Hanung Toys & Textiles

We recommend a buy in Hanung Toys & Textiles from a short-term perspective. It is apparent from the charts of the stock that after recording a 52-week low of Rs 24 in January, it began to trend up and has been on an intermediate-term uptrend. Within this trend, it was on a corrective phase during June and July (from Rs 105 to Rs 55). The stock resumed its uptrend, after taking support around Rs 55. On September 7, it conclusively penetrated a key medium-term resistance level of Rs 80 by gaining almost 10 per cent with good volume. The stock is hovering well above its 21- and 50-day moving averages. The daily relative strength index has entered into the bullish zone and the weekly RSI is likely to enter this zone. Both daily and weekly moving average convergence and divergence indicators are hovering in the positive region. We are bullish on the stock from a short-term horizon. We anticipate the stock to move further until it knocks our price target of Rs 95 in the resembling sessions. Traders with a short-term perspective can buy the stock while maintaining a stop-loss at Rs 81.

via BL

Hanung Toys

Hanung Toys

Hanung Toys

Hanung Toys

Hanung Toys

Hanung Toys

Sagar Cements, Hanung Toys

Sagar Cements, Hanung Toys

Hanung Toys: Buy

An investment can be considered in the stock of Hanung Toys and Textiles (Hanung). The company t continues to record strong order flows amid an uncertain export environment. It has so far handled the rupee appreciation well, with its realisations actually improving in recent times. Hanung’s toy export business may also benefit from the possible backlash on Chinese toy manufacturing following Mattel Inc’s recall of 18 million defective products. At the current market price of about Rs 160, the stock trades at about 10 times its likely 2007-08 earnings per share.

Long-term contracts

Entering into a long-term contract with buyers is not a standard practice in the textile industry, as international retailers tend to alter their sourcing plans based on changing fashions. Hanung has managed to enter into two-three year contracts with its clients. It recently bagged a Rs 600-crore order from IKEA, Sweden, with whom it has a long- standing relationship, for exporting soft toys/children’s furnishing. This order is likely to deliver a steady revenue flow over the next four years. It also received a Rs 200-crore order from a US buyer for exporting home furnishings, which is to be completed by December 2009.

In the backdrop of concerns of a slowdown in US imports and an appreciating rupee that might render Indian textile exports uncompetitive, the long-term nature of the contracts provides greater visibility to Hanung’s revenue stream.

Hanung is also well-placed now to cater to these orders. With the help of the proceeds from its IPO in late 2006, it has integrated backward into fabric manufacturing. The new facility has come on stream in July.

Rupee rise

The sharp appreciation of the rupee in the early part of 2007 did not have a significant impact on Hanung’s operating margins on the back of improving volumes. Operating margins in 2006- 07 were up 2 percentage points at 17 per cent.

In the first quarter of the current fiscal as well, margins have improved on the back of improving utilisation levels. Rising contribution from domestic operations and raw material imports, which have provided a natural hedge against the rising rupee, have helped limit the impact of currency appreciation on margins. Imports account for about 30 per cent of revenues.

Hanung has been able to negotiate with its buyers for better prices. About 20-25 per cent of its order from IKEA has been priced in rupee terms.

Higher domestic share

Besides, Hanung’s domestic operations may begin to take up a greater share of revenues from the current 25 per cent. Hanung sells soft toys to retailers such as Lifestyle, Shoppers’ Stop and other departmental “lifestyle” stores. These stores are on a rapid expansion path and are increasingly targeting the children’s segment.

Revenues from domestic operations jumped eight-fold in 2006-07 and increased by 50 per cent in the first quarter of 2007-08.

With the licence to use Disney characters for the manufacture of its toys and home furnishings, Hanung hopes to capitalise on the growing spends in the children’s segment.

Risks

A slowdown in the import of home furnishings following any decline in housing activity in the US or Europe is a key risk to our recommendation. The company has a high client concentration, with IKEA contributing a chunk of its revenues.

Finally, while the recent product recalls from China may have a beneficial impact on Hanung in the near term, toy manufacturers and retailers in the US are under pressure to raise safety standards.

Complying with stiffer norms may come with higher costs for Hanung, which also imports a significant amount of its materials for manufacturing of soft toys from China and Taiwan.

Hanung Toys

Hanung Toys

Anand Rathi - Hanung Toys, Maruti Udyog, Bajaj Hindustan

Hanung Toys

Maruti Udyog

Bajaj Hindustan

Hanung Toys and Textiles

Hanung Toys and Textiles (HTTL) manufactures and exports stuff toys and home furnishings. Incorporated in 1993 as a stuff toy manufacturer in technical collaboration with a South Korean company, it began to independently manufacture stuff toys five years later. In 2002, HTTL entered home furnishings and textile processing.

Presently, HTTL has capacity of produce 1,10,00,000 pieces per annum of stuff toys and 12,50,000 pieces pa of home furnishings. The company mainly exports to Europe, the US, Latin America and Middle East. But now it is increasing its focus in the domestic market and has launched its stuff toy brands Play-n-Pets and Muskan and home furnishing brand Splash.

HTTL is to set up an integrated home textile unit with a total cost of Rs 153.44 crore, which includes 72 airjet looms with superior quality wider width weaving capacity of 21,000 meters per day and processing capacity of 1,05,000 meters per day in addition to the existing processing capacity of 60,000 meters per day. The company also plans to part substitute its existing working capital requirement of around Rs 15 crore. The expansion is to be funded with a term loan of Rs 90 crore under the TUF (Technology Upgradation Fund) scheme and the balance through an IPO.

Strengths

• HTTL is the largest player in the organised market of stuffed toys and its co-branding initiatives with Walt Disney Company and Percept Picture Company (for Hanuman) can fuel growth in the domestic market due to the retailing boom in India.
• The project is to be located in Uttaranchal, where the company enjoys various tax benefits.

Weaknesses

• The inventory-holding period is around 150-180 days, which is considered to be very high. This is attributed to the fact that the raw material (in case of stuff toys) is imported and the company has to maintain finished goods stock for its buyers. Moreover, of the total expansion of Rs 168 crore, around Rs 48 crore will be used for meeting existing and future working capital requirement. Even though net profit in FY 2006 was Rs 12.98 crore, cash flow from operating activities was a negative Rs 2.07 crore.

• The capacity utilisation in the home furnishing sector has been 12%, 26% and 53% in FY 2004, FY 2005 and FY 2006, respectively, which is considered to be significantly low.

• Post expansion, processing facilities will meet only 12% of its fabric requirement in-house as HTTL has a 21,000-meter per day weaving capacity and 1,65,000-meter per day processing capacity.

• Chinese competition is a key threat to its business.

Valuation

HTTL has allotted shares to Bennett Coleman and Company (BCCL) at Rs 150 in February 2006. The current offer price band is Rs 85-95.

The FY 2006 financials do not include financials of two group companies Hanung Furnishings and Hanung Processors for the period April- October 2005. However, the financials for the first quarter ended June 2006 includes the financials of both companies that have been merged with the flagship company. Because of these, financials are not comparable.

The first quarter of FY 2006 gives an annualised EPS of Rs 7.7. Considering this EPS, PE will be 11 to 12 times on post-issue equity. Due to HTTL’s presence in stuffed toys (which fetches 60% of its profit), there is no comparable listed company. However, Alok industries and Welspun India, which are much larger and integrated players in home textiles, trade at a TTM PE of around 9 and 17 times, respectively.