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Tuesday, October 13, 2015

MAYUR UNIQUOTERS LTD: JACKETING YOUR PORTFOLIO !!!

Scrip Code: 522249 MAYURUNIQ
CMP:  Rs. 424.15; Market Cap: Rs. 1,962.86 Cr; 52 Week High/Low: Rs. 515.00 / Rs. 378.40. Total Shares: 4,62,77,600 shares; Promoters : 2,82,84,916 shares – 61.12 %; Total Public holding : 1,79,92,684 shares – 38.88 %; Book Value: Rs. 48.56; Face Value: Rs. 5.00; EPS: Rs. 15.20; Dividend: 61.00 %; P/E: 27.98 times; Ind. P/E: 28.94; EV/EBITDA: 17.24.
Total Debt: Rs. 44.82 Cr; Enterprise Value: Rs. 1,987.19 Cr.

MAYUR UNIQUOTERS LIMITED: Mayur Uniquoters Limited was founded in 1992 and is based in Jaipur, India. Mayur Uniquoters Limited manufactures and sells coated textile fabrics in India. The company’s products include artificial leather, synthetic leather, and PVC vinyl. Its products are used in footwear, furnishings, automotive OEM, automotive replacement, and automotive exports markets. The company sells products directly to OEMs, as well as to other manufacturers and wholesalers. It also exports its products to the Middle East, Cyprus, the United Kingdom, Russia, Sri Lanka, Nepal, the United Arab Emirates, Mexico, Italy, and the United States. The company had declared splits in face value of its shares from Rs. 10 to Rs. 5 in July 2013 and gave bonus of 1:1 in June 2012 and again 1:1 bonus in February 2014. Mayur Uniquoters Ltd has an installed capacity of 400,000 Linear Meters per month & it has a full range of machinery to full-fill Printing, Embossing, Lacquering, Sue ding and laminating needs. The company possesses fully equipped Physical, Chemical and Product Development Laboratories capable of testing nearly all the properties of Artificial Leather for different segments and applications. Company also manufactures and exports PVC Vinyl also referred to as Artificial Leather or Synthetic Leather; they are also termed as PVC Leather Cloth, PU/PVC Leather Cloth. The company has its own inline testing lab, physical testing lab, raw material testing lab, Colour testing lab and product development lab. Company carters to major automobile brands in India to name the few are BMW, General Motors, Daimler, Maruti Suzuki, Tata Motors, Honda, Ford, Hyundai, Nissan, LML. Mayur Uniquoters Ltd is locally compared with Superhouse Ltd, Lawreshwar Polymers Ltd, Super Tannery ltd, Super House Ltd, Crew BOS products Ltd, Mideast India Ltd, Mirza International Ltd, Fenoplast ltd, Zenith Exports Ltd, Mayur Leather Products Ltd, Relaxo Footware ltd, Jasch Industries, Responsive Industries, Fenoplast, Prabhat Industries, Polynova, Manish Vinyl and Veekay Polycoat globally compared with Daiichi Kasei Company Ltd of Japan, Chanco International Group Ltd of Hong Kong.

