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Friday, January 13, 2017

ADITYA BIRLA FASHION AND RETAIL LTD: RETAILING WAY !!!

Scrip Code: 535755 ABFRL
CMP:  Rs. 139.70; Market Cap: Rs. 10,744.23 Cr; 52 Week High/Low: Rs. 246.90 / Rs. 122.90
Total Shares: 76,90,93,684 shares; Promoters : 45,71,64,117 shares – 59.44 %; Total Public holding :  31,19,29,567 shares – 40.56 %; Book Value: Rs. 12.22; Face Value: Rs. 10.00; EPS: Rs. -0.76; Dividend: 00.00 %; P/E: --- times; Ind. P/E: 88.25; EV/EBITDA: 28.19x
Total Debt: Rs. 1,849.31; Enterprise Value: Rs. 12,573.21 Cr.

ADITYA BIRLA FASHION AND RETAIL LIMITED: The Company was incorporated in April 19,2007, as Peter England Fashion and Retail Ltd and changed its name to Pantaloons Fashion & Retail Limited on April 23, 2013. Then it changed its name to Aditya Birla Fashion and Retail Limited. ABFRL is a fashion and lifestyle company. The Company is engaged in providing branded fashion apparels and accessories, and the retail sale of clothing, footwear and leather articles in stores. It operates through two segments: Madura Fashion & Lifestyle, and Pantaloons. Its Madura Fashion & Lifestyle segment is engaged in manufacturing and distribution of branded fashion apparel and accessories, and comprises over 1,800 exclusive brand outlets (EBOs) and approximately 150 value stores. Its Pantaloons segment is engaged in retailing of apparel and accessories, and comprises over 160 stores, including one Pantaloons Kids store and approximately 30 Factory Outlets. The Pantaloons segment has a diversified customer base with men, women, kids and non-apparels. The Company's brands include Louis Philippe, Van Heusen, Allen Solly and Peter England. ABFRL is locally compared with Brandhouse Retail Ltd, Trent Ltd, V-Mart Retail Ltd, Thomas Scott India Ltd, Bombay Swadeshi Stores Ltd, Future Enterprise, V2Retail Ltd, Himatsingka Seide Ltd, and globally compared with Christian Dior of France, Nike of USA, Inditex (ZARA) of Spain, Cheil Industries of Korea, TJX Cos of USA, H&M Sweden, Kering (GUCCI) of France, Adidas of USA, VF (VANS) of USA, L Brands (Victoria secrets) of USA, Ross Stores of USA, Fast Retailing Japan, GAP of USA, Hermes International of France, Nordstrom of USA, PVH (Tommy Hilfiger) of USA, Burberry Group of UK.         

