The Hindu Business Line : Hanung Toys and Textiles: Invest

An investment with a medium-term perspective can be considered in the initial public offer of Hanung Toys and Textiles (HTT). The price band values the offer at 11-12 times its annualised FY-07 per-share earnings on the fully expanded equity. The valuation is stiff compared to its peers in the textile industry. Bright prospects in the toys business and an interesting product range in the home textiles business, however, make the offer attractive for an investor with an appetite for risk. The recommendation is not linked to any gains upon listing.

The Rs 150-crore Hanung is one of the larger manufacturers and exporters of soft toys in India. HTT exports soft toys, typically associated with teddy bears and bunnies, to retailers in the US and Europe. Customers include IKEA, Asda, and Metro. Revenues from this business, at Rs 90 crore, account for only about 65 per cent of the total. HTT started manufacturing home furnishings about two years ago on demand from its buyers. The business has quickly grown to Rs 50 crore and accounts for the balance 35 per cent. HTT is now tapping the market to partly fund a Rs 170-crore project to set up an integrated home textile facility, spanning weaving, processing and made-ups, in Uttaranchal. The scale of its expansion is ambitious — home textile capacities are set to expand more than five fold. The capacities are likely to be operational in January 2007.

Outlook for toys

With a rising number of double-income households, targeting children has become a trend with the media and retailers. About 90 per cent of HTT's production of toys is exported. It is planning to increase its share in the domestic market. It already has a presence in India through its brands Play-n-Pets and Muskan. HTT sells its products through a distribution network, and also through multi-brand outlets such as Lifestyle and Pantaloon. In both the export and the domestic market, it faces stiff competition from low-cost Chinese toys.

A greater thrust on selling through these departmental stores could prove beneficial, as that would provide access to customers with higher disposable incomes and a willingness to spend on quality products.

HTT has the licence to manufacture soft toys resembling characters such as Mickey Mouse and Nemo, the fish from Disney. With growing exposure to Western cartoon characters, this could attract interest.

It has tied up with Percept Picture Company for the manufacturing and selling rights of characters in the hit Indian animation, Hanuman. Merchandising is part of the strategy to market the film, as has been the case with Hanuman and Krrish. With films on Ganesha and Krishna on the spool, these trends are promising for HTT. Products that focus on Indian mythological characters will be a good counter to imports.

Niche product line

HTT's home furnishings business sells products that range from sheets and comforters to pillows and sleeping bags. While there are bigger players in the home furnishings business, Hanung has a children's line that few players focus on. Products include floor rugs and pillows shaped like anything from a fish to a football. The business, which started two years ago, has met with early success and the company appears to be well placed to jointly market toys and furnishings.

While the prospects appear strong, the substantial scaling-up of capacities poses execution risks. Five customers account for more than 80 per cent of its business.

The company will have to broaden its customer base, and in playing the volumes game, could succumb to pricing pressures. This could impact margins, especially if textiles begin to garner a higher share of revenues.

HTT will also have to make a significant mark in the domestic market in its toy business, as its exports have been growing at a sedate pace. With the domestic market just beginning to take off, it will call for higher advertising and brand building expenses, which could be a drain on resources.

Offer details: About Rs 90 crore would be raised from the offer of 95 lakh shares. The price band is Rs 85-95. The promoter's stake post offer will be 60 per cent. The project will be partly funded through debt worth Rs 90 crore raised under the Technology Upgradation Fund Scheme. The project will also fund its working capital requirements. The offer closes on October 5.

The lead managers are Karvy Investor Services and Anand Rathi.

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