Pandemic led disruptions hit performance…
Huhtamaki India’s (HIL) Q4CY20 performance was hit by pandemic led disruptions like unavailability of containers (hit export business), logistic issues and lower volume offtake of economic packaging products. Also, labelling business took a hit in Q4CY20 due to limited outdoor activities. Further, despite significant competition in the flexible packaging business HIL has refrained from taking any price cut and kept its focus on maintaining gross margins. While gross margin was up ~82 bps YoY supported by better mix, lower operating leverage dragged overall EBITDA margin down by ~356 bps YoY to 6.4%. We continue to like Huhtamaki for its innovative packaging solutions providing capacity (backed by strong R&D of parent), strong clientele base and comfortable balance sheet position (D/E at 0.3x).
Strong recovery post eased lockdown restrictions in CY20
HIL’s sales recovery was at ~95% in CY20 almost at pre-Covid level, despite ~17% revenue dip in Q4CY20. The company witnessed severe competition in the low end packaging business, which is largely price sensitive in nature. Regional players, along with other organised players have increased their market share by taking hit on realisation. However, HIL has maintained its realisation and refrained form taking any price cut for maintaining market share. According to the company, HIL has strong support from its parent (Huhtamaki Oyj) to launch innovative user friendly packaging solutions for its key clients. Huhtamaki’s ‘blueloop’ is another innovative packaging solution, which can be recycled and is well accepted by coffee, confectionery, dry food, personal & home care, etc, industries. HIL aims to increase the proportion of premium products in total revenue in the coming years along with steps to consolidate plants to drive overall EBITDA margin. We build in ~170 bps increase in EBITDA margin in CY20-22E.
Focus on emerging markets to drive growth:
Huhtamaki Oyj Huhtamaki Oyj (parent of HIL) released vision 2030 statements in which the company set a target to accelerate growth in emerging markets (in line with GDP growth rate) by launching innovative products and scaling up capacities. The company has set a target that 100% of its products should be recyclable, compostable or reusable by 2030 (that will be high margin products). The parent also aims to maintain EBIT margin at 10%+ with payout ratio of 40-50% in the long run.
Valuation & Outlook
We revise our revenue, earnings estimates downward by ~9%, 18%, respectively, considering the current quarter performance. We value the stock at | 360 i.e. 19x P/E on CY21E-22E average EPS of ~| 19 (earlier target price | 375). We maintain our BUY recommendation on the stock.
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