CD Equisearch Pvt Ltd

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1 March 8, 2016 Huhtamaki PPL ltd. No. of shares (m) 72.7 Mkt cap (Rs crs/$m) 1645/244.5 Current price (Rs/$) 226/3.4 Price target (Rs/$) 281/ W H/L (Rs.) 332/176 Book Value (Rs/$) 85.1/1.3 Beta 1.1 Daily volume (avg. monthly) P/BV (CY16e/17e) 2.4/2.2 EV/EBITDA (CY16e/17e) 7.2/6.3 P/E (CY16e/17e) 19.3/15.3 EPS growth (CY15/16e/17e) 16.4/10.6/26.5 OPM (CY15/16e/17e) 11.4/11.2/11.2 ROE (CY15/16e/17e) 13.0/13.1/14.9 ROCE (CY15/16e/17e) 11.8/9.5/10.7 D/E ratio (CY15/16e/17e) 0.9/0.8/0.8 BSE Code NSE Code PAPERPROD Bloomberg HPPL IN Reuters HUHT.BO Shareholding pattern % Promoters 68.8 MFs / Banks / FIs 6.0 Foreign 1.0 Govt. Holding 0.0 Non-Promoter Corp. 4.6 Total Public 19.6 Total As on Sept 30, 2015 Recommendation BUY Phone: + 91 (33) E- mail: research@cdequi.com Company Brief Huhtamaki PPL is a leader in the flexible consumer packaging sector serving various large and mid corporate players in the FMCG business. HPPL offers a wide portfolio of packaging solutions that include Flexible Packaging, Labeling Technologies, Shrink Sleeve solutions, Specialized Cartons, Cylinder Engraving and Specialized Films for high barrier. Quarterly Highlights HPPL reported a modest growth of 1.3% (y-o-y) to Rs crs in Q4CY15 in its standalone revenue whereas on a consolidated basis the revenue jumped by 70.2% to Rs crs as against Rs crs buttressed by the acquisition of Positive Packaging and by robust growth in the flexible and labeling materials which form the bulk of HPPL consumer packaging business. EBITDA for the same period stood at Rs crs as compared to Rs crs in Q4CY14 (a growth of 95.9%). The operating expenses rose by just 64.7% to Rs crs owing to the lower raw material prices which helped to keep the margins on a positive trend. The revision in the bonus provision increased the employee benefit expenses by 110.2% to Rs crs last quarter from Rs crs in the same period a year ago. For Q4CY15, the finance costs increased to Rs 9.93 crs as against Rs 0.89 crs in the same period due to issuance of non-convertible debentures for financing acquisition of Positive Packaging. The depreciation expenses also increased by 107.6% to Rs crs in Q4CY15 as a result of this acquisition. The net profit after extraordinary items rose to Rs crs last quarter showing an increase of 33.4% (Rs crs in Q4CY14). The growth in the bottom line was as a result of better operational performance with improved margins offsetting the increase in the depreciation, interest and tax expenses. The stock currently trades at 19.3x CY16e EPS of Rs and 15.3x CY17e EPS of Rs In the light of moderation in realizations owing to lower crude oil prices, we cut our current year sales estimate by 5.7%, prompting cut in earnings (CY16 EPS slashed by 4.6%; CY17 EPS by 4.9%). Considering promising sector trends, we maintain our buy recommendation with target of Rs 281 (previous target: Rs 311) based on 19xCY17 earnings (peg ratio: ~1) over a period of 9-12 months. Figures (Rs crs) CY13 CY14 CY15 CY16e CY17e Income from Operations Other Income EBITDA (other income included) Net Profit after MI and EO item EPS (Rs) EPS growth (%) Equity

2 [ CD Equisearch Pvt Ltd Outlook & Recommendation Indian Flexible Packaging Industry Indian packaging industry is among the fastest growing sectors spanning across almost every industry segment. It is currently valued at US$13 bn. and is expected to grow to US$ 16.5 bn. by 2016 (Source: FundsIndia). Flexible packaging technology has advanced dramatically over the past 10 years and is now a consumer household mainstay, steadily moving into new markets and applications. India s flexible packaging industry anticipates strong growth but remains challenged by negative perceptions about the use of plastics. India s flexible packaging market is growing at 14% a year and currently accounts for 24% of the consumer packaging market and is expected to be worth $32 billion in Packaging has a massive upside in the country because basic household items like flour, rice, sugar and tea are still being sold unpackaged in the country s interior, where organized retailing has yet to make its presence felt. Merely 5% are sold in packaged form and the majority 95% is unpackaged. The growth in the packaging industry in India is mainly driven by the food and the pharmaceutical packaging sectors. A major factor which has provided substantial stimulus to the packaging industry is the rapid growth of exports which requires superior packaging standards for the international market. Flexible plastic packaging is the fastest growing packaging category which has surpassed the FMCG and pharma industry growth rate achieving a CAGR of 16.6% over a three year period ending March In order to become a technology transfer driven country, India has to resuscitate the use of agricultural byproducts for packaging. Achieving this will help it to propel the growth to more than 20% from the current 15%. Consumer flexible packaging consumption by product ( 000 tonnes) Source: HPPL, CD Equisearch Source: Smithers Pira Positive Packaging to drive growth Through the acquisition of Positive Packaging, Huhtamaki is basically looking to increase its presence in the emerging markets including India. Positive Packaging has strong presence in international market and exports mainly to Africa, Middle East and North African countries. While there are no new markets aimed for exports, all depends upon how international economy picks up and how things stabilize. The integration is now fully complete and the synergies will come in the form of lower sourcing costs and economies of scale though the impact on administrative cost will not be seen immediately. Though the acquisition is expected to drive the growth for HPPL, the main synergies of manufacturing footprint, production and operative efficiencies will take another two years to unlock. 2 2

