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 needs. HPPL 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 FINANCIALS
FY14
FY15
FY16E
FY17E
SALES (₹ Crs)
1,225.33
2,175.00
2,436.00
2,728.32
NET PROFIT (₹ Cr)
60.33
76.49
89.23
113.22
EPS (₹)
9.09
10.52
12.27
15.57
PE (x)
19.90
23.80
20.40
16.10
P/BV (x)
2.30
2.90
2.70
2.40
EV/EBITDA (x)
9.20
9.00
7.90
7.10
ROE (%)
12.60
12.90
13.70
15.50
ROCE (%)
15.70
17.00
15.20
17.30
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