Brokerage house CD Equisearch is bullish on Huhtamaki PPL and has recommended buy rating on the stock with a target price of Rs 311 in its research report dated August 25, 2015.
The flexible packaging business in India is highly fragmented in nature. Total market size in India is ~Rs 240bn (~1.2mt-1.4mt) and thus the topmost players ( in the organized sector ) put together account for less than 16% of the industry. As much as 50% of the industry is still unorganized. Flexible packaging largely caters to FMCG companies (mainly in F&B and personal care) and growth has been 12%-13% in the past few years with the unorganized segment also growing at a decent pace. Huhtamaki PPL has all the top FMCG companies in India (in food and personal care segments) as its customers including HUL, Colgate-Palmolive (India), Britannia Industries etc. Capacity utilization level in the industry is typically 75-85% and the due to lower margins the capacity expansion plans are on hold.
As the leader in consumer packaging, HPPL’s business outlook is naturally affected by the health and buying behavior of the leaders in the FMCG and healthcare sectors, by the state of the consumer economy, and the acceptance and demand of the offered range of flexible consumer packaging materials. Over last two years rural demand sluggishness mainly due to unpredictable monsoon has hurt the FMCG industry’s growth. Huhtamaki PPL’s income from operations has still managed to grow by 20.5 % in CY13 and 12.88% in CY14. Income from operations in CY14 stood at Rs 1225.33 crore versus Rs 1085.5 crore in CY13. For CY15 we expect the same to be around 2175 crore (not comparable to CY14 due to acquisition of Positive Packaging) and going forward we expect a CAGR of 12% over next 2 years. About 28% of the income at the consolidated is derived from exports, (majority of which are to the African countries). Hence slowdown in those economies and forex fluctuation continue to remain a concern for the company.
The business sentiment, at the least for the near term has improved, with a majority Government at the center, the Indian economy being re-rated, inflows into stock exchanges, amongst other things. There is a lot of scope for growth in the FMCG sector from rural markets with consumption expected to grow in these areas as penetration of brands increases. Also, with rising per capita income, which is projected to expand at a CAGR of 7.4 per cent over the period 2013-19, the FMCG sector is anticipated to witness some major growth.
Through the calendar year 2014, the company took steps necessary for making the largest acquisition inthe consumer packaging space in India to date. On 30th January 2015, they completed the acquisition of Positive Packaging Industries Ltd – through a 100% equity buyout at an enterprise value of Rs 794 crores.. Combined team of HPPL and Positive, driven by a strong culture of innovation, high ethical values and strong customer focus will provide the customers unmatched competencies and expertise in flexible packaging. Moreover, the company’s innovation program - NASP (New Applications, Structures and Products/Processes) has become an entrenched part of the company’s culture.
"The stock currently trades at 20.4x CY16e EPS and 16.1x CY17e EPS. We expect earnings growth to pick up as result of acquisition of Positive Packaging. Hence, we assign ‘buy’ rating on the stock with a target of Rs 311 based on 20x FY17e EPS within a time period of 12 months", says CD Equisearch report.
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