Uflex Ltd BUY STOCK POINTER

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1 Mar-15 May-15 Jun-15 Jul-15 Aug-15 Sep-15 Oct-15 Nov-15 Dec-15 Jan-16 Feb-16 Mar-16 STOCK POINTER Uflex Ltd BUY Target Price ` 402 CMP ` 174 FY18E EV/EBITDA 4.0X Index Details Sensex 25,400 Nifty 7,758 Industry Packaging Scrip Details MktCap (` cr) 1,258.3 BVPS (`) O/s Shares (Cr) 7.2 AvVol 31, Week H/L 201.7/110.2 Div Yield (%) 1.6 FVPS (`) 10.0 Shareholding Pattern Shareholders % Promoters 47.6 Public 52.4 Total Uflex vs. Sensex Uflex SENSEX (RHS) Uflex Ltd (Uflex) is one of the largest fully integrated Indian flexible packaging solution providers with a global offering. In our opinion at the CMP of Rs 174 (0.4 P/BV) the stock is extremely undervalued. However, we believe this is set to change and expect the stock to get re-rated as the growth story unfolds. We recommend a buy on the stock with a SOTP based valuation price of Rs 402 (4x FY18 EV/EBITDA) representing an upside potential of 134% (over 18 months). At the CMP the stock is trading at 2.6x its forward FY18 EV/EBITDA. We are positive on the stock given that: The Indian packaging industry is one of the fastest growing markets and expected to become the fourth-largest packaging market in the world. Within packaging, the flexible plastic segment is the fastestgrowing in India, clocking a CAGR of 16.6% during the last five years. Uflex by virtue of its leadership position is best placed to benefit from this opportunity. Revenues are expected to grow at a CAGR of 7.4% from Rs 6,180 cr in FY 15 to 7,655 cr in FY 18 while consolidated net earnings are expected to grow at a CAGR of 23.5% to Rs cr over the same period. Its marquee client portfolio ensures repeat business for value added products. Further the improving product mix - in favour of the packaging business - should help Uflex improve margins substantially. The EBITDA and PAT margins are expected to reach 14.3% (+250bps) and 6.2% (+210 bps) respectively by FY18. Uflex has been at the forefront of innovation and in the past has added several feathers to its cap viz 3D bags, flexi tubes, High Barrier Laminate for Packaging Snacks etc. The Global Dupont Packaging Innovation Silver Award 2015 for the premium shower proof bag for building materials is testimony of its innovative DNA. This product if embraced would be a potential game changer for Uflex. Key Financials (` in Cr) Y/E Mar Net EPS EPS RONW ROCE P/E EBITDA PAT Sales (`) Growth (%) (%) (%) (x) , E 6, E 6, E 7, EV/EBITDA (x) Tuesday, 05 th April 2016

2 Uflex is setting up a Rs 550 crore Asceptic Packaging Material Project for packing liquids at Sanand, Gujarat. Global major Tetra Packaging is the only player currently operating in this space in India. We believe that Uflex s foray into this segment should be well received by the end user industry considering Uflex s reputation for offering quality products. Besides, having dual vendors always works well for the end user industry Tuesday, 05 th April 2016

3 Company Background Uflex Limited (Uflex), with a presence in more than 140 countries, is one of the largest fully integrated Indian flexible packaging solution providers. Uflex has a vast production capacity for Polyester chips, Biaxially Oriented Polyethylene Teraphthalate (BOPET) and Biaxially Oriented Polypropylene (BOPP) films, Cast Polypropylene (CPP) films, Printing and Coating Inks, adhesives, facilities for Holography, Metallization and PVDC coating, Gravure Printing Cylinders, Gravure Printing, Lamination and Pouch formation. The company has been conferred with the Global Dupont Packaging Innovation Silver Award 2015 for the Safe Pack Bag for packaging building materials. Business structure of Uflex Ltd Tuesday, 05 th April 2016

