Stock Discussion – Hindustan Adhesives Limited(HAL)

The main intention of this blog is to learn and understanding various stock analysis and valuation techniques. From time to time , I will draw your attention to certain stocks. This is not a buy or sell recommendation but you can definitely keep these stocks under your watch list and keep on monitoring them. Today , let’s discuss the stock of Hindustan Adhesives Limited or HAL. It is a micro-cap( 139cr) company.

About the company –

• Established in 1988, Bagla Group is one of the largest manufacturers of Adhesive Tapes and Polyolefin Shrink Films in the world.

• It was established by Mr. Madhusudan Bagla(pioneered self-adhesive water based Carton Sealing Tape manufacturing in India and  ), a first generation entrepreneur. Currently his son, Nakul Bagla(CFO) is the driving force behind the company

• The company manufactures Acrylic Packaging Tapes which are suitable for all type of Carton Sealing applications. The product range includes various tapes such as heavy-duty tape, tear tape, low noise tape, printed tape, coloured tapes, jumbo tapes, freezer tapes etc.

• Bagla Group is the packaging partner to the world’s biggest brands such as PepsiCo, Coca Cola , P & G, Reckitt Benckiser , Cadbury , Nestle etc. It has over 500 customers.

• Hindustan Adhesives Limited is a subsidiary of Bagla Group and is listed on the Bombay Stock Exchange

• Bagla Group has 5 manufacturing locations in India

The industry –

• The India adhesive tape market size is estimated at USD 254.3 million This market is divided primarily into two parts – Organized sector and unorganized sector. The organized sector contributes around 40% of the demand while the remaining demand is fulfilled by unorganized sector.
• Based on the end user , the market is divided into electrical, construction, logistic, automotive, healthcare , packaging and others. The automobile sector continues to heavily use tape (more specifically eco-friendly tape) to reduce the overall body weight of the vehicle. Pressure sensitive adhesive(PSA) tapes are highly used in specialist vehicle and transportation systems to bond the outer vehicle skin to the supporting structure. There is a rapid increase in demand from the automotive segment across the world. The market for adhesive tapes is expected to rapidly increase .
• Many consumers rely on online shopping. Tapes are excessively used by e-commerce platforms such as Amazon. The robust growth in the e-commerce and automotive sector will propel HAL. The packaging industry has been growing at a constant pace for the past few years. Expansion of the food and beverage industry is likely to increase the demand for packaging. This would lead to an increase in the use of tapes. Tapers(surgical) are also used in the healthcare sector. Medical adhesive tape, or surgical tape, is used to attach bandages, gauze, and other dressings to skin around wounds. The key driver of the Indian Tape market is the automobile sector.

• Usage of adhesive clips as an alternative to stitches is likely to act as an opportunity in the future
• Asia-Pacific dominated the adhesive tape market across the world with the most significant consumption from countries, such as China and India.
• In terms of revenue, the tapes market in India is expected to reach US$ 350.5 Million by 2031, expanding at a CAGR of 5.1% during the forecast period
• Consumers are developing a positive sentiment for bio-based adhesive tapes that adhere to government guidelines
• China announced a plan called ‘Made in China 2025’, which focuses on high-end equipment manufacturing in various sectors like automotive, appliances, etc. This is expected to increase the demand for adhesive tapes in the country.

Key Points –

• The company is doing new CAPEX(capital expenditure) which will start during the second half of this year and over 12 months period, expecting 100 Cr of more sales. Even without new capacity, Sales are expected to increase by 50 Crores from existing capacity.
• The company has set up a new unit in FY19 at Mundra (Gujarat) near Special Economic Zone(SEZ) for manufacturing of Self Adhesives Tapes with a total capacity of 27.20 million square metres.

• New product: The Company is developing many sustainable types of tape. Example – 50-micron packaging film. This would lead to an increase in sales because consumers are shifting to environmentally friendly tapes

• Old plants at U.P and Utrakhand are operating at 70% utilisations and plan to manufacture value-added products there 

• Margins are likely to increase going forward because of economies of scale

• The government plans to change export benefits scheme but the company is expecting to get a 3% export subsidy

Competitive Landscape –

• Global Adhesive Tapes Market is highly fragmented with the presence of a high number of market players.

• The players are adopting strategies such as mergers & acquisitions, product developments, partnerships, joint ventures, and expansions to improve their positions in the market, both regionally and globally.
• With advanced packaging techniques , Europe continues to spearhead the global market for BOPP tapes.
• Manufacturers are focusing on expanding their manufacturing capabilities to China where the cost of operating is low.

• The growth of market vendors depends on market conditions, government support, and industry development.

• The manufacturers/service providers are operating at the regional level

• The India adhesives and sealants market is consolidated, with the top four players with an approximate market share of 85.30%. The major companies include Pidilite Industries Ltd., Henkel AG & Co. KGaA, Sika AG, Arkema Group (Bostik India), and H.B. Fuller Company.

Risks and Weaknesses –

• Raw material price fluctuation risk: The basic raw material for the company is BOPP and granules which are derivatives of crude oil and any fluctuation in its prices directly impacts the profitability of the company.
• Moderate financial profile: The overall debt of company has increased to Rs 83.63 crore as on March 31, 2021 from Rs 70.24 crore as on March 31, 2020.The overall gearing of the company remains high at 1.93x
• Competitive nature of Industry: Technological advancements have led to increasing demand for lightweight packing materials. With the presence of large number of players in the BOPP tape market unorganized sector, it poses a serious competition to HAL’s future revenue visibility
• HAL  operates under single brand- Bagla group wherein they also operate their private entity- Bagla Polifilms Ltd which is involved in POFF Shrink film manufacturing. However, their product profile is different from Hindustan Adhesives Ltd because proportion of POFF shrink film to top-line is around 18%

Valuation –

HAL’s Financials –

Price to Earnings Ratio (PE Ratio) Chart (Last 5 years) –

Sales and Margins Chart ( Last 5 years) –

HAL’s Financials (Charts) –

*The information provided by Finance Voyager is for information purposes only and is not intended for advice. Finance Voyager also does not make any recommendation or endorsement as to any investment, advisor or other service or product. The information is only for educational purposes and not buy or sell recommendations.