Investment Rationale:
Mayur Uniquoters Ltd. (MUL), the largest manufacturer of artificial leather and PVC Vinyl in India and was established by Mr. Poddar in 1994. Mayur Uniquoters is a market leader with installed capacity of 2.5 million linear meters per month. Mayur Uniquoters Limited was incorporated in 1992 and is based in Jaipur, India. Mayur Uniquoters Limited manufactures and sells coated textile fabrics in India. The company’s products include artificial leather, synthetic leather, and PVC vinyl. Its products are used in footwear, furnishings, automotive OEM, automotive replacement, and automotive exports markets. The company sells products directly to OEMs, as well as to other manufacturers and wholesalers. It also exports its products to the Middle East, Cyprus, the United Kingdom, Russia, Sri Lanka, Nepal, the United Arab Emirates, Mexico, Italy, and the United States. Artifical leathers are economical and are in demand more due to inherent negatives of natural leather such as being derived from animal sources, tanneries causing pollution and most importantly due to its high cost, Synthetic Leather has become a better economical alternate to natural leather and Mayur Uniquoters sees an increasing trend of replacing natural leather with synthetic leather in various industries. Mayur Uniquoters is India’s largest organised polyvinyl chloride (PVC) based synthetic-artificial leather-maker, with an annual installed capacity of 36.6 linear mn metres. The company’s products are used in footwear, automobile, furnishing and lifestyle products. Around half of its revenue comes from footwear followed by high-margin auto OEMs which is around 39 %. India’s present synthetic leather industry size is around Rs. 45 to 50 billion and is expected to double in the next five years on the back of increasing demand form automotive, expansion of furniture-interior furnishing industry and lastly, rising consumption and purchasing power of consumers. Of the 160 coating lines operating in India, 60 are in the organised sector and remaining in unorganised. The industry is non-cyclical in nature and proxy on India’s consumption growth story. As a substitute for leather which is 70 % cheaper, PVC or Synthetic leather applications are vast and are rapidly replacing leather in many industries. Due to its diversified presence across industries, Mayur will play a dominant role being the largest organised player in synthetic leather industry’s expansion. The potential to scale up a footwear business is less as organised makers which are around 30 % source around 60 % of their needs from unorganised PVC leather suppliers and 70% of unorganised footwear makers rely on unorganised supplies due to cost factor. As the footwear business is mainly a volume play with lower realisations, Mayur is focusing more on the automobile and furnishing segments, where realisations are high with limited competition. It is also entering B2C furnishing with a pan India distribution network. Mayur being India’s only player, among Asia’s few, to enter the US auto OEM market for seating fabric and supply for the last four years. Its four-year ties with Chrysler and Ford earned the status of a dependable fabric supplier. Mayur plans to leverage this experience with GM, Mercedes among others. To strengthen its US presence, Mayur has set up a warehouse in Mexico and formed a fully-owned subsidiary in the US. That export OEM will clock in revenue CAGR of 25 % during FY15-18e. Due to the absence of credible suppliers, India imports 5mn metres of polyurethane (PU) every year from China where the concerns like quality, consistency, reliability exist. Mayur has raised funds to set up the largest PU capacity in India of Rs. 700 to 800mn. Two PU coating lines of 300,000 metres each will be on stream by FY18 and the company expects to clock revenue of Rs. 1 billion in the first year of operation. Mayur, being a well-known PVC supplier, will capture a larger share of the unorganised and imported PU market. Around half of the PVC or synthetic leather produced in India is consumed by the footwear industry for use in the upper part and inner sole. Major customers for the industry are Bata India, Liberty Shoes, Relaxo Footwear, VKS Footwear, Paragon, Lunar Footwear and Action. Mayur caters to more than 50 % of the requirements of Bata, VKC and Paragon. As many unorganised players to meet the demands of organised footwear makers, it is mainly volume play with realisations being moderate. The second-largest client with around 30 % for PVC-synthetic leather is the automobile industry, with applications in seat cover, head-arm rest, door panel pad, sun visors, roof pad, steering, gear cover and dash board. The requirement of PVC or synthetic leather varies 3-7 meters depending on the automobile models. The third-largest requirement comes from the furnishing and lifestyle industry and includes sofa-makers, jacket, hand bags, apparel-garments, and luggage and sports goods. PVC-synthetic leather appears and feels like natural leather and is rapidly finding replacement in many industries. As a cheap substitute of leather almost 70 % cheaper, its applications are limitless. This industry is a perfect competitive market with many players and no entry barriers; however, the challenge is to achieve scale and remain financially sound. A new player can enter the footwear or furnishing market where realisations are lower, but it will take years to penetrate the auto OEM market, where quality, timeliness and consistency are utmost priority. Mayur hence enjoys Economic Moat (A competitive advantage that one company has over the other companies in the same industry – by Warren Buffett) expanding moats which is a very strong sign of a future Multi-bagger stock. The broader industry is not cyclical and is driven by the underlying consumption growth story. Mayur also supplies to footwear makers where the given average realisation is of Rs. 225 to 250 per metres, Mayur supplies PVC/synthetic fabric to automakers such as Maruti Suzuki, Tata Motors, Isuzu, Mahindra & Mahindra, GM India, Ford India, Hero Honda and HMSI, with an average realisation of Rs. 166 per metre. Buyers’ willingness to pay a premium for better interiors prompted domestic OEMs to use better quality PVC/synthetic fabric. Mayur recently finalised a higher price point of Rs. 350 per metre with M&M, Ford India and GM India. Its global presence has earned clients like Ford India and GM India. Going forward, Mayur should be able to leverage this by adding more clientele and supplies to export OEMs (for seat-making) give a realisation of Rs. 450-480 per metre. Higher revenue contribution from automobile and other segments is expected to be higher, going forward. Recently, Mayur has raised funds from West Bridge to set up a Polyurethane (PU) plant in Dodsar (Jaipur) and has acquired more than half of the land needed. As PU is technology-driven, to make the process smooth and world class, the company will hire a team of technicians from China. Currently, it is solving water related issues (usage of waste water), as certain regions in Rajasthan come under the “dark zone” where it is illegal to use underground water. The issue is expected to be resolved in two to three months and the project would need 12-15 months to start post approvals, by 4QFY17. Going forward, Mayur plans to manufacture chemicals domestically, which are being imported and used by domestic players. The company expects Rs. 1.5bn revenue in the first year of operation, with two coating lines of 300,000 metres per month each and an estimated investment of Rs. 700 to 800 million. With an additional cost of 20 % to 25 %, PU scores over PVC in terms of better quality and finishing and wider applications. PU trades at a premium of 20 to 25 % to PVC fabric, with average realisation of more than Rs. 250 per metres. World over, PU is widely used due to its flexibility in usage, applications and further processing like to make fire retardant fabrics, water proof, denim fabric and many more variations which would be difficult with a PVC fabric. India’s PU market is 80 % unorganised. Mayur being a credible player in the PVC segment shall significantly influence the market dynamics.

