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Growth in the FMCG and Pharma consumption to drive growth for HIL.

Huhtamaki India Ltd’s (HIL) business growth is highly dependent on the growth in the FMCG and pharma consumption as majority of the revenue of the company is generated from these sectors. Indian FMCG sector is expected to grow at a CAGR of ~15% to reach USD 220 Bn by 2025. Covid-19 pandemic has lead to increase in demand for FMCG and Pharma products. We expect continued growth in demand for FMCG and Pharma, leading to increase in demand for flexible packaging.

Improvement in margins by adding new products through a continued focus on innovation.

In the consumables sector, constant innovation and product development is the key to increased customer orders, margins and realizations. In line with the effort of increasing the profitability and realization, HIL has shifted its focus from just being a supplier to being a major contributor in the growth of the consumer space. Additionally, HIL has focus on increasing share of premium innovative products which contributed ~25% of the total revenue in CY2018.

Geographical diversification in both the domestic markets and international markets.

HIL derives ~20% of its revenues from exports to countries like, Africa, Middle East, SEA, North and South America, LATAM. HIL to focus on increasing export share, which is more lucrative, that provides geographical diversification and natural forex hedge. The company also has a pan-India presence with 18 state of the art manufacturing facilities, with an installed capacity of ~1,58,000 MT, across the country. Many of them are strategically located near client’s manufacturing site, which facilitates quick turnaround and reduced logistics cost.

Robust Financial with a considerable dividend payout to attract more investors.

In the last 5 years, the solvency profile of HIL has improved considerably. The Debt to Equity ratio is down at 0.39X in CY19 from 1.17x in CY15, as the long-term debt level has came down from INR 434 Crore in CY15 to INR 101 Crore in CY19. The Net D/E ratio has improved to 0.24x in CY19 from 0.68x in CY15. HIL has maintained consistency in dividend payment and also it has gradually increased its dividend payments over the years. In the last 4 years, HIL has distributed ~13 - 65% of its profits as dividends.

OUTLOOK & VALUATION

We believe that the growth in the FMCG and the Pharma segment due to increased demand from consumers will be one of the major factors in the growth of the business of HIL. Additionally, innovation packaging products which form ~25% of the company’s total topline coupled with geographical diversification will have a substantial positive impact on the margins of the company. The strong and superior financials will enable the company to tackle any adverse factors in the industry with ease.

Hence, For CY21E to CY22E we expect the company to deliver sales growth of 10% in both the years. In addition to the growth in the revenue, we expect the company to deliver strong EBITDA and PAT margins of 11.5% and 5.9% by CY22 respectively. EPS for CY21E and CY22E is projected to be ~Rs. 15.39 and Rs. 23.31 respectively. Thus, we initiate coverage on Huhtamaki India Ltd with a BUY rating and assign a P/E multiple of 17X we arrive at a target price of Rs. 396 which provides an upside of ~41% from the current market price of Rs. 280.

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