Piramal Glass. Company Report. CMP : 92 Rating : Buy Target : 143

Transcription

1 Long Term Investment Call 26-Dec-11 Piramal Glass Ltd. Company Report Sector : Glass CMP : 92 Rating : Buy Target : 143 Piramal Glass Ltd (PGL) has a multi product industrial profile and is a global leader in delivering world-class packaging solutions. It is a manufacturer of glass containers for the Cosmetics & Perfumery (C&P), Pharmaceutical and Specialty Food & Beverages (SF&B) industries. PGL has its manufacturing facilities in India, US and Sri Lanka with 11 furnaces having a total installed capacity of 1145 TPD (tonnes per day). Key Data Year End Face Value (INR) BSE Code Reuters Code Bloomberg Code Shares Outstanding (Mn) Market Cap (INR Mn) 52 Week High/Low BSE Sensex / CNX Nifty 1-Year Average Volume ('000) Source: Bloomberg, (INR mn) Key Financials FY10 FY11 FY12E FY13E Revenue 11,039 12,185 13,080 15,383 Operating Profit 1,822 2,851 2,995 3,769 Operating Profit (%) Net Profit 32 1,033 1,038 1,543 Net Profit (%) Book Value Key Ratio FY10 FY11 FY12E FY13E P/E (x) P/BV (x) RONW (%) ROCE (%) Share Holding Pattern Promoters FII FI/MF/Other Institutes Others 23.7 Relative Price Performance Piramal Glass Nifty Mar Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov 10 PIRAMGLAS PRML.BO PIRA IN , / / Investment Rationale: Focus on high-margin C&P business to drive revenues: PGL believes the market share in the C&P premium segment can grow to 7-8% over the next two years from current levels of ~3%. PGL currently has a global leadership position in the colour cosmetic (Nail polish bottles) segment with a 50% market share. We believe that as the contribution of the C&P segment to the revenue increases and with the share of the premium segment within the C&P segment also increasing rapidly, will drive growth and improve margins going forward. Significant cost advantages Labour Arbitrage: In countries like US, which accounts for 37% of the global C&P premium segment, 80% of the C&P requirement is imported. The total cost of production in India, where manpower is among the cheapest in the world is ~60% of the global costs and is less than half of that in France and almost half of that in the US. This gives PGL to have a significant cost advantage over its global peers. Capacity expansion to meet the future demand: For FY12 and FY13, the company has a planned capex of INR 2600 mn, with INR 1000 mn assigned to a Greenfield expansion of 160 TPD for the C&P segment to the at Jambusar. This project is scheduled to be operational by March The remaining INR 1600 mn will be spent on realignment of 4 existing furnaces which will increase the capacity by ~50-60 TPD and will increase the total capacity by ~210 TPD. Stronger balance sheet to support growth: PGL had a debt of INR 9200 mn (as per FY11 Consol. balance sheet) and debt/equity of 3:1. In H1FY12 the debt/equity ratio was reduced to 2.5:1 from 3.4:1 in H1FY11. The debt service cover improved to 3.2 in H1FY12 as compared to 3.4 in H1FY12. PGL has been able to restructure its debt by going into to relatively lower interest rate of 7.5% foreign currency loan from peak rate of 13% to strength its cash flow. PGL follows an active hedging policy to its naked exposure which is currently to the tune of USD mn. Valuation: At the CMP of ~INR 92, the stock trades at ~8.0x and 5.2x of its FY12E and FY13E earning respectively. The company has been steadily shifting its product mix from low margin commodity business to high yield specialized business of C&P. We expect the C&P contribution to company's revenue to increase from 49% in FY11 to 56% in FY13E which is expected to boost EBITDA margins from 23% in FY11 to 25% in FY13E. We have valued the company at ~8x of it FY13E earnings which is at premium compared to other domestic peers, due to PGL's better margins profile and return ratios. We maintain our BUY rating on the stock with a target price of INR 143. Ashish Tiwari atiwari5@unicon.in Rohan Shetty rohan.shetty@unicon.in

2 CONTENTS Particulars Page Company Background...3 Milestones...4 Industry Overview...5 Business Overview...8 Investment Rationale...10 Concerns...13 Peer Comparison...13 Valuation & Outlook...13 Financial Statements