Outlook and Valuation:

Mayur Uniquoters Limited manufactures and sells coated textile fabrics in India. The company’s products include artificial leather, synthetic leather, and PVC vinyl. Its products are used in footwear, furnishings, automotive OEM, automotive replacement, and automotive exports markets. The company sells products directly to OEMs, as well as to other manufacturers and wholesalers. India annually consumes around 17mn per meters of PU, of which 5mn per metres are imported mainly from China. World over, the split between PU or PVC is 80 % to 20 %, while in India it is reverse. India’s per capita PU consumption is 300gms, while China’s is 2kgs. Under-penetration exists in both demand and supply side mainly due to inefficient infrastructure, non-availability of trained human resources, lack of product awareness and fluctuating raw material prices. Mayur is the market leader in India’s PVC synthetic leather industry and also caters to US auto OEMs – a market which no other domestic company has been able to penetrate. With increased penetration of organised players in the synthetic leather user industries, Mayur Uniquoters will stand to gain from its ability to deliver quality products consistently in an otherwise fragmented market. Given Mayur’s strong balance sheet, consistent quality and foray into polyurethane (PU), Mayur has its potential to scale up operations. There are not many listed companies which have a similar business as Mayur Uniquoters. However, its closest peer set would be footwear-related and auto ancillary companies. Footwear segment contributes 54 % to Mayur Uniquoters Ltd’s total revenues on the back of big clientele. The company’s clientele include Bata, Paragon, Liberty, Action, VKC group and Relaxo. The current market size of Indian footwear industry is estimated at Rs. 30,000 Cr to Rs. 35,000 Cr. The industry witnessed a CAGR of 18 % over FY08-12, which in turn led to growth in Mayur Uniquoters Ltd’s footwear segment. India is the world’s second-largest footwear maker after China. India produces more than 2.5 billion pairs of footwear per annum which is 12 % of global footware production and 70 % of this market are unorganised. Organised players like Bata, Relaxo, Liberty, VKC, Paragon, Lunar and Action on an average have 35 % to 40 % of their PVC/synthetic leather requirement met by organised players like Mayur and the rest by unorganised players. However, Mayur has limited scope to scale up as 60 % to 65 % of organised players’ demand is met from unorganised PVC or Synthetic leather makers at highly competitive rates. Also, 70 % of the unorganised footwear makers may not afford to source from Mayur due to lesser credit days and or pricing premium over others. 70-75% of the footwear makers are situated in northern India, and the company’s 70% (of footwear segment) supply goes to southern India. This reflects in Mayur’s revenue from the footwear segment; volumes were flat and realisation declined and we expect this trend to continue going forward. India’s average per capita footwear consumption is at 2.5 footwear pair’s p.a, which is much lower than the average per capita consumption of 5.0 pair’s in the developed countries. Thus, there is scope for improvement, which in turn offers big opportunity for players such as Mayur Uniquoters Ltd to cater to this growing market. Mayur can clock in revenue CAGR of 22 % during FY15-18e on the back of increasing demand and faster replacement of PVC/synthetic leather, shifting focus to high margin automobile and furnishing segments from footwear, well positioned to penetrate deeper among US auto OEMs and lastly expansion into polyurethane (PU) by setting up India’s largest capacity in Rajasthan. The premium valuation is justified looking at the valuation of its peers like the average PE of its peers is 29.4 for FY16E & 22.70 for FY17E whereas Mayur is trading at 26.02 for FY16E and at 21.64 for FY17E with average revenue CAGR for FY15 to 17E of its peers at 18 % and average PAT CAGR of 36 % where Mayur can have revenue CAGR for the FY15 to FY17E at 19 % and PAT CAGR of 22 %. Mayur Uniquoters offers a superior ROCE and ROE. It has reported an average of 61 % of RoCE since FY11 and will continue to generate healthy ROE, making it an attractive business to look at. Going forward, it is expected that the quality of ROE to remain in excess of 30 % with stable operating margins and minimal addition in leverage. Company will witness strong operating cash flows with no incremental huge capex; the Debt to Equity ratio is expected to be reduced further and company’s Operating cash flows are expected to remain strong on the back of robust sales and efficient working capital management. At the CMP of Rs. 424.15, the stock is trading at its all-time high P/E of 26.02x FY16E, 21.64x FY17E. The Company can post EPS of Rs. 16.30 for FY16E & Rs. 19.60 for FY17E. Given the attractive valuations with the pan India presence, robust growth prospects, one can buy this stock with expectations that the company’s surplus scenario is likely to continue for the next three years keeping its growth story in the coming quarters also.  

