the paper products ltd: value, growth and good corporate...

Initiating Coverage | Packaging | 26 June 2012

Page No. 1

The Paper Products Ltd (PPL) is one of the market leaders in the Indian flexible packaging

industry with a market share of ~15% of the organized market. PPL with its state-of-the-art

manufacturing facilities, wide portfolio of packaging solutions and marquee clientele is poised for

good sustainable growth over the next decade. PPL is majority owned by the Finland based

Huhtamaki Oyj group (60.8% stake), which is one of the top 10 consumer packaging companies

in the world with a CY11 turnover of Euro 2.0 bn and operations spread across 31 countries.

Investment Arguments

Stable business model and margin profile lends consistency in cash flow and good

earnings visibility: PPL packaging products enjoys consistent demand on account of

strong underlying demand from the FMCG business, with a decent average volume growth

(8-10% YoY). The company operates on a cost plus margin business model and hence has

a stable margin profile with an EBITDA margin in the range of 9-11% (avg of last 4 yrs -

10.2%). We expect PPL’s net sales, EBITDA and Adj PAT to grow at a CAGR of 13.3%,

13.8% and 11.7% over CY11-CY13E respectively. We expect the company to generate

OCF of `1446 mn and FCF of `564 mn during the CY11-CY13E period.

Tremendous growth opportunity due to a hugely under-penetrated packaging market

and multiple growth drivers in end user industry: The flexible packaging market (20% of

the overall packaging market) is valued at $3.5 bn, with only 35%-40% of it being organised.

With an expanding middle class population, rising incomes and growth in organised retailing,

FMCG and Pharmaceuticals are expected to post robust volume growth leading to a

corresponding strong growth in flexible-packaging. Lower packaging penetration (per capita

consumption of consumer packaging in India at $2.5 against that of $51.6 in US) will also

lead to a huge structural shift from unpacked to packaged products over the next decade

(currently only 15-20% of the total goods consumed in India are in packaged form). We

expect flexible packaging growth at 1.2x – 1.4x the volume growth of the underlying demand.

Strong promoter group and solid management team helps to bring in best practices,

attract marquee clients, adapt newer technologies and processes based on shift in

consumer trends: PPL is owned by Finland based Huhtamaki Oyj group, which is one of

the top 10 consumer packaging companies in the world and has operations spread across

31 countries. The promoter group brings in best practices in terms of technology expertise,

operating efficiencies and corporate governance. Moreover, Mr Suresh Gupta, MD of PPL,

also heads the global flexible packaging business of Huhtamaki, which is strategically a big

positive. The sales geography is increasing for PPL with exports picking up in New Zealand,

Australia and South America.

Debt-free status, high dividend yield, and reasonably good return ratios: The company

has strong dividend payout policy of ~35% leading to a very good yield of ~4-5%. In

addition, the company has reasonable return ratios, with expected RoAE of 16.2% and

16.4% and RoACE of 20.2% and 20.6% in CY12E and CY13E respectively.

Valuations and Outlook: At the CMP of `65.3/share, PPL is valued at a P/E of 7.3x and 6.5x

CY12E and CY13E respectively. PPL is a quality MNC and a niche play on the packaging front,

with consistent earning growth and a healthy B/S and OCF. Given the strong business and

financial profile, strong growth prospects and that rare thing in our equity markets --

good corporate governance -- at the CMP, PPL, valued at a P/BV of 1.0x CY13E, is an

attractive opportunity. We initiate coverage on the company with BUY rating and Jun13

target of `95.0/share (based on P/E multiple of 9.0x CY13E earning).

Rating CMP Target Upside /

Downside %

BUY 65.3 95.0 45.5

Source: NSE, ABML Research

High

Risk

Ret

urn

Hig

hM

edi

umLo

w

MediumLow

Source: ABML Research

Company Data

BSE Code 509820

NSE Code PAPERPROD

Equity Capital (` mn) 125.4

Face Value (`) 2

Market Cap (` bn) 4.1

Avg Daily Volume (Qtly) 105801

52 week H/L (`) 93.2/58.0

Source: NSE, BSE

Holders Mar 12 Dec 11 Sep 11

Promoters 63.7 63.7 63.7

FIIs 0.1 1.3 2.1

MFs/Banks & FI’s 5.7 5.7 5.4

Public & Others 30.5 29.3 28.8

Source: BSE

80

100

120

140

Jun-

11

Aug

-11

Sep

-11

Nov

-11

De

c-11

Feb

-12

Ma

r-12

May

-12

Jun-

12

Rel

ativ

e P

erfo

rman

ce

Paper Products Ltd Return Sensex Return

Source: Capitaline

Sunny Agrawal

022-42333458

[email protected]

In ` mn Sales YoY (%) EBITDA

YoY (%) Adj.PAT

YoY (%)

Adj. EPS (`)

YoY (%)

EBITDA (%)

RoAE (%)

RoACE (%)

