How To Value Hpl In India

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1 Materials - Containers & Packaging Oct 01, 2015 Bloomberg Code: HPPL IN India Research - Stock Broking Backed by Acquisition, Set to Augment Market Share New acquisition: In FY15, HPPL acquired 100% of Positive Packaging Industries Limited, India (PPIL). PPIL is well established in this packaging market with better technology, well established infrastructure and good customer base. Entry into new markets and synergy benefits are expected to push the growth of the company. Strong market share in fragmented flexible packaging segment: HPPL is leader in consumer packaging. It is among the top three flexible packaging companies in India serving various large and mid corporate players in the FMCG business. Most of the product line manufactured by the company goes largely in the consumer goods industry. It provides services to over 50 customers worldwide. Growth in consumer goods: As most of the products of HPPL go into consumer products, any revival in the growth of the segments like FMCG and expected positive growth from other sectors such as Healthcare, E-Commerce are expected to drive the growth of the company. Strong parent: With revenue of Rs Bn, its parent company Finland based Huhtamaki Oyj is one of the top 10 consumer packaging companies in the world. It is amongst the top market leaders with good market share in Europe & US. Valuation and Outlook With sizable market position in the domestic flexible packaging products, HPPL established well with good growth in topline and bottomline in the domestic flexible packaging with zero debt on books (prior to acquisition). To further strengthen its presence in the established markets, HPPL acquired PPIL. This acquisition led to sharp drop in RoE% and RoCE% as the synergy benefits and operating leverage could take time to unfold: and are expected to increase post At CMP of Rs.273, the stock is currently trading at PE of 18.7x on CY17E EPS. Considering the strong MNC parent, proven performance of the HPPL, new acquisition which is leading to consolidation and the expected synergy benefits, we initiate coverage and assign PE of 22.0x on CY17E EPS with a BUY rating for target price Rs.322, representing an upside potential of 18% for the company in the long term. Key Risks 1) Raw material prices. 2) Highly competitive sector. Recommendation (Rs.) BUY CMP (as on Sep, 30, 2015) 273 Target Price 322 Upside (%) 18 Stock Information Mkt Cap (Rs.mn/US$ mn) / wk High/Low (Rs.) 334 / 167 3M Avg. daily volume (mn) 0.1 Beta (x) 0.8 Sensex/Nifty / 7905 O/S Shares(mn) 72.7 Face Value (Rs.) 2.0 Shareholding Pattern (%) Promoters 68.8 FIIs 1.2 DIIs 5.5 Others 24.5 Stock Performance (%) 1M 3M 6M 12M Absolute (3) Relative to Sensex (2) Source: Bloomberg Relative Performance* Sep-14 Oct-14 Nov-14 Dec-14 Jan-15 HPPL IN Source: Bloomberg; *Index 100 Feb-15 Mar-15 Apr-15 May-15 Jun-15 Jul-15 Aug-15 Sensex Sep-15 Exhibit 1: Valuation Summary (Rs. Mn) YE Dec (Rs. Mn) CY13 CY14 CY15E CY16E CY17E Net Sales EBITDA EBITDA Margin (%) Adj. Net Profit EPS (Rs.) RoE (%) PE (x) , *Represents multiples for CY13 & CY14 are based on historic market price For private circulation only. For important information about Karvy s rating system and other disclosures refer to the end of this material. Karvy Stock Broking Research is also available on Bloomberg, KRVY<GO>, Thomson Publishers & Reuters Analyst Contact Jagannadham Thunuguntla jagannadham.t@karvy.com 1