Investment Rationale:
Aditya Birla Fashion and Retail Limited (ABFRL) have evolved from the amalgamation of the branded apparel and retail business of the Aditya Birla Group namely Madura Fashion (Madura) division (from Aditya Birla Nuvo, ABNL) and Pantaloons Fashion and Retail (PFRL). The consolidated entity is the largest pure fashion player in India with leading menswear brands (from Madura) and one of India’s largest big-box fashion retailers in the form of Pantaloons. In 1999 Aditya Birla group took over Madura Garments, in 2004 it translated itself from wholesale to retail, in 2006 it expanded its retail network for the brands, in 2007 it launched The Collective and People brand, in 2013 it acquired Pantaloons in 2015 it consolidated its apparel business. Madura is the owner and perpetual licensee of prominent brands such as Van Heusen, Louis Philippe, Allen Solly and Peter England with over 2000 retail stores and over 7000 points of sale, encompassing a retail footprint of 2.6 mn sq ft. ABFRL also houses The Collective, a super-premium retail concept offering high end brands such as Armani Jeans, Versace Collection, Hugo Boss, McQ Alexander McQueen etc. Pantaloon’s focuses on value fashion and is now a leading player in women’s wear with 163 stores covering 2.9 mn sq ft over 78 cities across the country. The merger of Pantaloons with Madura was completed in an all-stock transaction on Jan 9, 2016, with an effective date of 1st April 2015. The merger transaction was structured through the following route: Mirror demerger of Madura Fashion division into Pantaloons, Mirror demerger of Madura Lifestyle division (100 % subsidiary of ABNL) into Pantaloons The subsequent swap ratios were: 26 equity shares of Pantaloons for every 5 equity shares of ABNL, 7 equity shares of Pantaloons for every 500 equity shares of Madura Lifestyle, 1 equity share of Pantaloons for all outstanding preference shares of Madura Lifestyle Post the merger, Pantaloons was re-named ABFRL and the holding of ABNL in ABFRL declined from 72.6 %. However, the holding company Aditya Birla Group (ABG) which holds 57.2 % in ABNL retained majority ownership in ABFRL with a 51.1 % stake in the company. The total size of the Indian retail market is estimated to be USD 600 billion and has been growing at a CAGR of 7 % over FY10-15. Apparel retail market constitutes 8 % of India’s retail market and is pegged at USD 45 billion, of which, only 19 % is organised apparel retail. As per industry estimates, the entire retail sector is slated to grow at a CAGR of 11 % to USD 1 trillion by 2020, with modern retail outpacing the sector growing at 26 % CAGR to USD 150 billion. Organised apparel market is slated to grow at 15 % over the next five years. The key growth drivers for modern retail include favourable demographics, rising brand awareness leading to a shift to organised, improved infrastructure, increased penetration of e-commerce. India’s strong demographic profile is one of the key drivers to accelerated growth in organised formats. Factors like rising disposable income, increasing urbanisation, changing lifestyle with greater exposure to global fashion/trends and rise in discretionary spends are essential for a sustained growth of the organised sector. The urban population, which accounted for 30 % of the total population in 2010, is expected to increase to 40 % by 2030. Industry estimates expect higher per capita spend a + 25 % to 50 % with over 20 Cr nuclear family households. With growing urban population and increase in number of dual income nuclear families are expected to result in average annual household income tripling from US$ 6,393 in 2010 to US$ 18,448 in 2020. The penetration of modern retail via exclusive brand outlets, multi-brand outlets, departmental stores and cash & carry formats have exposed Indian consumers to the latest fashion trends and helped in building brand awareness. It is estimated that organised retail would contribute 40 % to total apparel retail market by 2020. The rise of e-commerce has been a boon to retailers allowing them to sell across the country without incurring the cost of setting up stores. The size of online retail is pegged at US$ 3.5 billion, with fashion contributing 35 % to the sales volume mix. By 2020, Indian online retail is expected to grow 13 times to US$ 45 billion, with proportion of online shoppers amongst internet users doubling to 40 %. The menswear segment contributes 42 % to the Indian apparel market and is expected to grow at a CAGR of 9 % to US$ 40 billion by 2023. While it is currently dominated by categories such as shirts and trousers, western wear, especially denim market is expected to grow at an astounding 14 % CAGR fuelling growth in the segment. By comparison, womens wear is relatively smaller in size contributing 38 %, but is expected to grow at a faster pace of 10 % CAGR to US$ 39 billion by 2023. The growth in this segment is expected to be driven by a shift to branded apparel and an increased share of western wear. The kids wear segment is the fastest growing category, estimated to grow at 11 % CAGR to US$ 22 billion by 2023, driven largely by the luxury and premium categories. ABFRL has strengthened its portfolio with acquisition of Pantaloons diversifying from men to women’s and kids wear. It has wide range of merchandise across all price segments, thereby expanding customer base and affordability in branded apparel segment. The Company has expanded to boost portfolio through organic and in-organic route into super premium segments like Simon Carter and Forever 21. ABFRL has established a global supply chain for raw materials, strong in-house design and product development capabilities to cater to the changing perception and taste