the paper products: the power of undervalued stock

04 January 2014

1 Blog: http://dharmawat.blogspot.com/

The Paper Products

The power of flexible packaging

The power of undervalued stock

A presentation by: Niteen S Dharmawat

at Equity Pune gathering…

Recap… & some updates…

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What was said:

Election year performance:

Mar 2013 when the market was @18500

Predicted that market does not give negative returns during election year

Result:

Broader market delivered 13.5% in last 10 months

Going forward:

Need to be extremely cautious

For broader market, I am not very optimistic going forward… Reasons…

Blog: http://dharmawat.blogspot.com/

Discussed it in one of the last meetings… and we are dot on….

3 Blog: http://dharmawat.blogspot.com/

“Someone is sitting in the shade today because someone planted a tree a long time ago.”

Warren Buffett

About Paper Products

4 Blog: http://dharmawat.blogspot.com/

Background…

Established in 1935

Today India's leading Consumer Packaging company

Offers total packaging solutions: Flexible Packaging, Labelling Technologies and Specialised Cartons.

A proxy to FMCG industry

Presence in all the four regions of Indian market

Fully integrated, state of the art manufacturing facilities at Thane, Silvassa, Hyderabad and Rudrapur

Highly skilled and experienced staff

Capable of working from product inception to the super market and with complete control and confidentiality.

Strong case to invest in Paper Products

5 Blog: http://dharmawat.blogspot.com/

Key points…

Growing Indian flexible packaging market

Assocham: India's packaged food industry likely to double to $30 billion by 2015 on the back of arrival of MNCs in the sector and modern retail trade

Favorable shift in demographics

Growing demands for consumer goods.

The new Food Safety and Standards regulations

Thrust on food processing and food safety

Growth in rural demand

Organic & inorganic growth in the Indian market

Paper Products…

6 Blog: http://dharmawat.blogspot.com/

Financial @a glance…

Revenue grew from 532Cr to 960Cr in last 5 years

Only one drop in revenue in 2009 else healthy growth

Book value of 56 (Dec 2012). A buying price close to 65 will be good for the stock.

PE: 9.40. Dividend yield 3.57

Consistent paying dividend for last several years.

ROE in double digit except in 2008

Year Dec 2012 Dec 2011 Dec 2010 Dec 2009 Dec 2008 Dec 2007

ROE(%) 13.28 17.05 12.97 14.89 8.89 12.44

Dividend Per share (INR)* 2.6 2.4 2.2 3.0** 1.8 1.8

Revenue (Cr) 961 793 704 577 612 532

NP (Cr) 45 53 48 37 21 28

Free cash flow (Cr) 105 140 78 107 102 97

* adjusted for any split/bonus

** Includes One Time Dividend of Rs1

Paper Products…

7 Blog: http://dharmawat.blogspot.com/

Financial @a glance…

Very strong financials:

Low debt company . Total debt less than INR 50Cr.

V/S

Investments in Mutual fund about INR 60Cr & Cash and Bank Balances about INR 15Cr

Market Cap 457Cr v/s Revenue of 960Cr & NP of 45Cr

Promoters and key public shareholders consistently increasing their stake (see subsequent slide)

Paper Products…

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OCF 64 85 45 67 65 31

Signal

Parameter Dec 2012 Dec 2011 Dec 2010 Dec 2009 Dec 2008 Dec 2007

Net profit 45 53 48 37 21 28

In INR Crores.

Blog: http://dharmawat.blogspot.com/

Net Profit (NP) V/S Operating Cash Flow (OCF)…

Remember Opto Circuit & Arshiya Int., we predicted the death of these companies.

OCF 119.48 -28.05 -9.38 13.83 -10.19 -15.50

Signal

Parameter Mar 2012 Mar 2011 Mar 2010 Mar 2009 Mar 2008 Mar 2007

Net profit 47.51 24.93 15.40 18.49 12.36 3.98

Arshiya International: from 130 to now 17

CFO 126 130 178 115 40

Signal (Red)

Parameter Mar 2012 Mar 2011 Mar 2010 Mar 2009 Mar 2008

Net profit 573 368 260 209 131

Opto Circuit: from 140 to now 25

Parameter Sep 2013 Jun 2013 Mar 2013 Dec 2012 Sep 2012 Jun 2012

Promoters’ SHP 63.78 63.70 63.70 63.70 63.70 63.70

Signal • Healthy promoters’ holding • Bought 50,100 shares between Jun-Sep2013 by Chairman & MD @avg price of Rs60.45 • No pledging…

Paper Products…

9 Blog: http://dharmawat.blogspot.com/

Parameter Sep 2013 Jun 2013 Mar 2013 Dec 2012 Sep 2012 Jun 2012

Trend of Public SHP > 1%

8.21 8.19 8.13 8.13 7.98 6.17

Signal

• ‘Strong’ investors with deep pockets moving into the stock: bought abut 12.78 Lac stocks in 15 months

• Three public investors with more than 1% holding include: HDFC Trustee Company, Shree Capital Services Ltd and Dolly Khanna.