P/E (x)

EV/EBITDA (x)

P/B (x)

CY10 7,040 21.9 709 (2.5) 361 (3.3) 5.8 (3.3) 10.1 13.0 15.6 11.3 5.9 1.4

CY11 7,973 13.3 814 14.8 502 39.0 8.0 39.0 10.2 16.1 18.9 8.1 5.0 1.2

CY12E 9,175 15.1 953 17.0 561 11.6 8.9 11.6 10.4 16.2 20.2 7.3 4.3 1.1

CY13E 10,239 11.6 1,054 10.6 627 11.8 10.0 11.8 10.3 16.4 20.6 6.5 3.8 1.0

Source: Company, ABML Research

Analyst Details

Financial Snapshot (` mn)

Chart: PPL vs. Sensex

Risk Return Matrix

Shareholding (%)

The Paper Products Ltd: Value, growth and good corporate governance – A rare combination


Page No. 2

Investments Rationale

Stable business and margin profile leads to consistency in cash flow and good earning visibility

Stable demand with moderate growth in packaging products

The Paper Products Ltd (PPL) is one of the market leaders in the Indian flexible packaging industry with

market share of ~15% in organized market (market size: ~$1.3 bn). The company offers a wide portfolio of

packaging solutions that includes -

Flexible Packaging: PPL produces a wide range of custom designed film, foil, and laminate structures,

for primary packaging of products in solid, powder or liquid form, in multiple SKUs. The customizing

process optimizes design for achieving product protection, product filling productivity, brand image

promotion and overall cost effectiveness. Specialised structures include those providing high barriers for

tropical climate, high strength for transportation over long distances, high speeds on filling lines,

holographic images and registered hot melt and cold seal coatings. Pre-formed pouches, including

stand-up and re-closeable are also options provided by PPL.

Labelling Technologies: PPL offers a range of labelling options to help customer create the right

package that constantly advertise their product. The labelling options available are – Shrink sleeves,

Wrap Around, Metallised Paper etc.

Specialised Cartoons: PPL manufactures specialized cartons for primary packaging of powders,

bottles and solids in a variety of consumer pack sizes. These cartons are not the ordinary one, as PPL

does value addition to suit the requirement of customer based on look and ability to suit the product it

will carry.

Specialised Pouches Specialised Cartons

Source: PPL Annual Report, ABML Research Source: PPL Annual Report, ABML Research

Product portfolio of PPL

Source: PPL Annual Report, ABML Research

Note: All the products and brands shown above are just indicative and doesn’t necessarily indicate that the products, brands

and companies are associated with PPL.


Page No. 3

The product portfolio of PPL caters primarily to FMCG companies and its marquee clients are MNCs

like HUL, Nestle, Cadbury, Britannia, Glaxo Smithkline, Coca Cola, Perfetti, Dabur, Marico, P&G etc.

The demand for branded FMCG products will continue to grow due to favourable demographics, rising

disposable income and inclusive growth led by various social schemes run by central govt and rising MSP of

the crops. FMCG industry has grown at CAGR of 15.4% during 2006-2010 period and is worth $28 bn and is

expected to grow to $74 bn by 2018 (Source: Technopak). (For further details on packaging industry and end

user industry, refer next key point on Page 5).

The importance of packaging in India can be gauged from the fact that, packaging cost as % of net sales

has gradually increased for well-diversified large FMCG companies like HUL and Dabur (refer chart

given below). Thus, there is increased thrust on packaging so as to attract consumers on basis of look and

feel and at the same time ensure that the product has longer shelf life and retain its key characteristics for

longer duration.

Chart: Packaging cost as % of Net Sales for well-diversified personal care FMCG companies

8.5

8.5 8.47.8

8.6

5.9 6.0 5.66.7

10.6

14.513.6 13.5 13.7

15.3

6.16.7

7.3 7.68.5

8.7

4

6

8

10

12

14

16

FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 * FY09 FY10 FY11

(%)

Dabur HUL

Source: Capitaline, ABML Research

Note: Due to change in FY ending, HUL data for FY08 not available

Capacity to grow at CAGR of 10-12% for next 3 yrs

In CY11, PPL has increased its installed capacity of laminate/films by 5600 tonnes (up 15.2% YoY) to 40990

tonnes. Out of 5600 tonnes, 2000 tonnes was added at Hyderabad plant (brownfield expansion), so as to

capture the growing demand from Southern market. The capex spend was `64 mn and commercial

production commenced in 2QCY11. The remaining 3600 tonnes was added at Rudrapur plant (greenfield

expansion), with total capex of `380 mn and commercial production has started during 1QCY12. Thus, the full

benefit of expanded capacity will be visible in CY12.