2 Company Financial Snapshot (Y/E Mar) Profit & Loss (Rs. Mn) CY15E CY16E CY17E Net sales Optg. Exp (Adj for OI) EBITDA Depreciation Interest Other Income PBT Tax Adj. PAT Profit & Loss Ratios EBITDA margin (%) Net Profit margin (%) P/E (x) EV/EBITDA (x) Dividend yield (%) Balance sheet (Rs. Mn) CY15E CY16E CY17E Total Assets Net Fixed assets Current assets Other assets Total Liabilities Networth Debt Current Liabilities Deferred Tax Balance Sheet Ratios RoE (%) RoCE (%) Net Debt/Equity Equity/Total Assets P/BV (x) Exhibit 2: Shareholding Pattern (%) Company Background With 68.8% ownership of The Paper Products with Finland based Huhtamaki Oyj, the company is renamed as Huhtamaki Paper Products Ltd in May HPPL is a pioneer in technology and market leader in flexible packaging in India. HPPL produces a wide range of custom designed film, foil and paper based laminate structures for primary packaging of products in solid, powder or liquid form, in consumer pack sizes. It also offers a range of labeling options. It has 4 plants at Thane, Silvassa, Hyderabad & Rudrapur which have got certified from various global agencies. Silvassa and Hyderabad plants also hold US DMF (Drug Master Files) certification, required by pharmaceutical customers. Its major subsidiary Webtech Labels is specialized in manufacturing high-end pressure sensitive labels, especially to pharmaceutical customers. HPPL has international business division across 4 continents and over 50 customers. It also manufactures lined cartons and systems for primary packaging of powders and solids. solids. In FY15, HPPL acquired 100% of Positive Packaging Industries Ltd, India (PPIL). Cash Flow (Rs. Mn) CY15E CY16E CY17E PBT Depreciation Interest (net) Tax (230) (289) (463) Changes in WC (1614) (841) (335) CF from Operations Capex (6069) (500) (670) Investment CF from Investing (5480) (420) (580) Change in Equity Change in Debt (510) Dividends (244) (175) (175) CF from Financing 4838 (675) (1207) Change in Cash (79) Exhibit 3: Geographical Revenue Segmentation (Rs. Mn) DIIs 5.5% FIIs 1.2% Others 24.5% Promoters 68.8% CY12 CY13 CY14 Domestic Export Source: BSE, Karvy Research 2

3 New acquisition to drive the growth: Oct 01, 2015 PPIL is a highly respected and quality manufacturer of flexible packaging products. It is well established in flexible packaging market with better technology, robust infrastructure and good customer base, operating through six manufacturing plants in India around Mumbai and Bengaluru. Both HPPL and Positive Packaging Products are into Primary packaging i.e. the packaging in which products are filled and are in direct contact. Positive Packaging has strong hold in African markets and exports which hover around 40% of total sales. Hutamaki PPL will also start exporting some of its products to African markets, wherein it was not present earlier. Huhtamaki, through this acquisition of PPIL, is basically looking to increase is presence in the various emerging markets. This, along with synergy benefits, could help both the companies to further strengthen market position in domestic and international markets. HPPL took a substantial expansion in 2014 with capex close to Rs.700 to Rs.750 Mn. Sizable market share in fragmented flexible packaging segment: HPPL is leader in consumer packaging. It is among the top three flexible packaging companies in India serving various large and mid corporate players in FMCG sector. Most of the product line manufactured by the company is largely consumed in the consumer goods industry. It provides service to over 50 customers worldwide, with around 20% of revenue from exports. The flexible packaging business in India is highly fragmented in nature. There are numerous smaller players with revenue less than Rs 5000 Mn. As much as around 50% of the market is still in unorganized space. Expected revival in growth in consumer goods sector: With diverse products, most of them go into consumer products. Any revival in the growth of the segments like FMCG and expected positive growth from other sectors such as Healthcare and E-Commerce are expected to drive the growth of the company. Pressure Sensitive Labels, Specialised Pouches, Shrink Sleeves, Wet Strength Labels and Specialized Cartons are few of its products. The company s future course is dependent on the health and buying behavior of the big players in the FMCG and Healthcare sectors. Fast increasing array of packaged foods & consumption products, growth in innumerable brands and the long term positive outlook on FMCG goods are expected to drive the demand for flexible packaging products. Considering the demand from packaging dependent main sectors such as FMCG, Healthcare and E-commerce, flexible packaging industry is expected to grow around 12% to 14%. HPPL deals with the large and mid corporate who are more into organized retail like HUL, etc. Strong Parent Company: With revenue of Rs.200 to Rs.210 Bn, its parent company Huhtamaki Oyj is one of the top 10 consumer packaging companies in the world. It is among the top market leaders with strong market share in Europe and US. Its main businesses are: Flexible Packaging Films, Food Service and Molded Fibre. Kraft, Costco, Nestle, McDonald s and Unilever are its major customers. It is present in Europe, US and emerging markets. Focus on NASP Programme: Its innovation program called NASP (New Applications, Structures and Products/Processes) which focuses more on adding value to the brands packaged at cost efficiencies. Its main objectives are to create new business through finding new applications & markets and to introduce new packaging products and structures. It protects or even improves existing business share from customers by creating improved packaging solutions, or improving cost competitiveness. It successfully delivered various innovative products in tea, coffee, shampoo, confectionery and pickle. During 2014, the NASP sales were around 29% of total sales. With more focus on delivering innovative products at very effective cost points will help to increase the penetration of customer products, the growth in these segments likely to continue. 3