of the consumers. It has an extensive reach through multi-channel distribution network of 2,100 retail stores and >7,000 additional points of sale operating in more than 375 cities/towns and own e-commerce venture to cater for online sales. ABFRL has presence in 375 cities with over 7000 points of sale and more than 2000 Exclusive Brand Outlets (EBOs) and Value Stores, with an overall retail footprint of 5.6 mn sq. ft. The company is the owner/perpetual brand licensor of leading brands such as Louis Philippe, Van Heusen, Allen Solly and Peter England. Pantaloons has a strong portfolio of exclusive brands, contributing to 60 % of total revenues and is one of the largest value fashion retailers in the country. The consolidation of these two entities has created a formidable player in the brand and fashion retail space, encompassing offerings across the value chain with an unparalleled network. Madura is expected to benefit from the stable cash flow generation of its mature brands and grow through new brand acquisition and increased penetration. Pantaloons is currently in the final phase of restructuring and stands to gain from profitable store expansion and uptick in urban demand. Madura, the brand business of ABFRL traces its origins from Madura Coats Limited, a readymade garments division of Coats Viyella PLC, UK. Madura Coats was acquired by the Aditya Birla Group (Indian Rayon Industries) in the year 2000. ABG also acquired the exclusive brand right/ownership of premium brands such as Louis Philippe, Van Heusen, Allen Solly, and Peter England. Since the acquisition of Madura Coats and the ownership/licensee of the brands, the company has grown the premium brands namely Van Heusen, Allen Solly, Louis Philippe and Peter England to an enviable position. Currently, the four brands report revenues in excess of Rs 10bn (at MRP) each, far ahead of its competitors in the brand space. Over the years, the company has acquired brands across the value chain to provide a diverse offering to its customers. The Collective is super-premium apparel and accessories retail outfit housing brands such as Armani Jeans, Versace Collection, Hugo Boss, Vivienne Westwood, McQ Alexander McQueen, etc. Louis Philippe is a premium menswear brand that specialises in formals, semi-formals, custom made clothing and accessories, while Van Heusen offers formal wear, party wear and casual wear ranges for both men and women. Allen Solly has created a niche for itself by introducing the concept of “Friday Dressing” to menswear in India and Peter England remains the largest mid-segment menswear brand in the country. PEOPLE is a fast fashion brand focusing on international and fusion styles with presence in menswear, womenswear and kidswear. ABFRL has recently acquired Forever21’s franchise from DLF brands for a consideration of Rs 1.75bn. This acquisition will help the company to take advantage of the fast growing women’s apparel segment. Madura’s menswear brands encompass the “premium” and “bridge to- luxury” categories in both - formal and casual clothing. Pantaloons has successfully captured the fast growing value and fast fashion segment providing ABFRL a portfolio of brands across the entire fashion pyramid. While Madura has a superior store network with over 1800 EBOs and 150 value stores covering over 2.8mn sq ft, the merger with Pantaloons gives it access to a further 146 big box retail stores and 22 factory outlets. The combined entity has a retail footprint of 5.6 mn sq ft, with presence in big box format, EBOs and MBOs. With its origins in Kolkata, Pantaloons has remained strong in the east region of the country, and the contribution from North and East was 56 % as of Q1FY17. Madura, on the other hand, has over 58 % of its stores located in the South, Central and Western regions of the country, giving ABFRL a strong pan-India presence. Pantaloons has over 5.5 mn members in their loyalty programme contributing to 75 % of sales while Madura runs various loyalty programmes for their brands and has a base of 8.6 mn members contributing to 55 % of sales. The combination of the loyalty programmes will enhance the user base and can be used by the company to provide a better service to its customers using big data analytics etc. In a bid to improve the diversity of offerings from a predominantly menswear brand portfolio, the company has launched new categories such as kids wear, women’s western wear, party-wear and accessories. This category extension not only helps de-risk the brand portfolio, repositioning the division from menswear to a family outlet, but also provides access to high growth categories such as womens wear and kids wear. In-line with their category expansion strategy, the company recently launched innerwear and athleisure wear (clothing designed for workouts and other athletic activities) in Bangalore, Chennai and Hyderabad markets, entering the Rs 710 bn innerwear market under their brand Van Heusen. While mainline brands have grown at a steady 17 %+ CAGR over the past 5 years, the category has seen some challenges over the past 12 months. Overall growth has been boosted by associated categories, which have reported a stronger growth at 37 % CAGR over the past 5 years. Increasing per capita income, and increasing discretionary spending, and a portfolio of brands across the entire fashion pyramid makes ABFRL the best in the retail sector also with its complemented presence across the traditional and new distribution platforms will have huge revenue positive. During the past several years, the company has invested heavily to further enrich its brands. With a strong foothold in Indian retail space, possession of some of the well-known brands, ABFRL is an eminent in Indian Retail sector.  