KEY FINANCIALSFY14FY15FY16EFY17E
SALES ( Crs)469.60506.30564.60660.50
NET PROFIT (₹ Cr)57.8062.5075.6090.50
EPS ()12.5013.5016.3019.60
PE (x)33.2030.8025.4021.20
P/BV (x)11.906.805.704.80
EV/EBITDA (x)20.4019.6015.9013.20
ROE (%)41.4028.2024.4024.60
ROCE (%)34.4022.8020.8021.90

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*As the author of this blog I disclose that I do not hold MAYUR UNIQUOTERS LTD in my any of the portfolios.


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Saturday, October 3, 2015

HUHTAMAKI PAPER PRODUCTS LTD: A MUST IN YOUR PACK !!!

Scrip Code: 509820 PAPERPROD
CMP:  Rs. 269.95; Market Cap: Rs. 1,962.85 Cr; 52 Week High/Low: Rs. 331.95 / Rs. 167.05; Total Shares: 7,27,11,934 shares; Promoters : 5,00,03,997 shares – 68.77 %; Total Public holding : 2,27,07,937 shares – 31.23 %; Book Value: Rs. 77.11; Face Value: Rs. 2.00; EPS: Rs. 8.41; Dividend: 140.00 % ; P/E: 32.09 times; Ind. P/E: 23.01; EV/EBITDA: 15.23.
Total Debt: Rs. 19.21 Cr; Enterprise Value: Rs. 1,974.89 Cr.

