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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 industry 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 FY23 and FY24 we expect the revenue of the company to grow at a rate of 5% and 7% to Rs. 13,783.5 cr and Rs. 14,748.3 cr respectively.

STRONG BALANCE SHEET AND ROBUST OPERATIONAL PROFILE

Compared to previous years the company’s operating margins have increased substantially from 12.4% in FY19 to 16.5% in FY22 and we expect the trend to continue for the year FY22 and FY23. The company’s debt equity ratio has also been stable at 0.7X in FY22 we expect the ratio to be come down to 0.6X and 0.5X respectively for FY23E and FY24E. Additionally, the company also has not only shown improvement in ROCE and ROE.

PRODUCT INNOVATION AND CAPACITY 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 FY23E to FY24E we expect the company to deliver sales growth of 5% & 7% respectively. In addition to the growth in the revenue, we expect the company to deliver strong EBITDA and PAT margins of 17.2% and 8.6% respectively in FY24E. Our estimates for EPS for the year FY23E & FY24E is projected to be ~Rs. 162 and Rs. 175 respectively. Hence, we reinstate coverage on Uflex Ltd and assign a P/E multiple of ~4.2X with a BUY rating, we have arrived at a target price of Rs. 737 that provides an upside of ~34% from the current market price of Rs. 552 within an investment horizon of 18 to 24 months.

KEY RISK

• Increased Competition: The packaging sector is highly fragmented in India, with existence of many smaller unorganized players along with large players. The increase in competition from peers may impact margins of the company.

• Fluctuating Raw material prices: The key raw material for the company is polymers, which are highly correlated to the movement in crude prices. Though the company has a pass-through mechanism in place up-to some extent, a significant increase in crude/polymer prices can result in rise in raw material cost leading to lower gross margins.

• Delay in growth of FMCG consumption: The demand for flexible packaging is highly co-related with the growth of FMCG sector, which is the key user industry. Any unfavorable scenario like bad monsoon during a year, which might impact FMCG demand will have negative impact on the demand for flexible packaging, leading to lower revenues and decreased profitability for the company

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