HUHTAMAKI PPL Ltd : TOTAL PACKAGING SOLUTIONS !!!

DEAR READER FRIENDS, 

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A VERY HAPPY DUSSEHRA !!!!

Scrip Code: 509820 / PAPERPROD

CMP:  Rs. 188.00; Buy at current levels.

Short term Target: Rs. 250; Medium to Long term Target: Rs. 400; STOP LOSS – Rs. 173.00 (for short term players only) ; Market Cap: Rs. 1,178.51 Cr; 52 Week High/Low: Rs. 211.70 / Rs. 59.85

Total Shares: 6,26,87,190 shares; Promoters : 3,99,79,253 shares – 63.78 %; Total Public holding : 2,27,07,937 shares – 36.22 %; Book Value: Rs. 53.79; Face Value: Rs. 2.00; EPS: Rs. 8.19; Dividend: 140.00 % ; P/E: 22.95 times; Ind. P/E: 24.03; EV/EBITDA: 11.41.

Total Debt: Rs. 19.21 Cr; Enterprise Value: Rs. 1,182.29 Cr.

HUHTAMAKI PAPER PRODUCTS 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, ITC, 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, 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. Flexible Packaging & Labelling is done at all facilities of HPPL, while Cartons are produced only at Hyderabad facility & Tube Laminates are produced only at Silvassa. 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. Economic growth and rising personal disposable income are growth drivers for the consumer goods sector, which in turn improves the demand for packaging. The Packaging industry is expected to grow around 10-12 % CAGR in the medium term. With Growing rural demand, retail push, planned investments by large MNCs in the FMCG business and with the strong fundamentals of the Indian economy, will boost the growth in FMCG and this will consequently boost the growth for Flexible Packaging. As per Indian Brand Equity Federation (IBEF), FMCG industry in India is expected to grow at a CAGR of 14.7 % between 2012 and 2020, which will also help the growth of the packaging industry. With the increasing penetration in the rural and semi-urban areas along with the Government initiatives to boost the rural infrastructure is likely to improve the demand for FMCG products, thus in turn would indirectly will benefit the specialized flexible packaging players like HPPL, who offers value addition in the form of both product specific like high speeds on product filling lines, insulation from heat & moisture, high strength for supporting long distance transportation, holographic images & custom designed packaging solutions like brand image protection, protection from counterfeit and cost effectiveness. The management has indicated that certain trends like - use of plastic tubes instead of metal tubes and PET bottles instead of glass bottles would drive its addressable markets. Recent trend of using pouches instead of rigid packs for hair/edible oils would expand its market size further. With its strong parental support, HPPL has been able to introduce new product segments in India like Tube laminates, which is growing at a decent rate. For Huhtamaki group India remains one of the key focus markets, and this is evident from the increase in stake in HPPL over the last few months. Parental support would enable HPPL to widen its product portfolio. The parent or its group companies does not receive any substantial amount from HPPL except for commission expenses Rs. 77 lakhs on sale to South African Group Company. This indicates minimal transfer of profits from the Indian operations to the parent company, which is beneficial for the minority shareholders of HPPL.

Outlook and Valuation:

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 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. In July 2014, HPPL acquired 100 % stake in Positive Packaging Industries Ltd. (PPIL was the part of Essel Group) for an enterprise value of Rs. 818 Cr inclusive of debt of Rs. 270 Cr. The transaction is expected to be closed in Q4CY14 and is likely to be funded through a mix of internal accruals, equity allotment. PPIL offers packaging solutions offers same products like HPPL. PPIL has 6 facilities in India: 2 in Bangalore, 2 in Ambarnath, 1 each in Taloja & Khopoli, which has been taken over by HPPL and 3 overseas facilities of PPIL, has been taken over by the parent company Huhtamaki. The current total installed capacity of PPIL in India is 45,000 TPA. With the acquisition of its competitor PPIL, HPPL is all set to become market leader in this space. This acquisition would almost double the HPPL’s turnover and it is likely to be an EPS accretive from the first year of acquisition itself. While the acquisition has increased the debt-equity of HPPL to 0.8x in CY14 from 0.1x in CY13, it is expected that the company will gradually repay its debt out of the strong cash flow generation expected over the next few years. The acquisition of competitor PPIL also enable HPPL gain further bargaining power with its customers, and will help to extend its customer network and would also help synergies in sourcing of inputs and up-gradation in technology. Huhtamaki Group has 100 % stake in almost all of its subsidiaries. The hike in holding by Huhtamaki in PPL since Feb 2014 from 60.8 % to 68.8 %, and with the change in name of the company from Paper Products to Huhtamaki PPL and with the fact that Huhtamaki has now complete control over almost all its subsidiaries signals that, Huhtamaki could probably look to delist HPPL in medium to long term period. Supported by parent company who is one of the world leaders in this sector, HPPL will have fullest support on innovations & technological side. On Financial side, HPPL has shown steady growth in the past and has maintained distributing its profits in form of dividends regularly. 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 ratio and Price to Book Value basis, HPPL is relatively expensive than Uflex. This is possibly due to the competitive advantage that HPPL enjoys over Uflex. 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 curent market price of Rs. 188.00, HUHTAMAKI PPL Ltd stock trades at P/E ratio of 14.46 x FY15E and 10.00 x FY16E respectively. Company can post Earning per share (EPS) of Rs. 13.00 for FY15E and Rs. 18.80. One can buy this stock with a target price of Rs. 250 for the shorter term and Rs. 400.00 for Medium to Long term investment. 

KEY FINANCIALS	FY13	FY14E	FY15E	FY16E
SALES (₹ Crs)	1,074.80	1,398.71	2,650.71	3,061.03
NET PROFIT (₹ Cr)	51.22	63.88	94.48	136.80
EPS (₹)	8.20	8.80	13.00	18.80
PE (x)	22.40	20.90	14.10	9.70
P/BV (x)	2.90	1.50	1.40	1.30
EV/EBITDA (x)	8.80	12.30	6.70	5.30
ROE (%)	13.10	7.20	9.90	13.70
ROCE (%)	19.60	6.60	12.40	16.30

I would buy HUHTAMAKI PPL LTD for Medium to Long term for target of Rs. 400.00 and for the shorter term the target would be Rs. 250.00. As I always say, I am a long term believer in markets & I do respect the markets and will keep a strict stop loss of ₹ 173.00 (for short term players only) on every purchase. (Why Strict stop loss of 8 % ?) - Click Here

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