HUHTAMAKI PPL Ltd: Huhtamaki Paper Products Limited was founded in 1935 and is headquartered in Thane, India. The company was formerly known as The Paper Products Limited and changed its name to Huhtamaki PPL Limited in May 2014. Huhtamaki PPL Limited is a subsidiary of Huhtavefa B.V. from Netherlands. The company have given bonuses in two tranches the first was in September 1987 in the ratio of 1:4 and second in September 1993 in the ratio of 1:2, Company also declared splits in the face value of its shares from Rs. 10 to Rs. 2 in January 2007. Huhtamaki PPL Limited provides packaging solutions in India. Its packaging solutions include flexible packaging products, including film, foil, and paper based laminate structures; labelling technologies, which include shrink sleeves, heat transfer, pressure sensitive, metalized paper, and wrap-around; and specialized cartons for packaging of powders and solids. The company also offers packaging machines comprising sleeve application machinery and shrink tunnels, heat transfer applicators, and support on labelling equipment for wrap around and self-adhesive labels; holographic options; metalized films; co-extruded blown films; extrusion coated materials; gravure cylinders; and polyethylene films. It serves various product groups, such as soaps and detergents, shampoos, noodles, biscuits, baby foods, chocolates, coffee, tea, milk powder, and juices. HPPL also exports its products to 5 continents. In 1999, PPL became a member of the Huhtamaki Packaging Worldwide, a global leader in consumer packaging. Huhtavefa BV is the holding company of Huhtamaki Netherlands BV, Netherlands. Huhtamaki is a global consumer & Speciality packaging company with a wide range of packaging products & other paper forming technology. In February 2014, Huhtamaki group increased its stake 63.78 % by acquiring 3.01 % stake from Mr. Suresh Gupta, Chairman of HPPL, at a total consideration of Rs. 169.63 Cr. Further, shares were allotted to Huhtamaki group at Rs. 134.08 on 20th August 2014 totalling to Rs. 134.41 Cr, thereby increasing Huhtamaki’s stake from 63.78 % to 68.8 %. PPL has three state of the art & fully integrated manufacturing facilities at Thane, Silvassa and Hyderabad with highly skilled and experienced staff. HPPL is capable of working with the customer from product inception to the super market and with complete control and confidentiality. HPPL has an impressive client list that includes, Levers, Nestle, Cadbury, Britannia, Glaxo Smithkline, Coca Cola, Perfetti, Dabur, Marico, P&G. HPPL has presence across 4 continents: South Asia, Africa, Middle East, Europe and Central America & provides service to over 50 customers worldwide. As of March 31, 2014, HPPL has 51 % stake in its subsidiary based in India named Webtech Labels Pvt. Ltd, which was acquired in Nov 2012 for a consideration of Rs. 37.70 Cr, in an all cash deal. Webtech Labels is specialized in manufacturing high-end pressure sensitive labels, especially to pharmaceutical customers. Huhtamaki PPL can be locally compared with Uflex Ltd, Glory Polyfilms Ltd, Xpro India Ltd, Essel Propack Ltd (Packaging India Pvt. Ltd. - part of Essel Propack group), Shree Rama Multi Tech Ltd, Cosmos Films Ltd, Nahar Poly Films Ltd Ecoplast Ltd, Yashraj Containeurs Ltd, Gopala Polyplast Ltd, Perfectpac Ltd, Ocean Agro (India) Ltd, Xpro India Ltd, Kanpur Plastipack Ltd, Kuwer Industries Ltd, paramount Printpackaging Ltd & from some unlisted players like Uma Polymers, Umax Packaging & Parikh Packaging and globally compared with Avery Dennison Corporation of USA, Ball Corporation of USA, Berry Plastics Group Inc of USA, Crown Holdings Inc of USA, Packaging Corporation of America of USA, Seal Air Corporation of USA, British Polythene Industries PLC of UK, Huhtamaki Oyji of Finland, Smurfit Kappa Group Plc of Ireland, Vetropack Holding AG of Switzerland, Polyplex (Thailand) Public Company Ltd of Thailand, The Pack Corporation of Japan, Lock & Lock Co., Ltd of South Korea, Greatview Aseptic Packaging Company Ltd of China, CPMC Holding Ltd of Hong Kong, Mpact Ltd of South Africa, Nampak Ltd of South Africa.