Table: Locationwise Plant Capacity

No. Location

Total CY11 Capacity (tonnes)

Capacity added during CY11

Commercial production started in

1 Thane ~7000 -

2 Silvassa ~11500 -

3 Hyderabad ~11500 ~2000 2QCY11

4 Rudrapur ~10990 ~3600 1QCY12

TOTAL ~40990 ~5600 Source: Company, ABML Research

PPL’s installed capacity has grown at CAGR of 9.9% during CY06-CY11 period. Going forward, the company

expects the same run-rate to be maintained on a conservative basis and accordingly, we have built in

capacity increment of 9.8% YoY and 10.0% YoY to 44990 tonnes and 49489 tonnes in CY12 and CY13

respectively. The company is also focusing on improving equipment reliability, especially equipments that are

more than 10 yrs old, improving throughputs, reducing job change over times and reducing waste.

PPL’s carton business is very small and has installed capacity of 5000 tonnes in CY11. This business

contributes only ~5.0% to the topline. The company aims to do only specialized carton kind of business and

hence has reduced its capacity from earlier 11,000 tonnes to 5000 tonnes by selling its old obsolete assets.

This is in line with the company’s strategy to concentrate on value added business on the higher end of the

price spectrum and vacate the low value business completely.


Page No. 4

Chart: Yr-end installed capacity of Laminates/Films and Cartons

3159

0

3759

0

3559

0

4099

0

4499

0

4948

9

1100

0

1100

0

1100

0

5000

5000

5000

0

10000

20000

30000

40000

50000

60000

CY08 CY09 CY10 CY11 CY12E CY13ET

onne

s

Laminates/Films Cartons


Variation in per tonne realization for laminates/films depends on variation in key raw material cost, like BOPET

and BOPP Films, Inks, adhesives and solvents, etc. The prices of BOPET and BOPP films (accounts for 50%

of total raw material cost) in turns depends on prices of PTA, MEG and crude oil prices - which has been very

volatile during last 2-3 yrs due to various factors and rapid depreciation/appreciation of rupee against dollar.

Hence, domestic prices of BOPET and BOPP films has also been very volatile and moves in tandem owing to

import parity. Since, PPL works on cost plus model it does not gets affected due to change in price of

plastic films as such. However, timing difference would persisit in terms of pass on which would be

both beneficial and adverse depending on the revision timing and rise / fall in raw material prices. We

have assumed price increment of 2.7% YoY each in CY12E and CY13E (this is equivalent to 2.7%

CAGR increase during CY01-CY11 period). Overall, we expect net sales to increase by 15.1% and

11.6% to `9174.9 mn and `10238.6 mn in CY12E and CY13E respectively.

Chart: Net Sales Trend

57777040

917510239

6121

7973

11.615.1

13.3

21.9

(5.6)

15.0

0

2000

4000

6000

8000

10000

12000

CY08 CY09 CY10 CY11 CY12E CY13E

Rs

mn

-10

-5

0

5

10

15

20

25

%Net Sales (LHS) YoY% (RHS)


Cost + margin business model…stable margin profile

PPL operates on a cost plus margin business model and hence has a stable margin profile with an EBITDA

margin in the range of 9-11% (avg of last 4 yrs - 10.2%). There is a slight variation in margin based on the

volatility in cost of key raw materials - like BOPET films, BOPP films, inks, adhesives etc – and lag in passing

those cost pressure/advantage to the end consumer. There is maximum adverse or favourable impact of

variation in raw material prices for 1.0-1.5 months, as average inventory holding period is 45 days. We expect

PPL’s EBITDA to grow by 17.0% and 10.6% to `952.6 mn and `1053.7 mn in CY12E and CY13E

respectively. On margin front, we expect the company to post EBITDA margin of 10.4% and 10.3% in

CY12E and CY13E respectively. There is further room for expansion of operating margin due to

presence of operating levers like administration, sales and employee expenses, as these expense

doesn’t rise in proportionate to rise in sales volume. We believe EBITDA/tonne is also the right metric to

monitor operating performance of PPL and expect EBITDA/tonne to increase by 5.1% and 1.7% YoY to

`26141/tonne and `26580/tonne in CY12E and CY13E respectively from `24881/tonne in CY11.


Page No. 5

Chart: Gross profit and EBITDA trend Chart: WC cycle

491.7

709.4

814.3

952.6

1053.7

727.5

8.010.1 10.2 10.4 10.3

31.0 30.4

33.8

12.6

29.329.3

29.5

100

250

400

550

700

850

1000

1150


Rs

mn

0

5

10

15

20

25

30

35

40

45

%EBITDA (LHS) EBITDA margin (RHS) Gross margin (RHS)

61

56 57 57 5759

444444

4850

42

65656566

74

53

36 36 363737

48

30

40

50

60

70

80


Day

s

Debtors Days Inventory Days Creditor Days WC Cycle


The margins for large MNC players in flexible packaging industry are in the range of 10-14%. The higher

margins for some players is due to demand for high-margin, value added packaging products in the matured

developed markets as compared to that of basic packaging material in emerging economies like India. We

believe, the demand in India for value added packaging products will increase from FMCG and Pharma

companies owing to the favourable demographics and sustainable 6 – 7% growth. Hence, in long term,

there is high probability of margin expansion for PPL due to increase in demand for high-margin value

added products.

