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CD Equisearch Pvt Ltd March 8, 2016

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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/$) 281/4.2

52 W H/L (Rs.) 332/176

Book Value (Rs/$) 85.1/1.3

Beta 1.1

Daily volume (avg. monthly) 12880

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 509820

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 100.0

As on Sept 30, 2015

Recommendation

BUY Phone: + 91 (33) 4488 0043

E- mail: [email protected]

Figures (Rs crs)

CY13

CY14 CY15 CY16e CY17e

Income from Operations 1085.80 1225.33 2037.38 2296.95 2590.39

Other Income 11.95 15.53 14.24 16.29 21.55

EBITDA (other income included) 126.52 134.58 246.53 272.76 311.13

Net Profit after MI and EO item 51.56 60.33 76.93 85.10 107.62

EPS (Rs) 8.22 9.09 10.58 11.70 14.80

EPS growth (%) 14.4 10.5 16.4 10.6 26.5

Equity 12.54 14.54 14.54 14.54 14.54

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 290.88 crs in

Q4CY15 in its standalone revenue whereas on a consolidated basis the

revenue jumped by 70.2% to Rs 527.99 crs as against Rs 310.14 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 68.15 crs as compared to Rs

34.79 crs in Q4CY14 (a growth of 95.9%). The operating expenses rose

by just 64.7% to Rs 462.88 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 50.30 crs last quarter from Rs 23.93 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 23.25 crs in Q4CY15 as a result of this

acquisition. The net profit after extraordinary items rose to Rs 20.56 crs

last quarter showing an increase of 33.4% (Rs 15.41 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 11.70 and 15.3x

CY17e EPS of Rs 14.80. 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.

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CD Equisearch Pvt Ltd


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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 2020.

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 2015. 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.

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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 30-40 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 76.93 crore in CY15 (Rs 60.33 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 40.38 cr vs. Rs

3.10 cr) and depreciation costs (Rs 90.53 cr vs. Rs 43.86 cr). With benefits of acquisition coming into play, the net profit is

expected to increase to Rs 85.10 crore (growth of 10.6%) and Rs 107.62 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 11.70 and 15.3x CY17e EPS of Rs 14.80. 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.

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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 31.4 143 2247 2235 175 18.8 8.0 4.7 19.6 1.0 2.3 12.9

Huhtamaki 14.5 226 1645 2037 77 11.4 3.9 3.9 13.0 0.8 2.7 21.4

Jindal Poly 42.1 418 1758 7024 369 13.7 6.5 7.2 18.7 0.3 0.8 4.8

Uflex 72.2 149.5 1080 6085 304 12.7 5.0 3.0 9.7 0.2 0.3 3.6

Calculations on ttm basis, * figures in crores

Source: HPPL, CD Equisearch Source: HPPL, CD Equisearch Source: HPPL, CD Equisearch

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Financials

Quarterly Results Figures in Rs crore

Q4CY15 Q4CY14 % chg CY15 CY14 % chg

Income From Operations 527.99 310.14 70.2 2037.38 1225.33 66.3

Other Income 3.04 5.77 -47.3 14.24 15.53 -8.3

Total Income 531.03 315.91 68.1 2051.62 1240.86 65.3

Total Expenditure 462.88 281.12 64.7 1805.09 1106.29 63.2

EBITDA (other income included) 68.15 34.79 95.9 246.53 134.58 83.2

Interest 9.93 0.89 1015.7 40.38 3.10 1202.1

Depreciation 23.25 11.20 107.6 90.53 43.86 106.4

PBT 34.97 22.70 54.1 115.62 87.62 32.0

Tax 14.47 4.58 215.9 36.89 19.11 93.0

PAT 20.50 18.12 13.1 78.73 68.50 14.9

Minority Interest -0.06 0.33 -118.2 1.80 1.90 -5.5

PAT after MI 20.56 17.79 15.6 76.93 66.60 15.5

Extraordinary Item 0.00 2.38 -100.0 0.00 6.27 -100.0

Net Profit 20.6 15.41 33.4 76.93 60.33 27.5

EPS(Rs) 2.83 2.12 33.4 10.58 9.09 16.4

Income Statement Figures in Rs crore

CY13 CY14 CY15 CY16e CY17e

Income From Operations 1085.50 1225.33 2037.38 2296.95 2590.39

Growth (%) 20.5 12.9 66.3 12.7 12.8

Other Income 11.95 15.53 14.24 16.29 21.55

Total Income 1097.45 1240.86 2051.62 2313.23 2611.94

Total Expenditure 970.93 1106.29 1805.09 2040.48 2300.81

EBITDA (other income included) 126.52 134.58 246.53 272.76 311.13

Interest 3.75 3.10 40.38 42.35 44.66

Depreciation 42.02 43.86 90.53 102.65 105.52

PBT 80.75 87.62 115.62 127.75 160.94

Tax 22.93 19.11 36.89 40.88 51.50

PAT 57.82 68.50 78.73 86.87 109.44

Minority Interest 1.61 1.90 1.80 1.77 1.83

PAT after MI 56.21 66.60 76.93 85.10 107.62

Extraordinary Item 4.65 6.27 - - -

Net Profit 51.56 60.33 76.93 85.10 107.62

EPS (Rs) 8.22 9.09 10.58 11.70 14.80

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Balance Sheet Figures in Rs crore