Investment Rationale:
Huhtamaki PPL Ltd. (HPPL) earlier known as The Paper Products Ltd. is India’s leading manufacturer of primary consumer packaging. HPPL supplies packaging materials for many of the top brands in India and commands about 60 % of market share in premium flexible packaging business. HPPL is India's leading Consumer Packaging Company offering a wide range of packaging solutions like Flexible Packaging, Labelling Technologies and Specialised Cartons and all this is supported by the Packaging Machine Division. HPPL provides the customer with Total packaging solutions. HPPL has very long and eminent clients list which includes all major players in FMCG sector. HPPL is like a one stop shop for FMCG companies for their packaging needsHPPL is specialised in flexible packaging and with a growing trend of processed food market and with the penetration of untapped rural markets by personal care companies, there will be the increase in use of flexible packaging. HPPL is amongst selected few companies worldwide having expertise in holographic images in packaging medium. This makes the packaging look attractive, thus enhancing the product visibility for premium positioning. HPPL derives almost 96 %-98 % of its revenues from the FMCG industry. Hence the company’s growth is largely linked to the growth of FMCG industry. Indian packaging industry is among the fastest growing sectors spanning across almost every industry segment and ranked 11th largest in the world. India has the second largest GDP among emerging economies based on purchasing power parity (PPP). The packaging industry in India is one of the fastest growing industries which have its influence on all industries, directly or indirectly. It is currently valued at USD 350 million and is expected to rise to USD 1.3 trillion by 2016. The development in the packaging industry in India is mainly driven by the food and the pharmaceutical packaging sectors. Growing Indian middle class coupled with the growth in organized retailing in the country are propelling growth in the packaging industry. Another factor, which has provided substantial stimulus to the packaging machinery industry, is the rapid growth of exports, which requires superior packaging standards for the international market. With this the need for adopting better packaging methods, materials and machinery to ensure quality has become very important for Indian businesses. One of the most vital factors has been declining inflation trend in the country translating into declining prices of the food and beverages (constituting ~49% of the WPI). The Indian packaging industry is growing continuously. The average annual growth rate is about 13 – 15 %. However, there is great growth potential since India’s per capita consumption of packaging is only 4.3 kgs whereas neighbouring Asian countries like China and Taiwan show about 6 kgs and 19 kgs, respectively. India’s per capita annual packaging expenditure was USD 20 in 2011, which is significantly lower than the top 20 market average of USD 347.6. The low per capita expenditure offers a huge business opportunity for packaging companies. The per-capita consumption of packaged beverages and food in India is still very low compared to other regions. However, expenditure on these products has doubled in the last five years. Within the next five years it will increase by another 14 % annually, as the demand for processed food is rising due to growing disposable incomes, urbanization, and a young population. This clearly indicates that there are many more commodities which need to be marketed in packaged condition and thus, a great business opportunity stands for the Indian packaging industry. Moreover, the Indian retail market is the 5th largest retail destination, globally and has been ranked the second most attractive emerging market for investment. India’s retail growth and increased consumption of consumer products is driving the demand for packaging in the country. Packaging has an annual global turnover of about $550 billion, and India’s share is about $16.5 billion per annum. According to a recent Mckinsey report, there will be a ten-fold increase in India’s middle class population by 2025, which will further trigger the consumption of packaging materials. This will bring another growth spurt to packaging, says the Mckinsey report, which also notes that the country needs more packaging professionals. According to the Packaging Industry Association of India (PIAI), packaging in India is one of the fastest growing sectors, partly because it spans almost every industry segment. Right from packaging of food and beverages, fruits and vegetables, drugs and medicines, to highly dangerous products, packaging has led to greater specialization and sophistication over a period of years. In the Indian packaging industry, processed food packaging represents 48 % of the total, personal care packaging is 27 %, pharma is 6 %, and the rest is 19 %, packaging in India is highly fragmented and has 22,000 firms, including raw material manufacturers, machinery suppliers, and providers of ancillary materials and services. Moreover, 85 % of these firms are Micro, Small & Medium Enterprises (MSMEs). As the industry grows and matures, there is expected to be a trend towards consolidation as supply side companies merge and acquire smaller companies to increase scale, reduce competition, and improve bargaining power with customers. The main problems faced by MSMEs are: lack of available sources of credit, high cost of packaging materials, lack of skilled labour, irregular power supply, and an underdeveloped sense of how to market, brand, and distribute. Today, flexible packaging is the fastest-growing sector of India’s packaging industry. The shift from traditional rigid packaging to flexible packaging on account of its attractiveness, cost effectiveness, and strength is largely aided by increasing consumer demand for processed food. The future of the Indian packaging industry is very good, if investment materializes. The growth of the domestic market will be good and export potential is substantial, too, if it’s properly addressed. If organized retail takes off as expected, growth opportunities are substantial, and enormous potential exists in converting wasted food into valuable product.