Chart: Margins for large MNC players in flexible packaging

10.5 11.0

13.4

9.6

12.812.0

13.7

10.4

13.412.5

14.4

10.5

0

2

4

6

8

10

12

14

16

Amcor Bemis Sealed Air Huhtamaki

(%)

FY11 FY12E FY13E

Source: Bloomberg, ABML Research

Tremendous growth opportunity due to a hugely untapped packaging market and multiple growth

drivers in end user industry

Globally, flexible packaging sector is estimated to be $160 bn and is growing at a CAGR of 7-7.5%. The

biggest markets for flexible packaging is North America and Europe which constitutes ~70% of the world

market and balance 30% is constituted by rest of the world. The developed markets are growing around 3-4%

whereas developing countries are growing in the range of 6-15% annually.

Indian packaging industry to grow @15% CAGR

The Indian packaging market is estimated to be a $17.3 bn industry in 2011. The industry is expected to grow

by 14.9% CAGR and is likely to be $27.8 bn industry by 2014. (Source: IBEF, Industry and ABML Research)


Page No. 6

Chart: Indian Packaging Industry Growth ($ bn)

6.9

13.3

17.3

27.8

0 5 10 15 20 25 30

2004

2009

2011E

2014E

$ bn

CAGR - 14.9%

Source: IBEF, Industry, ABML Research

The industry can be mainly divided into parts – (A) Rigid Packaging and (B) Flexible Packaging.

(A) Rigid Packaging – Rigid packaging dominates the Indian packaging market and accounts for 80% of

the market size(~$13.8 bn). Rigid packaging consists of metal containers, glass bottles, rigid plastics,

wooden racks etc.

(B) Flexible Packaging - The flexible packaging market holds the remaining 20% of the overall packaging

market with a size of ~$3.5 bn. Few examples of flexible packaging are stand-up pouches, milk pouches

and bags, laminated tubes, etc. Out of total flexible packaging market, only 35-40% is organised. The

unorganised sector consists of small players with focus on very limited set of small clients or focus on

particular products and lack high end technology, innovation capability and excellent product quality

required by well-established FMCG players. Organised players are technology driven with focus on

innovation and superior product quality.

Chart: Indian Packaging Industry

Packaging Industry in 2011 Estimated market size - $17.3 bn

Flexible Packaging (~20%) - $3.5 bn

• Stand-up pouches

• Milk pouches and bags

• Laminated tubes

• Squeezable bottles

Rigid Packaging (~80%) - $13.8 bn

• Metal Containers

• Glass Bottles

• Rigid Plastics

• Paper Cartons

Organised Market (35-40%) - $1.3 bn

• CAGR - 20%

• Focus on latest technology

• Innovation is key USP

• Key RM - Plastics, paper and metals

Unorganised (55-60%) - $2.2 bn

Packaging Industry in 2011 Estimated market size - $17.3 bn

Flexible Packaging (~20%) - $3.5 bn

• Stand-up pouches

• Milk pouches and bags

• Laminated tubes

• Squeezable bottles

Rigid Packaging (~80%) - $13.8 bn

• Metal Containers

• Glass Bottles

• Rigid Plastics

• Paper Cartons

Organised Market (35-40%) - $1.3 bn

• CAGR - 20%

• Focus on latest technology

• Innovation is key USP

• Key RM - Plastics, paper and metals

Unorganised (55-60%) - $2.2 bn

Source: IBEF, Industry, Secondary Research, ABML Research


Page No. 7

Flexible packaging to grow at faster pace led by changing consumption pattern, manifold benefits of

flexi-pack and rapid growth in end-user industry

The end user flexible packaging market is largely concentrated around the FMCG sector which has recorded

a CAGR of 15.4% during 2006-2010 period, leading to a ~20% CAGR growth in flexi-packaging market. This

is in comparison to 14.9% CAGR growth witnessed in overall packaging market.

Chart: FMCG market growth Chart: Expected flexible packaging market growth

15.717.8

21.3

24.2

27.9

0

5

10

15

20

25

30

2006 2007 2008 2009 2010

$ bn

CAGR - 15.4%

0.9

1.3

2.2

0.0

0.5

1.0

1.5

2.0

2.5

2009 2011E 2014E

$ bn

CAGR - 20%

Source: Industry, Secondary Research, ABML Research

Going forward, for next 5 yrs, we expect FMCG industry to continue to grow at CAGR of 15% led by –

(A) Higher disposable income in both urban area (aided by growth in services and manufacturing industry

leading to increase in income of salaried person) and rural areas (aided by higher MSP for agri-produce,

one time loan waiver and various rural focus flagship schemes like NREGA). Moreover, younger

population, increase in working women population, access to consumer credit, the provision of social

security and rising aspirations leads to increase in consumption of convenience products and superior

products and this will aid further penetration of consumer products like instant food, skin care, home

care, etc.