Outlook and Valuation:

Aditya Birla Fashion & Retail has extensive reach with a footprint of 5.5 mn square feet in India and is considered to be India’s No.1 pure fashion Lifestyle Company having five largest and most admired brands i.e. Louis Philippe, Van Heusen, Allen Solly, and Peter England & Pantaloons. ABFRL is building an agile design & supply chain by shifting from 2 seasons to 4 seasons and the company has worked with internal and external consultants for this transition. The main aim of this strategy is to stay ahead of the peers in introducing the latest trends in the market and to aid correction in the inventory levels. With expectations of a stable macro-economic environment over the next 6-9 months, FY2018 is expected to be better for the branded apparel players. With a strong presence in the Men’s and Women’s apparel space, ABFRL to be one of the key beneficiaries of improving discretionary consumption trend. ABFRL has acquired brand ‘Forever 21’during July 2016, and also acquired the online and offline rights of this contemporary women’s fast fashion brand. With ‘Forever 21’ acquisition, ABFRL has created a strong play in one of the fastest growing segments in the Indian Branded Apparel market. Also, in early September 2016, ABFRL entered into the men’s innerwear and athleisure market under the Van Heusen brand in Chennai, Hyderabad and Bengaluru. The Van Heusen branded men’s innerwear and athleisure products are available across 400 Multi Brand Outlets (MBO) and ABFRL plans to launch it pan-India next year. H1FY2017 results include the financials of ‘Forever 21’ which was acquired in Q2FY2017 and also the newly launched Van Heusen innerwear business. During November 2016, ABFRL signed an exclusive deal with the UK’s most successful fashion brand, Ted Baker to offer men’s wear, women’s wear and accessories in India. Ted Baker has more than 500 stores across Europe, the US, Canada, Australia, China, South Africa and the Middle-East. ABFRL’s portfolio of brands spans luxury, premium, sub-premium and fast fashion segments. The addition of Ted Baker will further augment ABRFL’s position in the affordable luxury space. The company is planning its first Ted Baker store by the end of FY2017. ABFRL runs three separate models for their Exclusive Brand Outlet’s, namely, Company-Owned-Company-Operated (COCO), Company-Owned-Franchise-Operated (COFO) and Franchise-Owned-Franchise- Operated (FOFO). The COCO model forms 30 % of EBOs, in here the company owns the inventory and also invests in rent and other capital expenditure to set up the store. Madura prefers using the COFO model which is 30 % of EBOs, where inventory is owned by the company but the franchise invests in store fittings, rent and operations. This is a preferred model, since the company is able to manage inventory at an aggregate level with better IT system with minimal capital investment in the store. In smaller markets, where the company feels that it lacks the experience and expertise to understand local trends, they prefer a FOFO model which constitutes 40 % of EBOs. In this model, the inventory is sold outright and is owned by the franchise. All sales made to MBOs are on an outright sale basis. Madura uses distribution agents, who are mapped to MBOs depending on the locality they service. The company has its average store size is of 1500 to 2000 sq. ft., and capex required is Rs. 3,000 per sq. ft., and has inventory of Rs. 20 lakhs which attains break even in 12-15 months with payback period in 48 – 50 months. The company has rationalized its store network over the past few quarters by closing down unprofitable stores to improve overall network health. Madura reported capital employed turn and ROCE of 7.7 x and 55 % respectively after adjusting goodwill. Since the acquisition of Pantaloons by ABG, the retailer is undergoing a massive restructuring programme in phase manner. In the first phase, the company managed the transition, whereby 22 stores were renovated and 14 new stores added. Additionally, to boost their private labels Pantaloons set up an in-house design studio to design their merchandise and also created a new vendor network. In second phase, gaps in the portfolio were filled with new brands. Pantaloons launched six new brands and also rolled out a new SAP system. Cost efficiencies, price improvement and optimising product mix led to 3.00 % improvement in gross margin. In the third phase which is in FY16, Pantaloons reported a revenue growth of 17 %, and an SSG of 5.9 % embarking on its growth journey. Pantaloons reported an EBIT loss of Rs 1.6 billion with EBIT loss of Rs 1.1 billion excluding one-offs of Rs 48.5 Cr, and is well on its way to achieve its profitability target in the near term. In its fourth phase company intends to build scale via store and brand expansion, currently, Pantaloons is in the process of adding 40 to 50 stores a year and adding new brands/categories wherever they find white spaces in their overall portfolio. This will help sustain the growth trajectory the company embarked upon. The company has now entered the final phase of restructuring of Pantaloons, where the focus would remain on driving profitable growth with a focus on private labels, new brand additions especially in the fast fashion space and category expansion in kidswear. Pantaloons has also been spearheading the shift to a 4 season model (versus a 2 season model that currently exists) to ensure freshness in stock and improve overall turns. Additionally, the company has managed to reduce their price points in Pantaloons by 7 % to 8 %, while improving their gross margins by increasing the contribution from more profitable private labels and by controlling the markdowns. On financial side in Q2FY2017, Aditya Birla Fashion & Retail’s (ABFRL) overall revenue grew by 13 % YoY, mainly led by a 22 % YoY growth in Pantaloons and 5 % YoY growth in Madura Fashion & Lifestyle (MFL). But, MFL witnessed a 10 % YoY decline in revenue on a like-to-like basis due to inventory correction. The branded readymade garments & fashion industry witnessed a prolonged End of Season Sale (EOSS) with deep discounting across segments. However, the Operating Profit Margin (OPM) of 8.8 % was down by only 0.70 %, led by lower discounting in the Madura business and reduced operating leverage in the Pantaloons business. Profit after Tax (PAT) stood at Rs. 64.9 crore, which was up by 7 % YoY. The demonetisation has had an adverse effect on ABFRL’s operations, particularly the wholesale business of Madura. The wholesale channel, as in most distribution businesses, has significant dealings in cash, which will impede the company’s ability to absorb incremental inventory. Also, footfalls in the Pantaloons business would be affected in Q3FY2017 and early part of Q4FY2017 due to a slowdown in overall discretionary consumption. Since 45 % of the company’s business happens in cash, H2FY2017 performance is expected to be much lower in comparison to H1FY2017. It is expected that ABFRL’s EBITDA margins to improve by 1.40 % over FY16-19E to 7.9 % on the back of completion of restructuring process in Pantaloons, improved consumer demand driving SSG and operating leverage in both Madura and Pantaloons, and improving mix in favour of private labels in the retail business. ABFRL can have EBITDA growth of 23.6 % CAGR over FY16-19E to Rs 7.5 billion. Decreasing interest burden coupled with strong operating level profitability is expected to drive PAT to Rs 2.4 billion in FY19E against a loss of Rs 1 billion in FY16. Operating leverage and mix improvement should drive margin profile. In addition, lower interest outgo will further aid profit growth. Improved profitability and controlled working capital to drive return ratios and free cash flow. The ROCE is expected to expand from 12.45 % to 15 % in FY19E.  ABFRL can report positive free cash flow from FY18E. Given the varied margin and growth profiles of both the divisions, Madura & Pantaloons are valued separately. Madura on an EV/EBITDA valuation methodology assigning a 10 % discount to Page Industries (Page has a superior return ratio profile). Pantaloons will turn profitable in the near term with robust EBITDA growth. Pantaloons on an EV/EBITDA valuation methodology given 20 % premium to SOTP Value in multiple of Shoppers Stop (SHOP) due to higher private label mix. Based on our SoTP valuation, ABFRL comes around Rs. 200 per share. ABFRL is expected to have better financial performance in FY2018 and FY2019. Expected recovery in the macro-economic environment, better Pantaloons performance and an improved performance by some of recent acquisitions would be the key triggers for ABFRL in the near term. The stock has already corrected by 15 % in the last six weeks and could be seen as a good entry point in view of its long-term growth prospects. Maintaining a Positive view on ABFRL a upside of 15-20 % from the current level is expected. The current market price of stock is Rs. 139.70, can post Earnings per share (EPS) of Rs. (0.10) in FY17E and Rs. 1.80 in FY18E. It is expected that the company’s surplus scenario is likely to continue for the next three years keeping its growth story in the coming quarters also. ABFRL is the best amongst the retail sector stocks.