3 COMPANY BACKGROUND Piramal Glass Ltd (PGL) has a multi product industrial profile and is a global leader in delivering world-class packaging solutions. It is a manufacturer of glass containers for the Cosmetics & Perfumery (C&P), Pharmaceutical and Specialty Food & Beverages (SF&B) industries. PGL has its manufacturing facilities in India, US and Sri Lanka with 11 furnaces having a total installed capacity of 1145 TPD. International operations contributed to 74% of FY11 revenues. PGL commands ~3-4% market share in world premium C&P segment and ~50% market share in colour cosmetics C&P segment. It controls ~35% market share in domestic pharmaceutical segment and ~91% market share in SF&B segment in Sri Lanka. The Company has offices in 10 countries and a distribution network in 44 countries. PGL is also the largest producer of nail-polish bottles globally. Segment wise breakup SF&B 23% Pharma 28% Source: Company, C&P 49% Segment Contribution & Growth Pharma SF&B C&P % 17% % 18% 54% 44% Sales CAGR : 24% 43% 45% 18% 18% 39% 37% 36% 24% 39% 44% FY05 FY06 FY07 FY08 FY09 FY10 FY11 Source: Company, Segment-wise CAGR (From FY 05 to FY 11 annualized) 49% 35% 26% 23% 30% 31% 28% 11% Market Overview End Product Price Bottle Price 1000 Pcs Market Segment Market Size Total market : US $ 2.3 bn ROCE $ 60 $ 15 $ $ $ $ 330 Premium Segment Select Perfumes Mass Perfumes & Skin Care $ 1016 (44%) $ 616 (27%) Premium Segment % % $ 8 $ 1.5 $ 85 - $ 160 $ 20 - $ 40 Mass Segment Low Mass Perfumes Color Cosmetics $ 500 (22%) $ 155 (7%) Mass Segment % % Source: Company, 3

4 MILESTONES PGL turnaournds after three years of consecutive losses 2005 Kojan merges into Gujarat Glass Ltd., which gets relisted as PGL NPIL demerges its 54% holding to Kojam Finvest which gets listed Acquires a part of The Glass Group (erstwhile Wheaton Glass) and marks entry into premium C&P market 1984 Gujarat Glass acquired by Piramal Group 1990 Merges with group company Nicolas Piramal India Ltd. (NPIL) and becomes its division 1998 Demerges as subsidiary, PE investors buy 45% in the demerged entity Acquires Ceylon Glass Company Ltd., Sri Lanka, And marks entry into SF&B segment Source: Company, 4

5 INDUSTRY OVERVIEW Indian Glass Packaging The Indian Packaging Industry is a USD 14 bn industry and has been growing at ~15% over the last few years. The industry is expected to accelerate further due to increasing urbanization, growing middle class and expansion in modern retail. The Indian glass container market stood at ~ USD 1 bn in FY10 and grew by ~12% YoY. The industry has significant entry barriers due to the capital intensive nature of the business. The industry has strong economic drivers for end-user segments (liquor and beer, pharmaceuticals, food, cosmetics, etc.) The liquor and beer industries are the main users of container glass with ~70% contribution, followed by pharmaceuticals ~10%, food products ~10%, beverages ~6% and cosmetics ~4%. The Indian Made Foreign Liquor (IMFL) segment has been registering a strong 12% CAGR over the past four years. The alcohol consumption has increased in the recent past due to growing inclination towards social drinking and higher disposable income. This in turn is expected to drive container glass demand. The Indian pharmaceuticals industry is expected to grow to ~USD 37 bn by 2013 from the levels of USD 17 bn in Glass bottles and molded vials represent a significant share of packaging medium for cough syrups, tonics, pediatric suspensions, dry powder and liquid injectibles. Moreover, tubular vials and ampoules are finding an extensive acceptance by pharmaceutical companies for their product packaging. In India, currently 10-12% of all food and beverages are packed in container glasses, vis-à-vis 40-50% in developed economies. India s retail food sector is expected to grow to ~USD 150 bn by 2025 (from the levels of USD 70 bn in 2008). The fruit-drinks category is growing at 25% annually, one of the fastest in the beverages market. Even sports and energy drinks, with low penetration in India, are expected to grow in the coming years. Attractive packaging besides innovative advertising and celebrity endorsements has gained importance in products marketing.we believe this growth will drive the demand for processed food packaging, especially container glass as it is considered non reactive and food-grade. We believe growth in India s retail food sector will drive the demand for processed food packaging, especially container glass as it is considered non reactive and foodgrade. 5

6 India s per capita consumption of container glass, at 1.4 per kg, is far lower than the global average, indicating an immense growth potential. World Glass Container per capita consumption (kg) South korea France Italy Germany Spain Ireland Czech Republic Austria Poland UK USA Hungary Mexico Argentina Chile Phillippines Belgium Japan Greece China Turkey Brazil India Indonesia Source: Company, 6

