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Proxy play on the domestic FMCG and Pharma sector.

The company’s business operations almost entirely depends on the growth in the FMCG and Pharma sectors as they are the largest consumers for the products manufactured by Uflex. By the year 2025, the FMCG sector is expected to grow at a CAGR of 15% to USD 220 Bn and owing to the effects of the pandemic the pharma sector is also expected to rise to USD 65 Bn by 2024 and USD ~120 Bn by 2030. Owing to the growth in the Pharma and FMCG sectors the flexible packaging sector is expected to growth at a CAGR of 15-16% by 2025 which can provide immense business opportunities for the company. Hence, for the years FY22 and FY23 we expect the revenue of the company to grow at a rate of 12% and 10% to Rs. 9,957.6 cr and 10,953 cr respectively.

Strong balance sheet and robust operational profile.

Compared to the years FY19 and FY20 the company’s operating margins have increased substantially from 12.4% in FY19 to 20.3% in FY21 and we expect the trend to continue for the year FY22 and FY23. the company’s debt equity ratio has also reduced from 0.72 in FY20 to 0.64 in FY21 and we expect the ratio to be around 0.50 and 0.40 respectively for FY22E and FY23E. Additionally, the company also has not only shown a substantial improvement in the ROCE and ROE.

Product innovation and additions cumulated with strong manufacturing capabilities may provide an additional competitive edge.

In the consumables sector, constant innovation and product development is the key to increased customer orders, margins and realizations. In line with an effort to achieve the same the company strives to introduce innovative products in the market that can provide a competitive edge. Additionally, the company has a strong network of manufacturing facilities which enables it to meet the demand of the customer in the most optimum manner where the capacity for packaging films: 381,000 TPA and packaging products: 135,000 TPA.

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 for Uflex Ltd. Additionally, innovation in packaging products coupled with geographical diversification and manufacturing capabilities will have a substantial positive impact on the margins and business operations of the company. The strong and robust financials will enable the company to tackle any adverse factors in the industry with ease. Hence, for FY22E to FY23E we expect the company to deliver sales growth of 12% & 10% respectively. In addition to the growth in the revenue, we expect the company to deliver strong EBITDA and PAT margins of 21% and 10.6% respectively in FY23E. Our estimates for EPS for the year FY22E & FY23E is projected to be ~Rs. 133.75 and Rs. 153.90 respectively. Hence, we initiate coverage on Uflex Ltd and assign a P/E multiple of ~4.75X with a BUY rating, we have arrived at a target price of Rs. 731.0 that provides an upside of ~38% from the current market price of Rs. 530.5 within an investment horizon of 18 to 24 months.

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