4 Key Investment Highlights Packaging business to drive revenue growth We expect sales to grow at a CAGR of 7.4% from Rs 6,180 cr in FY 15 to 7,655 cr in FY18 driven by robust growth in the packaging product segment (CAGR of 13.7% to Rs 3,930 crore by FY18) which is expected to be the key focus area for the company. The traditional film business, with its lower contribution margin, is expected to post flat growth, at best, over the same period. Revenue growth for Uflex 8,000 Rs in cr 7,655 7,000 6,000 5,000 4,516 5,161 5,863 6,180 6,504 6,922 4,000 3,496 3,000 2,000 FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY18E Net Sales 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Packaging segment revenue Value share 41% 40% 42% 45% 49% 51% 59% 60% 58% 55% 51% 49% FY13 FY14 FY15 FY16E FY17E FY18E Packaging Film Packaging product share set to improve Volume share 100% 17% 20% 21% 22% 23% 25% 80% 60% 40% 83% 80% 79% 78% 77% 75% 20% 0% FY13 FY14 FY15 FY16E FY17E FY18E Packaging Film Packaging product Tuesday, 05 th April 2016

5 Rosy outlook for the packaging product business We expect the packaging product segment volumes to rise significantly (CAGR of 9.2%) on the back of new product launches and a continued improvement in the existing product portfolio. In line with this volume growth, revenues are expected to grow at a CAGR of 13.7% from 2,676 cr in FY15 to 3,930 cr in FY18. EBITDA margins are also slated to improve by 100 bps per annum to 15% going forward (from the current 13%). Revenue growth in the packaging product business Uptick in volumes 4,500 4,000 3,500 3,000 2,500 2,000 1,500 1, Rs in cr FY13 FY14 FY15 FY16E FY17E FY18E Total Sales EBITDA margin (RHS) 21.0% 19.0% 17.0% 15.0% 13.0% 11.0% 9.0% 7.0% 5.0% 90,000 80,000 70,000 60,000 50,000 40,000 30,000 in MT FY13 FY14 FY15 FY16E FY17E FY18E Sales Volume Our bullishness stems from the following : The Indian flexible packaging market is the fastest growing market globally and Uflex by virtue of its leadership position is best placed to benefit from this upside. Uflex s revenue growth and margin expansion are expected to leapfrog on the back of its innovative product portfolio. In particularly its foray into the aseptic packaging business should help diversify revenue mix and accelerate growth. Impressive portfolio of marquee clients provides good revenue visibility Tuesday, 05 th April 2016

6 Fast paced growth of the flexible packaging industry puts Uflex in a sweet spot. The Indian packaging industry (valued at over USD 32 Bn in 2015) is one of the fastest growing markets and is expected to become the fourth-largest packaging market in the world. Within packaging, the flexible plastic packaging segment is the fastest-growing, clocking a CAGR of 16.6% (during the last five years) driven by strong growth of the Indian retail market and other end-users (including the pharmaceutical and processed food industry). This stupendous growth can be attributed to: Changing lifestyle and consumer trends towards packaging food. Increase in disposable income Improving shelf life due to packaging Rising population Global penetration of packaging Indonesia 18% Rest of world, 80% Emerging market, 20% Others 32% Brazil 15% India 27% Russia 7% Source: PCI, Ventura Research India s per capita annual packaging expenditure was US$20 in 2011, which is significantly lower than the top 20 market average of US$347.6 representing a huge latent potential. We expect the overall packaging industry in India to reach ~USD 73 Bn by 2020 driven by faster growth of the flexible packaging (25% CAGR) and rigid packaging (15 % CAGR) segments. Uflex with its innovation focus and leadership position is best placed to benefit from it Tuesday, 05 th April 2016

7 Innovative product to leapfrog revenue growth and margin expansion. Uflex has been at the forefront of innovation and in the past has added several feathers to its cap viz 3D bags, flexi tubes, High Barrier Laminate for Packaging Snacks etc. This innovation has been the fulcrum of its growth story. Going forth game changing innovations are expected to consolidate its leadership position and create new business opportunities for the company. Premium shower proof bag for building materials is a potential game changer Uflex won the Global Dupont Packaging Innovation Silver Award 2015 for the Safe Pack Bag for packaging building materials. This nano technology based innovation should find usage in retain packaging of cement and should help eliminate high levels of wastages and consequent pollution.this could become a potential game changer for Uflex should the industry embrace this innovative product. Besides the shower proof bag, Uflex s flexi tubes division has several innovative products to its credit viz Innolok Pouches, Slider Zipper Pouches (for powder and granules), 4D Pouches, Centre sealed etc. These innovations have helped Uflex win repeat orders from marquee clients. The recent innovations with the value added features like the holographic effect, lens on front panel, anti-counterfeiting, reverse printing, dual barrier etc are expected to propel Uflex s hold in the cosmetics and pharmaceutical markets which provide it with premium pricing power (over the traditional markets). This constant endeavor to add value has resulted in Uflex reporting higher EBITDA margins ( ~20%) than its peers. Foray into Asceptic packaging to drive the next leg of growth Uflex is setting up a Rs 550 crore Asceptic Packaging Material Project for packing liquids at Sanand, Gujarat. Global major Tetra Packaging is the only player currently operating in this space in India. We believe that Uflex s foray into this segment should be well received by the end user industry considering Uflex s reputation for offering quality products. Besides having dual vendors always works well for the end user industry. The facility is expected to be operational by mid 2017 and has a capacity of seven billion packs per year (for liquid products such as energy drinks, milk and juices). We estimate that ~90% of the output will be consumed by the domestic market and should enjoy high margins (20-25%) due to sparse competition Tuesday, 05 th April 2016