7 Global Glass Packaging The World Packaging Organization estimates the global packaging industry to have revenues of USD 425 bn, with a ten year historical CAGR growth of ~3.1% and is expected to grow to USD 597 bn by The industry is projected to grow at ~3.5% CAGR in the next five years mainly driven by growth in emerging markets. Geography End User 27% 5% 34% Europe Asia, Oceana, Africa & ME 9% 13% Liquor Beer North America 11% 52% Food Pharma 34% South & Central America 15% Others Source: Owens-Illinois, Inc. - Investor Presentation, March 2010 The global glass packaging market size is estimated to be at USD 30 bn. With C&P segment having a size of USD 2.3 bn, Pharmaceuticals having a market size of USD 2 bn and SF&B having a size of USD 1.3 bn. Global Glass Packaging Market Size Glass Packaging $ 30 bn Moulded Glass Packaging $ 28 bn Tubular Glass Packaging $ 2 bn Food & Beverages $ 24.1 bn Cosmetics & Perfumery $ 2.3 bn Pharmaceuticals $ 2.0 bn Specialty Food & Beverages $ 1.3 bn Addressable niche high value glass market Market size ~ 20% of overall market Addressable niche global markets Sources: Industry reports, Market size in FY 08-09/ CY-08 7

8 BUSINESS OVERVIEW PGL currently commands 5.8% market share in the ~ USD 2.3 bn Cosmetic & Perfumery (C&P) segment which has significant entry barriers like high quality and skill requirements. PGL is the latest global entrant into this segment and has grown by CAGR of 19% over the last 3 years. PGL also holds the distinction of being the only major player in this segment from Asia and hence has a significant cost advantage over its peers in the segment due to the comparatively low cost of manufacturing glass in India compared to other developed markets. C&P market share Piramal Glass 6% Others 13% Gerresheimer 8% Vitro 8% Bormiolli Rocco 6% Zignago Brosse 11% Pochet 10% Bormiolli Luigi 6% Source: Company, SGD 16% Heinz 16% The C&P segment constitutes the mass segment and the premium segment. These segments are further divided as follows: Mass Segment Colour Cosmetics: - This segment constitutes of nail polish bottles whose price ranges from USD per 1000 bottles. The growth in the segment is driven by the emerging economies particularly China and Brazil. This market is very fragmented and regionalized and requires new designs, particularly in the mass market. Low Mass Perfumes: - This segment constitutes of perfume bottles with an end prices in the range of USD 8 and are primarily sold in emerging economies. The price range in the segment is USD per 1000 bottles. The market is fragmented and characterised by frequent new product launches and short production runs. Customers in this segment prefer integrated packaging (Caps, Cartons etc.). Low mass perfumes are the easiest to produce in terms of quality and have higher manufacturing efficiencies. Competition in this space is driven by regional players in China and Poland. 8

9 Premium Segment MNC Mass Segment: - Perfumes and Skincare products with an end price in the range of USD 15 and produced primarily for developed economies. The price range in the segment is USD per 1000 bottles. This market is characterised by higher quality products with stringent plant audits before business development. This segment has a product development cycle of around 6-8 months and long production runs. Customers are mainly from developed economies in West Europe and North America. Perfumes Select Segment: - This segment comprises of high end perfumes with an end price greater than USD 60 produced mainly in France and USA. The price range of the segment is USD per 1000 bottles. The segment has an extremely high entry barrier due to the specific skill required. A concentrated customer base of 20 customers constitutes around 80% of the market. The suppliers in this segment are mainly based in the EU and USA. The segment has a product development cycle of months and customers conduct extensive periodic audits of the manufacturing plants. Bottle decoration accounts for ~40% of bottle cost due high labour intensity in decoration and quality sorting. Market Overview End Product Price Bottle Price 1000 Pcs Market Segment Market Size Total market : US $ 2.3 bn Market $ 60 $ 15 $ $ $ $ 330 Premium Segment Select Perfumes Mass Perfumes & Skin Care $ 1016 (44%) $ 616 (27%) Premium Segment France & USA West Europe, North America & Latin America $ 8 $ 1.5 $ 85 - $ 160 $ 20 - $ 40 Mass Segment Low Mass Perfumes Color Cosmetics $ 500 (22%) $ 155 (7%) Mass Segment Middle East, CIS Turkey, SE Asia, India. Across Globe Premium constitutes about 71% of overall C&P market Source: Company, 9