(B) Rapid growth in organised retailing in India – The share of organised retailing is likely to grow from 4-

5% in 2007 to 14-18% in 2015. In value terms, the organised retail industry is likely to grow from current

$26 bn in 2010 to $65-80 bn by 2015.

Chart: Flexible Packaging - Structural Growth Drivers

Flexible Packaging - Structural

Growth Drivers

Consumption-led and change in habits/trends

led factors Demographics led factors

• Increasing middle class

• Increasing disposable income

• Increase in nuclear families

• Urbanisation

• Social schemes of government

• Increase in MSP of crops

• Increase in SKU's

• Unpacked to packed products

• Expansion of modern retail

• Transformation to convenience products

Flexible Packaging - Structural

Growth Drivers

Consumption-led and change in habits/trends

led factors Demographics led factors

• Increasing middle class

• Increasing disposable income

• Increase in nuclear families

• Urbanisation

• Social schemes of government

• Increase in MSP of crops

• Increase in SKU's

• Unpacked to packed products

• Expansion of modern retail

• Transformation to convenience products

Source; ABML Research


Page No. 8

However, for next 5 yrs, we expect flexible packaging market to grow at faster rate of 20% CAGR, led by

rapid growth in end-user industry like FMCG and Pharma and further aided by –

(A) Changing consumption pattern: Indian consumer is evolving and is gradually moving from heavy

packaging to light, elegant, convenient, innovative better looking packaging solutions. Few examples of

transformation are as follow –

Table: Transformation in packaging trends

Product to be packed Conventional packaging Current packaging trend

Milk Glass Flexible pouches, Tetra packs

Beverage Glass, tinplate, aluminium PET bottles with labels, cans

Toothpaste Aluminium tubes Laminated tube, co-extruded tube

Soap Paper cartons Laminated cartons, BOPP/PE, PET/PE

Shampoo Glass HDPE container, sachets

Edible Oils Tinplate containers Flexible pouch, laminates, co-extruded pouch, tetra packs

Source: Industry, Secondary Research, ABML Research

(B) Manifold benefits of flexible packaging over rigid packaging: Following are the benefits of flexible

packaging over rigid packaging

Table: Benefits of flexible packaging over rigid packaging

Parameter Flexible Rigid

Weight Light Heavy

Raw material consumption Low (by weight) High

Sizes Good for smaller packs Suitable for bigger packs

Storage 60-70% less space required Greater space requirement

Re-use Not possible Can be reused

Energy saving 30-40% lower Greater energy required

Resealing Possible Not possible

Disposal Easy Difficult Source: Industry, Secondary Research, ABML Research

(C) Shift from unorganised to organised likely to open sizeable growth opportunity for existing

players: Historically, the Indian supply chain has been selling goods mostly in loose form or in

conventional packing of paper bags/wraps etc. At present, only 15-20% of the total consumption comes

in packaged form. Hence, per capita consumption of consumer packaging in India is still very low at

around $2.5 against that of $5.0 in China and $48.2 in Germany and $51.6 in US (Source: Constantia

Company Presentation). Thus, the shift from unpacked to packaged products will further boost the

demand for packaging and is likely to lead to a volume growth higher than its end-user industries. In

addition, it has been observed that with increase in per capita income, packaging spend per capita also

increases (refer chart below).

Chart: Packaging spend accelerates as wealth increases

GDP/capita

Co

nsu

mer

Pac

kag

ing

(U

SD

/cap

ita

p.a

.) Developing countries Emerging markets Developed markets

Czech Rep, Poland, Brazil, Mexico, Russia

USA (51.6)Germany (48.2)

China (5.0)

India (2.5)

50

20

5.0

2.0

CAGR = 6-15% CAGR = 3-4%

GDP/capita

Co

nsu

mer

Pac

kag

ing

(U

SD

/cap

ita

p.a

.) Developing countries Emerging markets Developed markets

Czech Rep, Poland, Brazil, Mexico, Russia

USA (51.6)Germany (48.2)

China (5.0)

India (2.5)

50

20

5.0

2.0

CAGR = 6-15% CAGR = 3-4%

Source: Constantia, ABML Research


Page No. 9

Packaging Value Chain

Following picture shows the value chain in packaging industry:

0.86 MT

Basic Petrochemicals

Laminates MFG Process - PPL'S Domain

PTA MEG

Film grade chips

PET FILMS Printing Lamination SlittingFLEXIBLE

PACKAGING MATERIALS

Inks AdhesivesCustomers like

HUL, Nestle, etc

0.34 MT

Raw materials for PPL Mfg process

1 M

T o

f po

lyst

erm

elt0.86 MT

Basic Petrochemicals

Laminates MFG Process - PPL'S Domain

PTA MEG

Film grade chips

PET FILMS Printing Lamination SlittingFLEXIBLE

PACKAGING MATERIALS

Inks AdhesivesCustomers like

HUL, Nestle, etc

0.34 MT

Raw materials for PPL Mfg process

1 M

T o

f po

lyst

erm

elt

Source: Industry, ABML Research

Competitive Landscape

Global Players

The major players worldwide in flexible packaging are –

1) Amcor: Amcor is an Australian company and is the world’s largest supplier of flexible packaging with

presence in 30 countries. Within emerging economies, the company has presence in 24 countries and