3 Financials and Valuations With the complete integration of the two entities, Huhtamaki is looking forward to improve its business in flexible packaging manufacturing in Middle East and hopes to increase its sales in African countries. The benefits of the synergy have been reflected in the CY15 results. HPPL s income from operations increased by 66.3% to Rs 2038 crs in CY15 as against Rs 1225 crore in CY14 mainly due to the acquisition of Positive Packaging Industries. About 25% of its revenue is derived from exports to various countries, majority of which are to the African countries. Though the trading conditions have not improved absolutely to ones expectations, but looking at the positive momentum in the growth, we expect its revenues to increase by 12.7% to Rs 2297 crore in CY16 and to Rs 2590 crore in CY17. At the operating profit margin level, HPPL showed improvement in both standalone and consolidated level basis. Softening of the raw material prices because of continuous slide in oil prices increased its margin to 11.4% in CY15. Owing to the high degree of volatility in raw material prices in the near term, the margin is expected to hover around 11.2% over the next two years. Source: HPPL, CD Equisearch Source: HPPL, CD Equisearch Source: HPPL, CD Equisearch In CY15, HPPL did not go into any major expansion. It plans to have a routine capex of around crore for CY16. With sizable market share in the domestic flexible packaging products, Huhtamaki generated good growth in both its topline and bottomline. The net profit after tax (excl extraordinary items) rose by 27.5% to Rs crore in CY15 (Rs crore in CY14). The net profit margin declined to 3.9% (5.1% in CY14) on account of massive increase in the interest expenses (Rs cr vs. Rs 3.10 cr) and depreciation costs (Rs cr vs. Rs cr). With benefits of acquisition coming into play, the net profit is expected to increase to Rs crore (growth of 10.6%) and Rs crore in CY16 and CY17 respectively. The return ratios like ROCE and ROE stood at 11.8% and 13.0% respectively in CY15. ROCE is expected to decline to 10.7% in CY17 while ROE is expected to increase to 14.9% in CY17 backed by growth in the topline and improvement in the margins. The current ratio is expected to increase to 2.2 by CY17 while the debt-equity ratio will remain stable at 0.8. Source: HPPL, CD Equisearch Source: HPPL, CD Equisearch Source: HPPL, CD Equisearch The stock currently trades at 19.3x CY16e EPS of Rs and 15.3x CY17e EPS of Rs In the light of moderation in realizations owing to lower crude oil prices, we cut our current year sales estimate by 5.7%, prompting cut in earnings (CY16 EPS slashed by 4.6%; CY17 EPS by 4.9%). Considering promising sector trends, we maintain our buy recommendation with target of Rs 281 (previous target: Rs 311) based on 19xCY17 earnings (peg ratio: ~1) over a period of 9-12 months. For more info, refer to our Aug 2015 report. 3 3

4 Risks and Concerns Volatility in raw materials At present raw material costs constitute 68% of HPPL s revenues. Considering the outlook of petrochemicals, there is a risk of high volatility. The high volatility in the raw material prices caused by various factors like foreign exchange movement and sharp fluctuations in the crude oil prices may make operating profits highly vulnerable. Client Concentration Risk Huhtamaki top clients include Costco, Kraft, McDonald s Unilever, Coca Cola, Cadbury, Nestle, Glaxo Smithkline, Perfetti, Marico and P&G which together account for almost 60% of its revenue. Thus HPPL is prone to client concentration risk and their retention is extremely important in order to maintain the market share in the business. Other Factors Since a large portion of its revenue is derived from the FMCG sector, any slowdown in this sector due to higher inflation can hit the revenue growth. Rural distress, arising due to vagaries of monsoon can also fetter the company s revenue as it will have an impact on the production of consumer goods. Flexible packaging industry being a fragmented market can put HPPL into severe competition with other packaging companies like Uflex, Essel Propack and Jindal Poly Films etc. Cross Sectional Analysis Company Equity CMP MCAP* Sales* Profit* OPM (%) NPM (%) Int Cov ROE (%) Mcap/Sales P/BV P/E Essel Propack Huhtamaki Jindal Poly Uflex Calculations on ttm basis, * figures in crores Source: HPPL, CD Equisearch Source: HPPL, CD Equisearch Source: HPPL, CD Equisearch 4 4