10 INVESTMENT RATIONALE Focus on high-margin C&P business to drive revenues C&P is a high value business commanding better realization & higher operating margin PGL has 5.8% market share in USD 2.3 bn global C&P segment. The company has attained a global leadership position in the colour cosmetics and low mass perfumes segments with 50% and 10% market share respectively. The company has adopted a long term strategy which focuses on increasing the market share in the high margin premium segment which has a better ROCE as compared to the mass segment. The company has shown a steady increase in revenue contribution of premium segment to the total C&P revenue over the last few years. PGL currently has a market share of 3-4% in the premium segment; the management believes that the company is well positioned to grow its market share to 7-8% over the next two years, which in-turn would contribute to revenue and margin growth. We believe that the contribution of the C&P segment to the total revenue will increase to ~ 53% and 56% in FY12E and FY13E respectively. With the change in the product mix in the C&P segment and its growing contribution to the overall business will drive margins and revenue going forward. Premium C&P Growth Trajectory Premium % 43% % 32% 28% % % 72% 62% 68% 57% 55% 0 Source: Company, Mass Premium CAGR of 28-30% CAGR : 26% CAGR : 26% 46% 54% FY06 FY07 FY08 FY09 FY10 FY11 FY13E 10

11 Cost Piramal Glass Ltd. Significant cost advantages - Labour Arbitrage Flacconage is a labour and skill intensive industry. Though the manufacturing of glass itself is highly automated, critical functions such as quality control need large teams of skilled professionals. In countries like US, which accounts for 37% of the global C&P premium segment, 80% of the C&P requirement is imported thus giving significant advantage to companies having manufacturing facilities in countries which have lower labour costs. The total cost of production in India, where manpower is among the cheapest in the world, is less than half of that in France and almost half of that in the US. The project costs in India amount to ~60% of the global costs. PGL is able to produce glass at significantly lower costs than its competitors in other parts of the world giving the company a significant advantage over its peers. For FY11, global sales accounted for 74% of the total sales. We believe that the global sales will increase further over the next two years and contribute ~75% of the total sales. Sustainable Cost Advantage Cost India France Freight Raw material Overheads Depreciation 7 12 Mold cost 1 4 Labour 4 53 Energy 8 8 Packing material 4 4 Raw material 6 6 Total Packing material Energy Labour Mold cost Depreciation Overheads Freight Source: Company, India France Capacity expansion to meet the future demand Between FY12-FY13, the company has a planned capex of INR 2600 mn, with INR 1000 mn assigned to a Greenfield expansion of 160 TPD for the C&P segment to the at Jambusar. This project is scheduled to be operational by March The remaining INR 1600 mn will be spent on realignment of 4 existing furnaces which will increase the capacity by ~50-60 TPD and will increase the total capacity by ~210 TPD. PGL has strategically focussed on expanding its C&P furnace capacities as it has higher margins. We believe that with the further capacity expansion will enable the company to capture higher market share in the C&P segment. 11

12 Strong client base PGL derives 74% of its revenues from global sales. PGL's acquisition of Glass Group, USA gave it access to 37 % of the global C&P premium segment. Today, PGL has expanded its customer base to 17 of top 20 top customers which constitute ~80% of premium market. These being premium brands have quite stringent eligibility criteria for its vendors which include environmental norms, design norms, design history, etc. The company has reputed brands like Coty, Elizabeth Arden, Estee Lauder, L'Oreal, Revlon, Unilever, etc as its customers which enable PGL to maintain regular order flows due to the nature of the business where clients do not regularly change their vendors. Moreover, such reputed clients, help to form a quality client portfolio. Stronger balance sheet to support growth PGL had a debt of INR 9200 mn (as per FY11 Consol. balance sheet) and debt/equity of 3:1. In H1FY12 the debt/equity ratio was further reduced to 2.5:1 from 3.4:1 in H1FY11. The debt service cover improved to 3.2 in H1FY12 as compared to 3.4 in H1FY12. PGL has been able to restructure its debt by going into to relatively lower interest rate of 7.5% foreign currency loan from peak rate of 13% to strength its cash flow. The Indian operations have foreign debt of USD 40 mn in form of PCFC and will have a minimal impact on the P&L due to the receivables (Exports to the range of 60% of standalone sales). Other foreign currency loan are in their respective currency (USA - USD 60mn & Sri Lanka -USD 40 mn) which is only for the translation and has a natural hedge because of the distribution of their foreign currency denominated assets and liabilities. PGL follows an active hedging policy to its naked exposure which is currently to the tune of USD mn. Moreover, the company is also planning one time sale of 21 acres of land in Sri Lanka in FY12 with an estimated value of ~ INR mn will go towards debt servicing. Given the strong cash flows from operations, we believe that the debt equity ratio will improve to 1.6 in FY13E. 12