India is one of the key focus area for the company with its products aligned towards Food and Pharma

industry. During 1HFY12 (FY – Jul-Jun), the company has acquired 2 plants of Uniglobe in India with

estimated annual sales of A$20 mn. In FY11, the company has reported sales of A$ 12.4 bn, EBITDA of

A$ 1.5 bn of and PAT of A$ 570.3 mn. Flexibles contributed A$ 4.6 bn to FY11 topline and has posted

EBIT margin of 9.8%. Emerging markets contributes 17% to the topline.

2) Bemis: Bemis is a global manufacturer of flexible packaging materials with CY11 net sales of $5.3 bn,

operating profit of $367.4 mn and PAT of $184 mn and contribution from North America, Latin America,

Europe and APAC at 67%, 21%, 11% and 1% respectively. Bemis is headquartered in Neenah,

Wisconsin and employs nearly 20,000 people in 80 manufacturing facilities in 12 countries around the

world. In 2011, Flexible packaging contributed nearly 89% to the topline and has posted operating

margin of 9.0%.

3) Constantia: Constantia is a Europe focused leading flexible packaging solution provider with operations

spread across 20 countries. For 2011, the company has reported Sales, EBITDA, EBITDA margin and

PAT of Euro 1.2 bn, Euro 170 mn, 14.0% and Euro 58 mn respectively.

4) Sealed Air: Sealed Air is a global leader in food safety and security, facility hygiene and product

protection. In 2011, the company has reported sales of $5.6 bn, operating profit of $ 447.4 mn (margin –

7.9%) and PAT of $148.3 mn. In 2011, Food Packaging segment contributed 36% to the topline and has

posted operating margin of 13.5%.

5) Huhtamaki: Huhtamaki Oyj is one of the top 10 consumer packaging companies in the world and has

operations spread across 31 countries. Huhtamaki has posted topline of Euro 2 bn in 2011, employs

14000 people worldwide, has 61 manufacturing units and has operations spread across 31 operating

countries.


Page No. 10

Table: Key Financials of large MNC players in flexible packaging

Sales EBITDA EBITDA margin Adj PAT Particulars (in mn) Curr. FY end Mcap FY09 FY10 FY11 FY09 FY10 FY11 FY09 FY10 FY11 FY09 FY10 FY11

Amcor AUD June 8833 9535 9850 12412 1038 1132 1299 10.9 11.5 10.5 218 202 380

Bemis USD Dec 3263 3515 4835 5323 464 611 588 13.2 12.6 11.0 153 210 187

Sealed Air USD Dec 3024 4243 4490 5641 654 697 755 15.4 15.5 13.4 244 256 149

Huhtamaki EUR Dec 1201 1832 1952 2044 201 216 197 10.9 11.0 9.6 67 105 92


Domestic Players

The major domestic competitors in flexible packaging are –

1) Uflex: It is one of the largest multi-national integrated flexible packaging companies in India with its

operations spread across India, Dubai, Mexico, Egypt, Poland and USA. The company has

predominantly 2 business divisions, viz, Plastic Film Business (current installed capacity – 276600 TPA;

revenue contribution – 47%) and Flexible Packaging Business (current installed capacity – 67000 TPA;

revenue contribution – 53%). For FY12, the company has posted net sales of `44285 mn, EBITDA of

`6876 mn and PAT of `2556 mn.

2) Positive Packaging: Positive Packaging is among top 3 players in printed and laminated, barrier-grade

flexible packaging materials with manufacturing facilities in India, Nigeria and U.A.E.

3) Others: Other key players in Indian packaging industry are Jindal Polyfilms, Cosmo Films, Garware

Polyster, Polyplex, Paharpur, Multiflex – mainly into film business and Essel Propack – mainly into

laminated tubes and caps and closure.

Table: Key Financials of domestic players in packaging industry

Sales EBITDA EBITDA margin Adj PAT Particulars (in mn) Curr. FY end Mcap FY10 FY11 FY12 FY10 FY11 FY12 FY10 FY11 FY12 FY10 FY11 FY12

Uflex INR Mar 7553 22909 34654 45141 4405 11310 6509 19.2 32.6 14.4 1903 6968 2556

Jindal Polyfilms

INR Mar 7240 17036 28077 27824 3451 9102 4012 20.3 32.4 14.4 2045 5949 2242

Cosmofilms INR Mar 1754 9597 11298 11250 951 910 940 9.9 8.1 8.4 677 310 302

Polyplex INR Mar 5146 12180 24333 24158 2195 8875 4086 18.0 36.5 16.9 1373 13365 2081


Debt-free company with high dividend yield and reasonable RoE trading at 1.0x FY13E BV

PPL is virtually a debt-free company with only interest free sales tax deferred loan from Govt of Andhra

Pradesh to the tune of `221.5 mn, repayable till 2024. We expect company to generate FCF to the tune of

`564 mn during CY11-CY13E period. We have assumed that surplus funds will be parked in the short term

liquid MF and has accounted for interest income in “Other income”.