SOTP VALUATIONS :
Business Subsidiary 
Value Per Share ()
Madura
179.47
Pantaloons
46.04
Enterprise Value (Rs.)
255.51
less Net Debt (Rs.)
24.66
Market Capital (Rs.)
200.85
Shares Outstanding (cr)
76.90
Value Per Share
200.85

KEY FINANCIALSFY16FY17EFY18EFY19E
SALES ( Crs) 6,060.005,994.007,119.008,683.00
NET PROFIT (₹ Cr)(104.10)(5.40)75.90137.50
EPS () (1.40)(0.1)1.001.80
PE (x)(102.60)(786.0)147.7048.90
P/BV (x)11.3011.5010.708.80
EV/EBITDA (x)30.8030.1021.5017.60
ROE (%) (16.20) (0.6)7.8012.70
ROCE (%)3.507.6010.6012.30

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*As the author of this blog I disclose that I do not hold  ADITYA BIRLA FASHION AND RETAIL 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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I confirm that I shall not deal or trade in securities mentioned in this article within thirty days before and five days after the publication of this article. I also confirm that I will not deal or trade directly or indirectly in securities mentioned in this article in a manner contrary to the ideas put forth in the article. I have not received any financial compensation for writing this article.
 

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Tuesday, January 3, 2017

HUHTAMAKI PPL LTD: POWER PACK STOCK !!!