13 Revenue concentration from few clients CONCERNS 80% of C&P revenues are generated from the top 20% C&P clients. Any order execution delays or failure on the part of PGL to retain such clients can dent revenues of the company. Currency Risk PGL is subject to risks from fluctuations in the currency as exports contribute substantially to its revenues. PEER COMPARISON Domestic Peers Company Price Market Cap EPS P/E P/B EV / EBITDA (INR) (mn) FY12 FY13 FY12 FY13 FY12 FY13 FY12 FY13 HSIL Ltd , HNG , Piramal Glass , International Peers Price Market Cap EPS P/E P/B EV / EBITDA Company (EUR) (mn) CY11 CY12 CY11 CY12 CY11 CY12 CY11 CY12 Zignago Vetro SpA Gerresheimer AG , SGD , VALUATION & OUTLOOK At the CMP of ~INR 92, the stock trades at ~8.0x and 5.2x of its FY12E and FY13E earning respectively. The company has been steadily shifting its product mix from low margin commodity business to high yield specialized business of C&P. We expect the C&P contribution to company's revenue to increase from 49% in FY11 to 56% in FY13E which is expected to boost EBITDA margins from 23% in FY11 to 25% in FY13E. The company's increasing focus on C&P business, significant cost advantage over its competitors in other parts of the world would able PGL to increase its market share in C&P specially premium segment. Most of the domestic peers are trading at a one year forward multiple of 3.6x-5.6x but are not exactly comparable given the difference in product mix and target markets. Globally glass companies which have similar product mix are commanding an average P/E multiple of 10.1x. We have valued the company at ~8x of it FY13E earnings which is at premium compared to other domestic peers, due to PGL's better margins profile and return ratios. We maintain our BUY rating on the stock with a target price of INR

14 FINANCIAL STATEMENTS Profit & Loss FY09 FY10 FY11E FY12E FY13E Balance Sheet FY09 FY10 FY11E FY12E FY13E Total Revenue 10,088 11,039 12,185 13,080 15,383 SOURCES OF FUNDS growth % Share Capital Total operating expenditure 9,348 9,218 9,333 10,085 11,614 Reserves & Surplus 254 1,595 2,216 3,143 4,577 EBITDA 740 1,822 2,851 2,995 3,769 Shareholder's Funds 434 2,399 3,020 3,948 5,381 EBITDA Margin % Total Loans 13,571 9,824 9,200 9,600 8,541 Other Income Deferred Tax Liab./ (Asset) Depreciation & Amortisation ,069 1,107 1,205 Total Liabilities 14,544 12,713 12,862 14,300 14,784 Interest 1,314 1, APPLICATION OF FUNDS PBT -1, ,277 1,297 2,058 Gross Block 14,052 13,673 15,174 16,441 17,974 PBT Margin % Less: Accu. Depreciation 4,489 5,252 6,580 7,686 8,891 Total Tax Net Block 9,562 8,421 8,595 8,755 9,084 % of PBT Capital Work-in-Progress , Reported PAT -1, ,033 1,038 1,543 Investments growth % N.A Current Assets 6,429 5,873 6,349 6,822 8,183 PAT Margin % Current Liabilities 1,033 1,070 1,326 1,397 1,677 Adjusted PAT -1, ,433 Net Current Assets 4,834 4,150 3,865 4,267 5,348 Adjusted PAT Margin % Total Assets 14,544 12,713 12,862 14,300 14,784 Cash Flow FY09 FY10 FY11E FY12E FY13E Ratios FY09 FY10 FY11E FY12E FY13E PBT -1, ,277 1,297 2,058 Per Share Data (INR) Depreciation ,069 1,107 1,205 Adj. EPS Interest Adj. Cash EPS Change in Working Capital BookValue Other Exp/(Inc) Cash Flow from Operations ,580 3,195 2,285 2,192 Operating Ratios Purchase of Fixed Assets/WIP -1, ,508-2, Inventory (days) Sale of Fixed Assets Debtors (days) Other Exp/(Inc) Creditors (days) Cash Flow from Investments -1, ,502-1, Debt / Equity (x) (Repayment)/ Proceeds From Borrowings 3,158-3, ,059 Proceeds from Right Issue Returns (%) Share Premium Received - 1, RONW Interest Paid -1,322-1, ROCE Cash Flow from Financing 1,832-2,352-1, ,803 Inc./(Dec.) in Cash Valuation Ratios (x) Opening Cash balances P/E (x) Closing Cash balance P/CashEPS (x) Source: Company, P/BV (x) EV/Total Sales (x) EV/EBITDA (x)

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