Shareholding Pattern (SHP)…

SHP Pledged 32.13 23.87 25.36 17.97 17.47 11.01

Signal

Parameter Sep 2012 Jun 2012 Mar 2012 Dec 2011 Sep 2011 Jun 2011

SHP Unpledged 12.46 19.36 17.87 25.26 25.73 32.19

Opto Circuit: from 140 to now 25

Product groups servicing include:

10 Blog: http://dharmawat.blogspot.com/

A proxy to FMCG

Soaps and Detergents

Shampoos

Noodles

Biscuits

Coffee, Tea, Milk powder

Baby Foods

Chocolates

Juices

Product categories

11 Blog: http://dharmawat.blogspot.com/

A proxy to FMCG

Product categories

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A proxy to FMCG

Some customers include…

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A proxy to FMCG

Paper Products is a part of an MNC

Parent Company: Huhtamaki

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“You only have to do a very few things right in your life so long as you don't do too many things wrong.”

Warren Buffett

Paper Products is a part of Huhtamaki

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Huhtamaki…

Huhtamaki headquartered in Finland

Revenue Euro 2.4 billion

14,200 employees

60 manufacturing units

One of the top 10 consumer packaging companies in the world

A market leader in several product categories.

Huhtamaki businesses in brief

16 Blog: http://dharmawat.blogspot.com/

Huhtamaki…

Huhtamaki Key Customers

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Huhtamaki…

Huhtamaki Key Customers

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Huhtamaki…

For Paper Products: Cross selling opportunities…

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Huhtamaki…

For Paper Products: Advantage ‘Huhtamaki’

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Huhtamaki…

Huhtamaki’s 60% of net sales to emerging markets when taking exports into account

2012-2020: global population expected to grow by 750 million

94% of this growth in developing countries

2012-2020: global consumer expenditure to grow by USD 23 trillion

74% of this growth in developing countries

21 Blog: http://dharmawat.blogspot.com/

“I never attempt to make money on the stock market. I buy on the assumption that they

could close the market the next day and not reopen it for several years.”

Warren Buffett

Stock price movement

22 Blog: http://dharmawat.blogspot.com/

A stagnant stock…

* adjusted for any split/bonus

Price is the closing price at the end of the year

Stock price: www.bseindia.com

Stagnant during last 7 years

More than 6 times in 5 years.

Parameter Dec 2012 Dec 2011 Dec 2010 Dec 2009 Dec 2008 Dec 2007

Net profit (Cr) 45 53 48 37 21 28

Revenue (Cr) 961 793 704 577 612 532

Stock Price (INR) 72 60 57 60 31 73

23 Blog: http://dharmawat.blogspot.com/

“Price is what you pay. Value is what you get.”

Warren Buffett

Competitive advantages: Paper Products

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Paper Products…

Global presence

High focus on NPD and continuous innovation

Strong technical knowhow

Product portfolio - depth & width

Management team

Focus on both organic and inorganic growth: last year took majority stake in WebTech Labels, a leader in the Indian

high-end pressure sensitive label sector. Annual sales:75Cr.

What to expect in 2014: Paper Products

25 Blog: http://dharmawat.blogspot.com/

Paper Products…

1. Drive global sourcing initiatives

2. Improve utilization of Asian base for exports

Huge business opportunity for Paper Products

As per Huhtamaki’s latest announcements:

Why a strong case in favor of ‘India’ compared to other ‘Asian countries’:

Making constant investments in expanding capacities

Depreciation of INR and appreciation of Chinese Yuan against international currencies

Started manufacturing facility at fourth location in India

Acquired majority stake in WebTech Labels recently

Translates into

Recent news: Paper Products

26 Blog: http://dharmawat.blogspot.com/

Is it an indication of future events?

30th-Nov-2013

Change of Registered Office: from Nariman Point to BKC

31st-Dec-2013

Sale of Office premises: Sold a small office property in Nariman Point, Mumbai at a consideration of Rs. 723 Lacs.

Holding about 7acres of prime land in Thane. Conservatively valued at INR 500Cr+.

Risks and Mitigations…

27 Blog: http://dharmawat.blogspot.com/

Risk => Rewards?

1. Imports => INR 137Cr (raw material),

Exports => 169Cr provides cushion to currency risk

2. Volatility in price of Raw Materials, fuel cost and transport cost and supply of uninterrupted power

3. FMCG companies shifting suppliers purely on price considerations

Investments in emerging technologies and capacities to exploit the opportunities and mitigate risks.

Continuous improvements in operations, safety and hygiene standards, supply chain and working capital management.

Flagship programs like NASP (New Applications, Structures, Products and Processes) to counter competitive pressures. This focuses on growth through innovation and value engineering.

Working on numerous projects with customers with a global footprint with active help and support from the Global NPD team of Huhtamaki Flexibles.

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About the presenter: Niteen is an MBA and cleared CFA Level 2, CFA Institute USA. A firm believer in long-term financial planning, and a 20 years veteran of the stock market, he likes to analyse the economy, and individual stocks. He also conducts investor education sessions. He likes reading books/magazines/news papers on the topics as diverse as general management, technology, investment, fiction, marketing and the Gita. He is a person who believes in "Everything else can stop but learning".

Blog: http://dharmawat.blogspot.com/

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IMPORTANT DISCLAIMER: Investment in equity shares has its own risks. Sincere efforts have been made to present the right investment perspective. The information contained herein is based on analysis and up on sources that I consider reliable. I, however, do not vouch for the accuracy or the completeness thereof. This material is for personal information and I am not responsible for any loss incurred based upon it & take no responsibility whatsoever for any financial profits or loss which may arise from the recommendations above. I sincerely request you to do your homework before you take any position whatsoever. I, my relatives or friends may have/have positions in the stocks discussed here.

Thank you

Email: niteen.dharmawat@gmail.com

Mobile: 9850571857

Blog: http://dharmawat.blogspot.com/

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