Scrip Code: 509820 PAPERPROD
CMP:  Rs. 240.30; Market Cap: Rs. 1,747.26 Cr; 52 Week High/Low: Rs. 326.45 / Rs. 176.00
Total Shares: 7,27,11,934 shares; Promoters : 3,99,79,253 shares – 63.78 %; Total Public holding : 2,27,07,937 shares – 36.22 %; Book Value: Rs. 84.71; Face Value: Rs. 2.00; EPS: Rs. 12.36; Dividend: 140.00 % ; P/E: 19.44 times; Ind. P/E: 22.66; EV/EBITDA: 7.77.
Total Debt: Rs. 528.64 Cr; Enterprise Value: Rs. 2,136.06 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 from 60.77 % to 63.78 % by acquiring 1,88,48,087 shares or 3.01 % stake from Mr. Suresh Gupta, Chairman of HPPL, at a total consideration of Rs. 169.63 Cr or Rs. 90 per share. Further, 1,00,24,744 equity 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 & 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. The company mainly caters to the premium segment of packaging and enjoys 60 % of market shares in premium segment. Its major clients include Britannia, Hector Beverages (Paper Boat), Cadbury, Castrol, Coca Cola, Dabur, Emami, Eveready, GSK, Godrej, Hindustan Unilever, ITC, Marico, Nestle, Pepsi, Perfetti, P&G, Tata Tea, TTK-LIG, Wipro etc. The top ten clients only accounts for 60 % of the HPPL’s revenues. Product-wise, Laminates and Converted, Coated & Uncoated Paper and Films category accounts for a major portion of HPPL’s total revenues. HPPL derives around 80 % of its revenues from the domestic market, while exports account for the balance 20 %. 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. Holograms are also popular as a deterrent against counterfeits for product protection. The packaging industry in India is expected to reach $ 73 billion in 2020 from $ 33 billion in FY 16. In the coming years, Indian packaging industry is anticipated to register 18 % annual growth rate, with the flexible packaging and rigid packaging expected to grow annually at 25 % and 15 %, respectively. The Indian packaging industry constitutes about 4 % of the global packaging industry. The per capita packaging consumption in India is quite low at 4.3 kgs, compared to countries like Germany where it is 42 kgs and Taiwan where it is 19 kgs. However, organised retail and boom in e-commerce, which offer huge potential for future growth of retailing, is giving a boost to the packaging sector. Today, plastics are the material of choice in packaging for the sectors such as FMCG, food and beverages, pharmaceuticals etc. Globally, plastics comprise of 42 % of packaging with the combination of rigid and flexible plastics in packaging. Plastics are used heavily for packaging due to innovative visual appeal for customer attraction and convenience. Additionally, they improve the hygiene quotient and shelf-life of the products especially in food and beverages segment. As plastics possess versatile properties it can help us do more with less. One such property is light weight. As plastics are light in weight, they have a high product to package ratio which results in lighter weighed end product. For example, only 1.5 pounds of flexible plastics can deliver approximately 60 pounds of beverage; compared to three pounds of aluminium or 50 pounds of glass. Thus, plastic packaging enables in shipping more products with less packaging material. And also brings down the fuel consumption and the overall transportation cost. Huhtamaki PPL Ltd is setting up a new Flexible Packaging manufacturing unit in Assam which is likely to be commissioned during the first half of 2017, to better service its customers based in North East India. The Company's subsidiary, Webtech Labels Private Limited, is setting up a new label manufacturing unit in Sikkim, to service its customers based in North East India and likely to be commissioned during the first half of 2017. Further, the main Label manufacturing unit of Webtech Labels, located at Mahape, Navi Mumbai, primarily catering to Pharma companies will be relocated to a new state of the art facility in the Greater Mumbai Region by the end of 2017. The combined value of these investments/modernisation is expected to be appx. Rs. 65 crores. 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: 