8 Impressive portfolio of marquee clients provides good revenue visibility. Marquee clients to drive future growth Stable operations of the film business Intense global competition and a marked slowdown in European demand are expected to lead to the packaging film business (contributing ~58% of the total revenues and ~79% of the total volume) reporting muted growth. However revenues are expected to grow at a dismal rate of 0.1% over the same period due to muted pricing. With a current utilization of ~72% there is adequate capacity to manage future growth and hence no major additions to its 3,37,000 tpa capacity are planned Tuesday, 05 th April 2016

9 Muted volume growth for packaging film business '000 MT FY13 FY14 FY15 FY16(E) FY17(E) FY18(E) Packaging Film volume The packaging film business is spread across different geographies to cater to domestic and international demand. Geographical diversification of manufacturing facilities Tuesday, 05 th April 2016

10 However margins set to expand While revenues are expected to decline due to a fall in the unit realizations, margins are expected to improve due to a larger fall in the input crude prices and improving working capital cycle. The prices of PET chips which were highly volatile over the past few years are also expected to stabilize and as a result we expect the EBITDA margin to improve by 300bps from 10.9% in FY15 to 13.9% in FY18. EBITDA per ton expected to improve significantly Wide variation in prices have had a serious impact on margins 3,800 3,700 3,600 3,500 3,400 3,300 3,200 3,100 3,000 Rs cr '000 Rs / ton Rs /kg 2,900 FY13 FY14 FY15 FY16E FY17E FY18E 5 40 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 Total Sales PET CHIPS Tuesday, 05 th April 2016

11 Financial Performance The company reported a marginal decline in its topline numbers during Q3 FY16. Net sales declined by 2.0% YoY to Rs 1,498 cr from 1,530 cr in Q3 FY15 due to a fall in raw material prices which was partially passed to the customers. However EBITDA margins improved marginally by 0.8% YoY to Rs cr led by a decrease in raw material costs. The operating margin also improved by 40bps YoY to 12.5% from 12.1%. The PAT jumped by 38.4% YoY to Rs 78.6 cr due on account of a lower provision for tax. In FY15, Uflex s net sales stood at Rs 6,180 cr, registering a growth of 5.4% YoY. Its EBITDA rose by 7% YoY to Rs cr, while margins improved marginally by 10 bps YoY to 11.8%. PAT grew by 27.6% YoY to Rs 251 cr on the back of a reduction in finance cost. Consolidated Quarterly Financial Performance (Rs crores) Description Q3FY16 Q3FY15 FY15 FY14 Net Sales Growth (%) Total expenditure EBITDA Margin (%) Depreciation EBIT (Ex. OI) Non-Operating Income EBIT Margin (%) Finance Cost Exceptional Items PBT Margin (%) Provision for Tax Profit after Tax Margin (%) Tuesday, 05 th April 2016

12 Financial Outlook With product innovation across different packaging products and an improving product mix in favor of value added products (proof bags, aseptic packs), the revenue growth trajectory should continue. We expect sales to grow at a CAGR of 7.4% from Rs 6,180 cr in FY 15 to 7,655 cr in FY 18 while net consolidated earnings are expected to grow at a CAGR of 23.5% to Rs cr over the same period. The EBITDA and PAT margins are expected to reach 14.3% and 6.2% respectively by FY18. Strong business growth on the cards Return ratios expected to improve 9,000.0 Rs in cr 35% 40% 8, , , , % 25% 20% 35% 30% 25% 4, , , , FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 15% 10% 5% 0% 20% 15% 10% 5% FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY18E Net Sales EBITDA Margin (RHS) PAT Margin (RHS) RoCE RoE Working capital set to improve Improving solvency ratios No of days FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY18E No of times No of times FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY18E Creditor days Debtor Days Inventory days Interest coverage Debt Equity (RHS) Tuesday, 05 th April 2016