Chart: Net debt and Investments

494

202

(112)(278)

(635)

394634

854994

(872)

170310

(1000)

(500)

0

500

1000

1500


Rs

mn

Net Debt Investments



Page No. 11

The company has an dividend payout policy of ~35% and assuming dividend payout ratio of 33%, dividend

yield turns out to be 4.5% and 5.1% in CY12 and CY13 respectively. In addition, the company has reasonable

return ratios, with expected RoAE of 16.2% and 16.4% and RoACE of 20.2% and 20.6% in CY12E and

CY13E respectively. Moreover, at CMP, the company is trading at P/BV of 1.0x CY13E book value, which we

believe is trading at very attractive valuation.

Chart: Dividend Payout and Return ratios

53.0

33.528.7 28.6

33.0 33.0

10.7

17.4 15.618.9 20.2 20.6

8.8

14.7 13.016.1 16.2 16.4

0

10

20

30

40

50

60


(%)

Dividend Payout ROACE ROAE


Strong promoter group along with solid management team helps to bring in best practices, attract

marquee clients and adapt quickly to change in technology and consumer trends

PPL is promoted by Finland based Huhtamaki Oyj group, which is one of the top 10 consumer packaging

companies in the world and has operations spread across 31 countries. Huhtamaki Oyj group holds 60.8%

stake in PPL. Huhtamaki had revenues of Euro 2 bn (~$2.6 bn) in 2011, employs 14000 people worldwide,

and has 61 manufacturing units with operations spread across 31 countries.

About Huhtamaki in 2012

EUR 2.0billion in net

sales in 2011

14,000people

employed

61manufacturing

units

31operating countries

Globally Organized Geographically Organized

Flexibles Films Molded Fiber Disposables

FlexiblePackaging

FilmsMolded

FiberNorth

AmericaFoodservice

E-A-O

28% 9% 12% 26% 23%

Sh

are

of

net

sal

es

*R

epo

rtin

g

seg

men

tsB

usi

nes

ses

EUR 2.0billion in net

sales in 2011

14,000people

employed

61manufacturing

units

31operating countries

Globally Organized Geographically Organized

Flexibles Films Molded Fiber Disposables

FlexiblePackaging

FilmsMolded

FiberNorth

AmericaFoodservice

E-A-OFlexible

PackagingFilms

Molded Fiber

North America

FoodserviceE-A-O

28% 9% 12% 26% 23%28% 9% 12% 26% 23%

Sh

are

of

net

sal

es

*R

epo

rtin

g

seg

men

tsB

usi

nes

ses

Source: Huhtamaki Presentation, ABML Research

* 2% net sales is from Others


Page No. 12

As seen above, the flexible packaging division contributes 28% to the topline, i.e. Euro 578 mn.

Geographically, Europe contributes little over 50% to the flexible division, followed by Asia at the second place

with India’s contribution at ~20% of the total global flexible turnover. In CY11, PPL has exports to the tune of

`1379.6 mn (17.3% of the total turnover) and the company mainly exports to Africa and Middle East. The

company is developing new export markets in South America, New Zealand and Australia, which augurs well

for the company, as it helps in diversifying geographic risk and capturing volume growth. Within Huhtamaki

group, there is no restriction in terms of sales to particular country and the addition of markets / geography is

based on proximity, management bandwidth and cost-benefit analysis. The key advantage for markets like

India is cheap labour as compared to developed countries. Going forward, it can help PPL to cater to

developed and emerging countries in more profitable manner and thereby explore opportunity in new

geography as well as in the existing export markets.

The promoter group brings in best practices in terms of technology expertise, operating efficiencies and

corporate governance. Moreover, Mr Suresh Gupta, MD of PPL also heads the global flexible packaging

business of Huhtamaki, thereby indicating the strength of the management team for Indian operations.

This also provides an edge strategically within the Huhtamaki family. All this factors helps the company

to adapt quickly to change in technology and consumer demand and trends.