Outlook and Valuation:
Clients of the HPPL
HPPL established in 1935 as Paper Products Ltd is a pioneer and the market leader in flexible packaging in India and has a market share of 60 % + 6 % of PPL in premium flexible packaging business and about 9 % overall in the organized market, which is of about $2 billion by size. It has its manufacturing facilities at Thane, Silvassa, Hyderabad and Rudrapur. The current installed capacity of HPPL for paper & films is 52,000 MT and company’s capacity utilization rate is 75 % to 80 %. HPPL successfully meets the packaging needs of almost entire range of FMCG segments including personal products, personal wash, laundry, foods, sauces, beverages, bakery products, spices, chocolates and confectionery, dairy and also for seeds, specialized chemicals, electronics, healthcare and many other specific specialized uses including anti-spurious packaging. HPPL thus enjoys Competitive advantage due to use of its superior technology & capability. HPPL has an MNC Tag and with diverse products & Strategic acquisition of competitor, adds to its competitive advantage. HPPL has expanded its business into promising overseas markets with a view to benchmark itself with the global competition and has presence across 4 continents (South Asia, Africa, Middle East, Europe and Central America) & provides service to over 50 customers worldwide. HPPL has its International Business Division set up as a separate business group servicing large Multinational accounts across 4 continents and over 50 customers worldwide. In 2014, the company acquired 100 % stake in the Positive Packaging Industries Ltd for Rs. 794 Crore and completed the takeover deal in January 2015. Positive Packaging Industries has an annual turnover of approximately Rs. 1,000 crore and enjoys 6 % market share. It is a privately owned flexible packaging company with nine manufacturing facilities in India and the UAE as well as significant business in Africa and other export markets. With the completion of the acquisition, Huhtamaki is looking forward to improving its flexible packaging manufacturing capabilities into Middle East and expects to double its sales in Africa. The benefits are likely to be reflected in its CY15 numbers. The current installed capacity of HPPL is 52,000 MT with utilisation rate of 75 % to 80 %, whereas PPIL’s total installed capacity is at 45000 MT. After the completion of this acquisition, HPPL’s total manufacturing capabilities will stand at whopping 86 % increase at 97,000 MT, thereby increasing the utilisation rate of the company, henceforth impacting the revenues positively. It will also enable HPPL to gain further bargaining power with its customers, to achieve better economies of scale, to extend its customer network and would also help synergies in sourcing of inputs and up-gradation in technology. With the desired manufacturing capabilities, the company will gain hold of industrial and pharmaceutical product packaging thereby diversifying product coverage and strengthening its integrated capabilities. Going forward, PPL will be able to revive its products offerings and also take advantage of already established capabilities in order to widen its product portfolio in the domestic market as well. The HPPL creativity program, called NASP (New Applications, Structures and Products-Processes) is one of the major drivers of growth for the Company. The Company maps the sales of NASP products introduced into the market using a 3 year cycle, and calls these NASP sales. During CY14, the NASP sales contribution to the overall sales was around 29 %, helping to drive growth. The Company’s management in their NASP program has jointly worked with their customers to deliver cost savings using smart ideation and technology wherein a wide array of products like tea, coffee, shampoo, confectionery, pickle, etc. would be made available in packs at a price of one rupee. The NASP first objective is to create new business through finding new applications and markets for existing structures and technology processes. The second objective is to introduce new packaging products and structures and technology processes not only for new applications and markets, but also to offer new technically superior solutions or solutions which add value to the brand being packaged, or, importantly, solutions which offer cost advantage without compromising performance. Hence, the NASP exercise creates new business, but as importantly, it also protects or even improves existing business share from a customer by creating improved packaging solutions, or improving cost competitiveness. The packaging market in India is all set for the next level