13 Valuation Uflex s stock quoting at a CMP of Rs 172 (0.4 P/BV) is extremely undervalued. However we believe that Uflex s business is on a firm wicket and given the compelling fundamentals the stock warrants a re-rating. We believe that the rerating will pan out as the market takes cognizance of the growth triggers viz i. Strong growth prospects of the packaging industry. ii. Foray into aseptic packaging which is the next level of growth iii. Strong revenue visibility given its marquee clients iv. Concrete steps being taken to improve the overall profitability v. Constant innovation through which it is unlocking new business opportunities and consolidating its leadership position in the packaging industry. We have valued the company using the Sum of the parts (SOTP) methodology and ascribe a value of Rs 402 per share. We have valued the films business at an EV/EBITDA of 3.5X FY 18 and the packaging business at an EV/EBITDA of 4.6X FY18. This price objective represents a potential upside of 134% over the next 18 months from the CMP of Rs 172. Based on above we recommend a BUY. SOTP valuation table Uflex SOTP Valuation Basis Multiple EV ( Rs in cr) Film Business FY18E EBITDA - Rs 518 cr 3.5 X Packaging Business FY18E EBITDA - Rs 575 cr 4.6 X Total EV 4,458.2 Less: FY18 Debt (2,037.7) Add: FY18 Cash Market Capitalisation 2,900.3 No of shares outstanding 7.2 Total value per share CMP Potential upside 134% We believe that further value unlocking could unfold post demerger of the two businesses. However we have not factored this in our valuation model and represents an upside tick to our estimates Tuesday, 05 th April 2016

14 Mar-12 Mar-13 Mar-14 Mar-15 Mar-16 Mar-12 Mar-13 Mar-14 Mar-15 Mar Yr Fwd EV/EBITDA Band 5,000 4,500 4,000 3,500 3,000 2,500 2,000 1,500 EV 3X 3.5X 4X 4.5X 5X 1- Yr Fwd P/B Band 1- Yr Fwd P/E Band Mar-12 Mar-13 Mar-14 Mar-15 Mar-16 0 CMP 0.1X 0.2X 0.3X 0.4X 0.5X CMP 2X 3X 4X 5X 6X Tuesday, 05 th April 2016

15 Peer comparison ( Rs in crores) EBITDA Margin (%) PAT Margin(%) ROE(%) P/E P/BV EV/EBITDA Y/E March Sales EBITDA PAT Uflex Ltd E E E Cosmo Films (Films business) E E E Essel Propack E E E Huhtamaki PPL E E Tuesday, 05 th April 2016

16 Financials and Projections Y/E March, Fig in ` Cr FY15 FY16E FY17E FY18E Y/E March, Fig in ` Cr FY15 FY16E FY17E FY18E Profit & Loss Statement Per Share Data (Rs) Net Sales Adj. EPS % Chg Cash EPS Total Expenditure DPS % Chg Book Value EBDITA Capital, Liquidity, Returns Ratio EBDITA Margin % Debt / Equity (x) Other Income Current Ratio (x) PBDIT ROE (%) Depreciation ROCE (%) Interest Dividend Yield (%) Exceptional items Valuation Ratio (x) PBT P/E Tax Provisions P/BV Reported PAT EV/Sales Minority Interest EV/EBIDTA PAT Efficiency Ratio (x) PAT Margin (%) Inventory (days) Other opr Exp / Sales (%) Debtors (days) Tax Rate (%) Creditors (days) Balance Sheet Cash Flow Statement Share Capital Profit Before Tax Reserves & Surplus Depreciation Minority Interest Working Capital Changes Long Term Borrowings Others Deferred Tax Liability Operating Cash Flow Other Non Current Liabilities Capital Expenditure Total Liabilities Other Investment Activities Gross Block Cash Flow from Investing Less: Acc. Depreciation Changes in Share Capital Net Block Changes in Borrowings Capital Work in Progress Dividend and Interest Non Current Investments Cash Flow from Financing Net Current Assets Net Change in Cash Long term Loans & Advances Opening Cash Balance Total Assets Closing Cash Balance Tuesday, 05 th April 2016

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