5 Financials Quarterly Results Figures in Rs crore Q4CY15 Q4CY14 % chg CY15 CY14 % chg Income From Operations Other Income Total Income Total Expenditure EBITDA (other income included) Interest Depreciation PBT Tax PAT Minority Interest PAT after MI Extraordinary Item Net Profit EPS(Rs) Income Statement Figures in Rs crore CY13 CY14 CY15 CY16e CY17e Income From Operations Growth (%) Other Income Total Income Total Expenditure EBITDA (other income included) Interest Depreciation PBT Tax PAT Minority Interest PAT after MI Extraordinary Item Net Profit EPS (Rs)

6 Balance Sheet Figures in Rs crore CY13 CY14 CY15 CY16e CY17e Sources of Funds Share Capital Reserves Total Shareholders Funds Minority Interest Long Term Debt Total Liabilities Application of Funds Gross Block Less: Accumulated Depreciation Net Block Capital Work in Progress Investments Current Assets, Loans & Advances Inventory Trade Receivables Cash and Bank Short term loans Other Assets Total CA & LA Current Liabilities Provisions-Short term Total Current Liabilities Net Current Assets Net Deferred Tax Net long term assets Total Assets

7 Key Financial Ratios CY13 CY14 CY15 CY16e CY17e Growth Ratios (%) Revenue EBITDA Net Profit EPS Margins (%) Operating Profit Margin Gross profit Margin Net Profit Margin Return (%) ROCE RONW Valuations Market Cap/ Sales EV/EBITDA P/E P/BV Other Ratios Interest Coverage Debt Equity Current Ratio Turnover Ratios Fixed Asset Turnover Total Asset Turnover Debtors Turnover Inventory Turnover Creditor Turnover WC Ratios Debtor Days Inventory Days Creditor Days Cash Conversion Cycle

8 Financial Summary US dollar denominated CY13 CY14 CY15 CY16e CY17e Equity capital Shareholders funds Total debt Net fixed assets (inc CWIP) Investments Net current assets Total assets Revenues EBITDA EBDT PBT Profit after minority & extraordinary items EPS ($) Book Value ($) *income statement figures translated at average rates; balance sheet at year end rates; projections at current rates All dollar denominated figures are adjusted for extraordinary items. 8 8

9 Disclosure& Disclaimer CD Equisearch Private Limited (hereinafter referred to as CD Equi ) is a Member registered with National Stock Exchange of India Limited, Bombay Stock Exchange Limited and Metropolitan Stock Exchange of India Limited (Formerly known as MCX Stock Exchange Limited). CD Equi is also registered as Depository Participant with CDSL and AMFI registered Mutual Fund Advisor. The associates of CD Equi are engaged in activities relating to NBFC-ND - Financing and Investment, Commodity Broking, Real Estate, etc. CD Equi is registered under SEBI (Research Analysts) Regulations, 2014 with SEBI Registration no INH Further, CD Equi hereby declares that No disciplinary action has been taken against CD Equi by any of the regulatory authorities. CD Equi/its associates/research analysts do not have any financial interest/beneficial interest of more than one percent/material conflict of interest in the subject company(s) (kindly disclose if otherwise). CD Equi/its associates/research analysts have not received any compensation from the subject company(s) during the past twelve months. CD Equi/its research analysts has not served as an officer, director or employee of company covered by analysts and has not been engaged in market making activity of the company covered by analysts. This document is solely for the personal information of the recipient and must not be singularly used as the basis of any investment decision. Nothing in this document should be construed as investment or financial advice. Each recipient of this document should make such investigations as they deem necessary to arrive at an independent evaluation of an investment in the securities of the companies referred to in this document (including the merits and risks involved) and should consult their own advisors to determine the merits and risks of such an investment. Reports based on technical and derivative analysis center on studying charts of a stock's price movement, outstanding positions and trading volume, as opposed to focusing on a company's fundamentals and as such, may not match with a report on a company's fundamentals. The information in this document has been printed on the basis of publicly available information, internal data and other reliable sources believed to be true but we do not represent that it is accurate or complete and it should not be relied on as such, as this document is for general guidance only. CD Equi or any of its affiliates/group companies shall not be in any way responsible for any loss or damage that may arise to any person from any inadvertent error in the information contained in this report. CD Equi has not independently verified all the information contained within this document. Accordingly, we cannot testify nor make any representation or warranty, express or implied, to the accuracy, contents or data contained within this document. While, CD Equi endeavors to update on a reasonable basis the information discussed in this material, there may be regulatory compliance or other reasons that prevent us from doing so. This document is being supplied to you solely for your information and its contents, information or data may not be reproduced, redistributed or passed on, directly or indirectly. Neither, CD Equi nor its directors, employees or affiliates shall be liable for any loss or damage that may arise from or in connection with the use of this information. CD Equisearch Private Limited (CIN: U67120WB1995PTC071521) Registered Office: 37, Shakespeare Sarani, 1st Floor, Kolkata ; Phone: +91(33) ; Fax: +91(33) Corporate Office: 10, Vasawani Mansion, 2nd Floor, Dinshaw Wachha Road, Churchgate, Mumbai Phone: +91(22) /0653; Fax: +91(22) 2283, 2276 Website: research@cdequi.com buy: >20% accumulate: >10% to 20% hold: -10% to 10% reduce: -20% to <-10% sell: <-20% 9 9