of growth. Strong favourable demographic factors such as increasing disposable income levels and rising consumer awareness and demand for processed food are boost for this sector. With the rise of the Indian middle class which is expected to go up from today’s 5 Cr to 58.3 Cr by 2025 the prospects of the industry looks good. Also important is that the world’s multinational giants are taking rapid strides in India’s food, beverage, health and beauty, and pharmaceuticals sectors. This will also drive growth in packaging. These factors are forcing both packaging suppliers and end users to shift from bulk packaging to retail, unit-level, small-sized packaging. In addition, exploding organized retail growth and newly relaxed investment norms in retail and other sectors augur well for the packaging market in India. HPPL has surpassed the FMCG and Pharma industry growth rate over last three years growing at an average rate of 16.3 % as compared to 14.8 % growth in the former and 11 % growth in the latter. The packaging industry growth is expected to propel from current 15 % annually to more than 20 %. HPPL being one of the largest players in India commanding 10 % of the total packaging market and close to 66 % of the flexible packaging market share is a key beneficiary of the changing dynamics in the packaging industry. HPPL has reported a moderate growth of 4.4 % YoY in its standalone revenue in Q1CY15 at Rs. 283 Crore. EBITDA for the same period stood at Rs. 36.3 Crore showing a growth of 31.3 % YoY mainly due to decrease in the stock pileup of the Company that declined by 44.7 % and fall in expenses on raw materials by 1.7 %. PAT was reported at Rs. 18.3 Crore in Q1CY15 showing an increase of 11.1 % on a YoY basis. The growth in the bottom-line in Q1CY15 was as a result of an increase in other income by 118 % on YoY basis offsetting the increase in depreciation, interest and tax expenses. At CMP, HPPL is trading at a significant premium to its nearest competitor Uflex. This is despite Uflex having a larger business size & higher operating margins. Even on Market Cap to Sales and Price to BV basis, HPPL is relatively expensive than Uflex. This is possibly due to the competitive advantage that HPPL enjoys over Uflex. Huhtamaki PPL Ltd. is one of the most prestigious flexible packaging companies in India and is continuously taking up new initiatives to expand its presence overseas to tap the vast potential in the global markets. With the recent acquisition of Positive Packaging Ltd., the manufacturing capabilities of HPPL are expected to increase considerably which in turn will increase the revenues for the Company. The Company is a market leader in the flexible packaging industry in India and has reputed clients like HLL, Colgate, Nestle, etc. It is expected that the projected growth rate of 15 % in the flexible packaging industry will positively impact HPPL in the future. With the acquisition of PPIL the value for HPPIL stake in PPIL comes at Rs. 87.41 per share and stake in Webtech Labels Pvt. Ltd comes at Rs. 6.01 per share. At the current market price of Rs. 269.95, HUHTAMAKI PAPER PRODUCTS Ltd stock trades at P/E ratio of 22.00 x FY16E and 17.33 x FY17E respectively. Company can post Earning per share (EPS) of Rs. 12.27 for FY17E and Rs. 15.57. One can buy this stock with expectations that the company’s surplus scenario is likely to continue for the next three years keeping its growth story in the coming quarters also.  

KEY FINANCIALSFY14FY15FY16EFY17E
SALES ( Crs)1,225.332,175.002,436.002,728.32
NET PROFIT (₹ Cr)60.3376.4989.23113.22
EPS ()9.0910.5212.2715.57
PE (x)19.9023.8020.4016.10
P/BV (x)2.302.902.702.40
EV/EBITDA (x)9.209.007.907.10
ROE (%)12.6012.9013.7015.50
ROCE (%)15.7017.0015.2017.30

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*HPPL has given ABSOLUTE RETURN of 43.49% from last recommended CLICK

*As the author of this blog I disclose that I do not hold HUHTAMAKI PAPER PRODUCTS LTD in my any of the portfolios.


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Disclaimer
This is a personal blog and presents entirely personal views on stock market. Any statement made in this blog is merely an expression of my personal opinion. These informations are sourced from publicly available data. By using/reading this blog you agree to (i) not to take any investment decision or any other important decisions based on any information, opinion, suggestion, expressions or experience mentioned or presented in this blog (ii) Any investment decisions taken if any would be his/hers sole responsibility. (iii) the author of this blog is not responsible.
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