4 Exhibit 4: Business Assumptions Y/E Dec (Rs. Mn) CY14 CY15E CY16E CY17E Comments Consolidated Revenue Revenue Growth (%) EBITDA EBITDA Margins (%) PAT (normalized) PAT Growth (%) 18.0 (30.9) Fully Diluted EPS (Rs) Fully Diluted EPS Growth (%) 1.7 (30.9) The revenue from PPIL is going to drive the growth in CY15E and CY16E. Significant jump in CY15 is because of PPIL s acquisition. EBITDA Margins (%) are expected to be maintained as lower crude oil prices are expected to be low. Interest costs for the new acquisition are affecting the bottomline. Capex (ex. Acquisition) - cash capex (806) (6069) (500) (670) High capex in CY15 is due to acquisition. Net CFO Net Debt (1561) Free Cash Flow 132 (5506) Good growth in last few years Exhibit 5: % 4.9% 4.0% 6% 3.2% 4% 2.1% 2% 0% CY13 CY14 CY15E CY16E CY17E Sales (Rs. Mn) Net Profit (%) With CAGR of 8% in sales in the last three years, the company generated revenue of Rs Mn in CY14. Mainline flexibles and Labeling materials, which form the bulk of consumer packaging business, had a sales revenue growth of 13.3%. The small specialized cartons business had a negative growth of 5%, primarily due to lower off-take from seeds customers. The company s exports in 2014 grew by 5.7% to Rs 2223 mn over Stable Operating profit margins Exhibit 6: % 10.9% 11.0% % 9.5% 10.4% 9.8% 8.9% 9.2% 8.6% 8.0% CY13 CY14 CY15E CY16E CY17E EBITDA (Rs Mn) EBITDA Margin (%) Over the years, the company is maintaining the operating profit margins around 8-10%. In CY14, the operating profit margins declined in few specialized segments with volatile crude oil prices showing negative trend. In the long run, management is looking for EBITDA margins between 9% to 11%. 4

5 On Debt and Capex Exhibit 7: CY13 CY14 CY15E CY16E CY17E Borrowings (Rs Mn) Capex & Acquisitions (Rs. Mn) Prior to acquisition, HPPL is zero debt company with normal capex of around Rs Mn. Post the acquisition, the debt on the books has increased significantly as most of the debt is funded through loan raised from its parent company and debt of newly acquired company. The company has done sizable capex around Rs 600 Mn in CY14. The normal capex is around Rs Mn. Return Ratios (%) Exhibit 8: CY13 CY14 CY15E CY16E CY17E RoE% RoCE% RoE% is expected to decrease in CY15E because of high interest costs on debt raised for inorganic growth. It is expected to decrease from 13.5% in CY14 to 7.7% in CY15E but expected to improve in CY17E on the back of expected growth in topline and improvement in operating profit margins. The RoCE% is also expected to decrease in CY15E because of the new acquisition which has cumulative debt of around Rs 2500 mn but is expected to improve from 11.6% in CY15E to 15.2 in CY17E. Others In order to part fund the acquisition of PPIL, HPPL has allotted mn equity shares of FV of Rs. 2 each to Huhtamaki group in Aug This has increased HPPL s equity capital from Rs mn as on June 30, 2014 to Rs mn. Acquisition: On 8th July, 2014, the company and the shareholders of Positive Packaging Industries Limited, India, ( Positive ) had entered into a definitive agreement, pursuant to which the company on 30th January, 2015, acquired 100% of outstanding shares of Positive. This has been completed, after obtaining all necessary approvals. The total enterprise value was Rs Mn inclusive of debt and debt like items of Rs Mn, subject to closing adjustments. The net amount paid by the company towards the acquisition is Rs Mn. In addition, the company has incurred expenses towards acquisition amounting to Rs.49.2 Mn, out of which Rs 31.5 Mn has been debited to investment account. 5

6 Exhibit 9: Company Snapshot (Ratings) Low High Quality of Earnings 33 Domestic Sales 33 Exports 33 Net Debt/Equity 33 Working Capital Requirement 33 Quality of Management 33 Depth of Management 33 Promoter 33 Corporate Governance 33 6

