent a lot of time and money on betterring the existing products and innovating new ones. They have become market leaders in almost every product that they sell.

Soon after the initial business, he took on branding the company extremely seriously. From ad films, to investor relations to the superb way he communicates in investor con-calls. It was clear professionalism and passion all the way. Look at the ad they made for the IPL last year.

“All that matters in a commodity business is the price.” The truth could probably not be further than this. In a way, the most important brands are in the commodity business, as it is even more difficult to distinguish and trust businesses/products in this space. I pulled up the SUPERBRAND list of consumer businesses for 2018. I’m sure you will be as surprised as i was.

Little surprise then, the company has been spending consistently on branding. The marketing budget for the company hence forth is upwards of 15 cr a year. Quality of marketing usually trumps quantity. Memorable ads will always stay in your brain. For marketing the company chose the best and picket up a man from Ogilvy, whose ads are really, really good. Last year, the company moved into the Pipes and Fittings space. Not only was this market a commodity, but it was rampant with competition and undercutting. Since piping has predominantly been viewed as a B2B product, why then are companies creating ads for B2C ?

Simple. The replacement market, is usually a consumer decision. Look at the story of Amara Raja batteries and Exide and you will understand that the replacement market is the back-door-entry into the OEM market. Here is the super-duper ad for the pipes business.

After traditional products in roofing, the company moved to CREATE Charminar fortune, a fibre particle board solution to replace the Asbestos sheets. This is a bomb of a product, and according to Dhirup Choudhary (lets call him DC from now on), DC is willing to place his own personal money on the product. We investors get a little excited when we see promoters increasing stake, now imagine management willing to bring in own money to back a product. 🙂

HIL was doing well on site and doing extremely well on the markets too. Its given quite a few investors I know at least 4x-5x returns in the last 3 years. Everything looked hunky dory and then out of the blue, the debt-free HIL does something completely out of the box. They go buy a German flooring company called Parador. This is Parador.

Parador, though reckoned the best flooring brand in Germany and selling to over 80 countries had a measly turnover of just about 1,300 cr. With at least 35% capacity to spare and a lot more spare capacity to come with re-organisation of the countries exported to, the uncertainty for investors is quite high now. In the words of Mohnish Pabrai, this is a High Uncertainty-Low Risk kind of situation. Low risk because, the price that was paid was not too high and that DC has said it would be EPS accretive. The loan rate is at 1.6% for the Euro debt. Recently the company opened up office is China. Yes IN CHINA. Here is why.

This will be really interesting to watch. Also HIL wants to take Parador to SE Asia and maybe even Africa.

To me HIL seems to be firing on all cylinders with massive increase in sales from the building products and the pipes and fittings segment. It is also super interesting to note that they have a huge R&D focus and have an Engineering Division to CREATE THEIR OWN PLANTS. They even have won quite a few awards for a great place to work !

At a Market Cap of 1,350 cr, no debt on the Indian products, 2 Superbrands and now 3 great Brands under its belt, I think this company has some major leverages to take advantage of. If things go well i see the company generating a PAT of 350 cr in the next 5 years, up from about a 100 in the last year. I don’t know what PE multiple the market will give it, but I think the range of Market Cap will be between 3,500-7,000 cr.

Any which way you look at it, it is a pure “Heads I win, Tails i don’t lose too much” story.