Huhtamaki PPL Limited (HPPL) is a part of Huhtamaki Oyj, Finland and is known for packaging since the company was founded in 1935. Today, HPPL offers a wide portfolio of packaging solutions that include Flexible Packaging, including a variety of Pouching Solutions, Labelling Technologies, Shrink Sleeve solutions, Specialised Cartons, Cylinder Engraving and Specialised Films for high barrier. And all this supported by Packaging Machine Expertise, to provide you with Total packaging solutions. Today HPPL is like One Stop Shop in a true sense. HPPL has a thriving International business, an area of high focus across its technology groups. With 13 state of the art, fully integrated manufacturing facilities at Thane, Silvassa, Hyderabad, Rudrapur, Navi Mumbai, Parwanoo, Khopoli, Taloja, Ambernath, Banglore; a highly skilled and experienced team, HPPL is capable of working with you from product inception to the super market and with complete control and confidentiality. Through close collaborations with customers in developing innovative packaging solutions, HPPL delivers truly meaningful brand experiences for consumers. HPPL’s technical excellence and superior quality standards help its customers in improving aesthetics, increasing shelf life & handling transportation of their products. HPPL is a pioneer and the market leader in flexible packaging in India and has a market share of 60 % in premium flexible packaging business and about 9 % overall in the organized market, which is of about $2 billion by size. It has currently, installed capacity of for paper & films is about 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. India is a growing market for plastics and consumes about 12.8 million metric tonnes (MMT) of plastics annually against global consumption of 285 MMT per year. The plastics and polymer consumption is growing at an average rate of 10 %. About 30,000 processing units with 113,000 processing machines have created manufacturing capacity of 30 MMT per annum in India. This has been achieved with a 13 % CAGR of processing capacity during last 5 years. The industry has invested $5 billion in the machinery and it is expected to invest $ 10 billion more for increasing the capacity during the next 5 years. The per capita consumption of polymers in India during 2014-15 was just 10.5 kg as compared to 109 kg in USA, 45 kg in China and 32 kg in Brazil. India is expected to be among the top ten packaging consumers in the world by 2016. The low level of per capita plastics consumption in India is indicative of the massive growth potential of the plastic industry. Give n the rising consumerism and modern lifestyles, it is expected that per capita consumption will be doubled in the next five years. On financial side the company’s net profit stood at Rs. 16.79 Cr as against Rs. 15.97 Cr in the corresponding quarter ending of previous year, an increase of 5.13 %. Revenue for the quarter rose by 6.76 % to Rs. 557.47 Cr from Rs. 522.19 Cr, when compared with the prior year period. During the quarter, company reported EBIDTA of Rs. 59.94 Cr as against Rs. 55.33 Cr in the corresponding period of the previous year, up by 8.33 %. During Q3 CY16, Profit before tax up by 38.26 % to Rs. 29.09 Cr from Rs. 21.04 Cr in Q3 CY15. EPS of the company stood at Rs. 2.31 a share during the quarter, as against Rs. 2.20 over previous year period. During 9M CY16, Net sales up by 9.66 % to Rs. 1,655.26 Cr from Rs. 1,509.39 Cr in 9M CY15. During the nine months ended 2016, net profit was increased by 23 % to Rs. 69.33 Cr from Rs. 56.37 Cr over the nine months ended 2015. Net Sales PAT of the company are expected to grow at a CAGR of 23 % and 17 % over 2014 to 2017E, respectively. Huhtamaki PPL Ltd is setting up a new Flexible Packaging manufacturing unit in Assam which is likely to be commissioned during the first half of 2017. 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. At the current market price of Rs. 240.30, the stock is trading at a PE of 19.66 x FY16E and 16.50 x FY17E respectively. The company can post Earnings per share (EPS) of Rs. 12.22 in FY16E and Rs. 14.56 in FY17E. It is expected 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) 1,225.342,037.382,229.452,474.69
NET PROFIT (₹ Cr)66.6076.9388.85105.89
EPS () 9.1610.5812.2214.56
PE (x)25.5622.1319.1616.08
P/BV (x)3.012.762.422.10
EV/EBITDA (x)12.007.777.136.36
ROE (%) 11.02 12.7813.1213.44
ROCE (%)28.6932.0732.0032.42

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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. 

As a Disclosures I Confirm that : 
I confirm that I shall not deal or trade in securities mentioned in this article within thirty days before and five days after the publication of this article. I also confirm that I will not deal or trade directly or indirectly in securities mentioned in this article in a manner contrary to the ideas put forth in the article. I have not received any financial compensation for writing this article.
 

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