Sources of Funds

Share Capital 12.54 14.54 14.54 14.54 14.54

Reserves 378.27 552.94 604.14 664.74 747.84

Total Shareholders’ Funds 390.81 567.48 618.68 679.28 762.39

Minority Interest 20.13 22.03 23.83 25.60 27.43

Long Term Debt 39.90 35.41 435.21 478.50 504.60

Total Liabilities 450.84 624.92 1077.72 1183.38 1294.41

Application of Funds

Gross Block 594.60 660.61 1234.37 1269.37 1304.37

Less: Accumulated Depreciation 362.78 385.33 475.86 578.51 684.04

Net Block 231.82 275.28 758.51 690.86 620.33

Capital Work in Progress 10.98 5.94 - - -

Investments 54.79 186.34 206.62 260.90 398.03

Current Assets, Loans & Advances

Inventory 93.48 98.25 156.07 171.68 188.84

Trade Receivables 208.69 245.78 418.87 481.70 539.50

Cash and Bank 15.80 11.65 15.37 17.40 18.60

Short term loans 12.06 16.15 20.65 24.60 29.35

Other Assets 13.84 15.31 32.75 35.80 39.40

Total CA & LA 343.86 387.13 643.71 731.18 815.70

Current Liabilities 179.09 213.07 466.19 435.02 475.74

Provisions-Short term 30.30 35.20 58.83 62.36 66.56

Total Current Liabilities 209.39 248.27 525.02 497.38 542.30

Net Current Assets 134.48 138.86 118.69 233.80 273.40

Net Deferred Tax -0.99 -5.49 -4.23 -4.50 -4.50

Net long term assets 19.76 23.99 -1.87 2.33 7.15

Total Assets 450.84 624.92 1077.72 1183.38 1294.41

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Key Financial Ratios


Growth Ratios (%)

Revenue 20.5 12.9 66.3 12.7 12.8

EBITDA 21.9 7.4 92.1 10.6 14.1

Net Profit 14.4 17.0 27.5 10.6 26.5

EPS 14.4 10.5 16.4 10.6 26.5

Margins (%)

Operating Profit Margin 10.6 9.7 11.4 11.2 11.2

Gross profit Margin 10.7 10.2 10.1 10.0 10.3

Net Profit Margin 4.9 5.1 3.9 3.8 4.2

Return (%)

ROCE 12.6 11.9 11.8 9.5 10.7

RONW 13.8 12.6 13.0 13.1 14.9

Valuations

Market Cap/ Sales 0.4 1.1 0.9 0.7 0.6

EV/EBITDA 3.7 9.0 8.3 7.2 6.3

P/E 9.1 19.9 22.7 19.3 15.3

P/BV 1.2 2.3 2.8 2.4 2.2

Other Ratios

Interest Coverage 20.7 27.2 3.9 4.0 4.6

Debt Equity 0.1 0.1 0.9 0.8 0.8

Current Ratio 1.9 2.3 1.6 2.0 2.2

Turnover Ratios

Fixed Asset Turnover 4.6 4.8 3.9 3.2 4.0

Total Asset Turnover 2.5 2.3 2.4 2.0 2.1

Debtors Turnover 5.9 5.4 6.1 5.1 5.1

Inventory Turnover 10.7 11.5 14.2 12.5 12.8

Creditor Turnover 7.0 6.9 7.8 6.8 6.9

WC Ratios

Debtor Days 61.8 67.7 59.5 71.6 71.9

Inventory Days 34.2 31.6 25.7 29.3 28.6

Creditor Days 52.0 53.2 46.6 53.9 52.5

Cash Conversion Cycle 44.0 46.1 38.7 47.0 48.0

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Financial Summary – US dollar denominated


Equity capital 2.0 2.3 2.2 2.2 2.2

Shareholders’ funds 63.1 89.6 93.3 101.0 113.3

Total debt 7.5 6.6 79.8 81.8 86.2

Net fixed assets (inc CWIP) 39.2 44.4 114.4 102.7 92.2

Investments 8.9 29.4 31.2 38.8 59.2

Net current assets 21.7 21.9 17.9 34.8 40.6

Total assets 72.8 98.7 162.5 175.9 192.4

Revenues 185.1 200.8 317.6 341.4 385.1

EBITDA 20.4 21.0 38.4 40.5 46.2

EBDT 19.7 20.5 32.1 34.3 39.6

PBT 12.6 13.3 18.0 19.0 23.9 Profit after minority & extraordinary items 8.8 9.9 12.0 12.7 16.0

EPS ($) 0.14 0.15 0.16 0.17 0.22

Book Value ($) 1.0 1.2 1.3 1.4 1.6

*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.

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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 INH300002274. 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 – 700 017; Phone: +91(33) 4488 0000; Fax: +91(33) 2289 2557 Corporate Office: 10,

Vasawani Mansion, 2nd Floor, Dinshaw Wachha Road, Churchgate, Mumbai – 400 020. Phone: +91(22) 2283 0652/0653; Fax: +91(22) 2283, 2276

Website: www.cdequi.com; Email: [email protected]

buy: >20% accumulate: >10% to ≤20% hold: ≥-10% to ≤10% reduce: ≥-20% to <-10% sell: <-20%

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CD Equisearch Pvt Ltd - Business Standardbsmedia.business-standard.com/_media/bs/data/market-reports/equity... · CD Equisearch Pvt Ltd March 8, 2016 Equities ... (peg ratio: ~1)