IGI Logo

On the cusp of recovery…

Huhtamaki India (HIL) is one of the leading manufacturers of flexible packaging company in India. The company is backed by strong parent group Huhtamaki Oyj (~68% stake in HIL), which helps HIL to leverage its technical know-how and launch sustainable packaging solutions for its clients. Going forward, under its 2030 strategy HIL aims to 1) regain market share through launch of innovative and sustainable packaging solutions 2) Drive profitability through cost optimisation measures 3) achieve efficient working capital management by strengthening supply chain management. We believe strong client base (such as Nestlé, Coca-Cola, Unilever, etc), launch of innovative products (backed by strong R&D of parent) & focus on profitable growth will drive the overall performance of HIL. On a favourable base, HIL may witness 3x growth in its PAT over CY22-24E, supported by revenue CAGR of ~6% and EBITDA margin recovery of ~300 bps.

Triggers

Focus on sustainability, innovation to drive performance

The Indian flexible packaging industry is likely to grow at 10.6% CAGR to ~US $12.7 billion from FY21-25 led by strong demand from F&B, pharma and consumer goods segment. Riding on these industry tailwinds, HIL is enhancing its focus on developing sustainable & innovative packaging solutions, scaling up its core businesses and plans expanding in the emerging markets. The company is consistently focusing on creating circular sustainable packaging solution under its “Blueloop” product category. To cater its major customers’ commitments to achieve 100% recyclable packaging solutions, HIL also plans to launch various other innovative products over CY22-24E. All these factors combined are likely to aid the company in regaining its market share. In addition, HIL’s revenue from exports has grown at a CAGR of ~11% over CY19-22 and now contributes ~28% to its overall revenue. We believe robust global supply chain network along with strong backing of parent in launching innovative products will aid HIL in gaining market share globally.

Easing raw material prices to aid margin recovery

HIL’s EBITDA margin saw a sharp decline from its pre-Covid level of 11.3% in CY19 to 5.3% in CY22. EBITDA margin contraction was mainly on account of lower gross margin amid sharp increase in raw material prices & delay in taking price hikes. However, prices of LDPE & PVC have seen a sharp dip from their peak of | 145 & | 126 in CY22 to | 96 & | 90 levels, respectively, as on date. We believe easing raw material prices coupled with focus on innovative products will help drive EBITDA margin up by ~300 bps over CY22-24E. In addition, HIL is undertaking various cost optimisation measures under its ‘Project Parivartan’, which will further aid in EBITDA margin recovery.

Improved profitability to drive return ratios

HIL’s return ratios witnessed a sharp fall in CY19-22 dragged by lower profitability and higher debt/equity led by increased working capital requirements. Going forward, we believe recovery in profitability & stringent working capital management will help drive RoCE, RoE to ~19%, ~17% by CY24E. We also believe monetisation of land banks (near Mumbai) will further help reduction in overall debt level.

Valuation & Outlook

In the last two years, HIL has faced EBITDA margin pressure due to sharp increase in raw material prices and delay in price hikes. Going forward, we believe that easing of raw material prices, focus on launching innovative products will be key drivers of revenue & margin recovery in CY23-24E. On the balance sheet front, the company has maintained a stable debt/equity ratio of 0.5x along with efficient working capital. We believe improved profitability will help in driving return ratios, going forward. We value the stock at | 280 i.e. 15x P/E on CY23E-24E average EPS of | 19. We re-initiate coverage on the company with a BUY rating on the stock.

To Read Complete Report & Disclaimer Click Here

https://secure.icicidirect.com/Content/StaticData/Disclaimer.html

Above views are of the author and not of the website kindly read disclaimer