7 Valuation & Outlook With sizable market position in the domestic flexible packaging products, HPPL established well with good growth in topline and bottomline in the domestic flexible packaging with zero debt on books (prior to acquisition). To further strengthen its presence in the established markets, HPPL acquired PPL. With this acquisition, the debt on the books raised to around Rs 5500 Mn and is among the top 2 players in Flexible packaging industry. This acquisition led to sharp drop in RoE% and RoCE% as the synergy benefits and operating leverage could take time and are expected to increase post Consolidation of the top players supported by strong parent backup and strong operating cash flow are expected to augur well for the company in the long term. At CMP of Rs.273, the stock is currently trading at PE of 18.7x on CY17E EPS. Considering the strong Multi National Company (MNC) parent, proven performance of the HPPL, new acquisition which is leading to consolidation and the expected synergy benefits, we initiate coverage and assign PE of 22.0x on CY17E EPS a with a BUY rating for target price Rs.322, representing an upside potential of 18% for the company in the long term. Exhibit 10 (a): Comparative Valuation Summary CMP (Rs.) Mcap EV/EBITDA (x) P/E (x) EPS (Rs.) (Rs. Mn) CY15 CY16E CY17E CY15 CY16E CY17E CY15 CY16E CY17E HPPL** Uflex * Source: Bloomberg, Karvy Research, *Uflex Financial Year Ending is March 31st. **HPPL CY15 numbers are estimates. Exhibit 10 (b): Comparative Operational Metrics Summary CAGR % (FY15-17E) RoE (%) Price Perf (%) Net Sales (Rs. Mn) Sales EBITDA EPS CY15 CY16E CY17E 3m 6m 12m CY15 CY16E CY17E HPPL** Uflex * Source: Bloomberg, Karvy Research, *Uflex Financial Year Ending is March 31st, **HPPL CY15 numbers are estimates. Key Risks yvolatile Raw material prices: Based on the petro-chemicals outlook, there is a risk of high volatility. High volatality in raw material costs could put pressure on the gross and operating profit margins. yhighly competitive sector: The sector is highly competitive sector with many unorganised players. 7

8 Financials Exhibit 11: Income Statement YE Dec (Rs. Mn) CY13 CY14 CY15E CY16E CY17E Revenues Growth (%) Operating Expenses EBITDA Growth (%) Depreciation & Amortization Other Income EBIT Interest Expenses PBT Tax Adjusted PAT Growth (%) 18.0 (30.9) Exhibit 12: Balance Sheet YE Dec (Rs. Mn) CY13 CY14 CY15E CY16E CY17E Cash Sundry Debtors Inventory Loans & Advances Investments Net Block CWIP Total Assets Current Liabilities & Provisions Debt Deferred Tax liability Total Liabilities Shareholders Equity Reserves & Surplus Total Networth Minority Interest Total Networth & Liabilities

9 Exhibit 13: Cash Flow Statement YE Dec (Rs. Mn) CY13 CY14 CY15E CY16E CY17E PBT Depreciation Interest Tax Paid (250) (150) (230) (289) (463) Inc/dec in Net WC (339) (160) (1614) (841) (335) Other Income (35) (67) (80) (80) (90) Cash flow from operating activities Inc/dec in capital expenditure (382) (806) (6069) (500) (670) Inc/dec in investments 56 (1315) Cash flow from investing activities (216) (2043) (5480) (420) (580) Inc/dec in borrowings (47) (29) (510) Issuance of equity Dividend paid (190) (205) (244) (175) (175) Interest paid (38) (31) (499) (510) (522) Cash flow from financing activities (285) (675) (1207) Net change in cash 9 (41) (79) Exhibit 14: Key Ratios YE Dec CY13 CY14 CY15E CY16E CY17E EBITDA Margin (%) EBIT Margin (%) Net Profit Margin (%) Dividend Payout ratio Net Debt/Equity (0.1) (0.3) RoE (%) RoCE (%) Exhibit 15: Valuation Parameters YE Dec CY13 CY14 CY15E CY16E CY17E EPS (Rs.) DPS (Rs.) BV (Rs.) PE (x) P/BV (x) EV/EBITDA (x) EV/Sales (x) ; *Represents multiples for CY13 & CY14 are based on historic market price 9

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