Valuations

At CMP of `65.3, PPL is valued at a P/E of 7.3x and 6.5x CY12E and CY13E respectively. On P/B basis, the

company is trading at 1.1x and 1.0x CY12E and CY13E respectively. Historically, PPL has traded in 1-yr

forward P/E band of 6.0x-13.0x and 1-yr forward P/B band of 0.9x-1.5x. Currently, the business is available at

the lower end of 1-yr fwd P/E and P/BV band, which we believe is attractive, looking at the healthy dividend

payout and reasonable return ratios (refer valuation charts given below). In addition, global peers are trading

at an average P/E of 11.1x FY13E earnings and P/BV of 1.6x FY13E book value. PPL’s 5-yr mean 1-yr fwd

P/E multiple is 9.7x and we believe, the fair P/E multiple for PPL should be 9.0x, implying discount of close to

25% (considering the size and geographic reach) to global peers average FY13E P/E multiple. We initiate

coverage on the company with BUY rating and June-13 price target of `95.0/share (based on P/E

multiple of 9.0x CY13E earning).

We believe the current market valuations presents an excellent opportunity to buy a quality niche

MNC business with consistent earnings growth; excellent dividend payout; and a healthy balance

sheet and operating cash flow.

Valuation Charts

1-yr fwd P/E 1-yr fwd P/BV

0.0

3.0

6.0

9.0

12.0

15.0

18.0

21.0

Dec

-06

Aug

-07

Mar

-08

Oct

-08

May

-09

Jan-

10

Aug

-10

Mar

-11

Nov

-11

Jun-

12

-1 SD

Mean: 9.7

+1 SD

+2 SD

-2 SD0.4

0.8

1.2

1.6

2.0

2.4

Dec

-06

Aug

-07

Mar

-08

Oct

-08

May

-09

Jan-

10

Aug

-10

Mar

-11

Nov

-11

Jun-

12

-1 SD

Mean: 1.2

+1 SD

+2 SD

-2 SD



Page No. 13

Peer Comparision

Global Peers

P/E P/B EV/EBITDA Div Yield RoE Particulars (in mn) Curr. FY end Mcap FY12E FY13E FY12E FY13E FY12E FY13E FY12E FY13E FY12E FY13E

Amcor AUD June 8833 14.2 12.4 2.5 2.4 7.8 7.1 5.1 5.5 16.7 19.8

Bemis USD Dec 3263 15.2 13.6 2.0 1.8 7.4 7.0 3.2 3.3 12.8 13.3

Sealed Air USD Dec 3024 10.9 8.6 1.0 0.9 6.7 6.2 3.3 3.3 8.7 11.7

Huhtamaki EUR Dec 1201 10.3 9.8 1.4 1.3 6.9 6.5 4.5 4.7 14.0 13.5

AVERAGE 12.6 11.1 1.7 1.6 7.2 6.7 4.0 4.2 13.1 14.6


Domestic Peers

Due to differences in the business characteristics, there are no like to like comparable peers for PPL in the domestic listed space. In addition, for the

not-so comparative domestic peers, consistent consensus estimates are not available due to lack of coverage. Hence, we have not shown

valuations for PPL’s domestic peers.

Key Concerns/Risk

Slowdown in growth of underlying FMCG sector: Since, demand for PPL products depends on the underlying volume growth in the FMCG industry, any slowdown here due to any reason may impact earning growth of PPL.

Managing engineering and skillsets across multiple locations: PPL’s product profile is such that it requires specific skillsets among the workers and varying engineering capabilities. Acquiring workers with specific engineering skillsets at competetitve cost and their retention is likely to be challenge for the company.

Key Management Team

Mr. Suresh Gupta, Chairman and MD

Mr. M. K. Srinivasan, CEO and ED

Mr. Parag Vyavahare, CFO


Page No. 14

Profit & Loss Balance Sheet

In ` mn CY10 CY11 CY12E CY13E In ` mn CY10 CY11 CY12E CY13E

Net sales 7,040 7,973 9,175 10,239 Equity capital 125 125 125 125

YoY (%) 21.9 13.3 15.1 11.6 Reserves 2,811 3,163 3,507 3,892

Total expenses 6,331 7,159 8,222 9,185 Net worth 2,937 3,288 3,632 4,017

Inc/dec in stock (64) 9 0 0

Raw material cost 5,030 5,628 6,486 7,239 Total borrowings 225 221 216 210

Purchase of finished goods - - - - Deferred tax 53 25 25 25

Employee Cost 591 643 730 828

Other expenses 774 879 1,006 1,119 Total liabilities 3,215 3,535 3,874 4,253

EBIDTA 709 814 953 1,054

YoY (%) (2.5) 14.8 17.0 10.6 Asset Block 1,787 1,898 1,968 2,046

EBIDTA (%) 10.1 10.2 10.4 10.3 Investments 394 634 854 994

Depreciation 324 320 349 385 Goodwill 0 0 0 0

Other income 83 137 140 161

EBIT 469 631 743 830 Current assets 2,510 2,691 2,831 3,155

Interest 6 6 6 6 Inventories 892 844 932 1,055

Extraordinary income/(expenses)

153 29 0 0 Debtors 1,188 1,296 1,336 1,512

PBT 616 654 738 824 Cash 108 223 234 259

(-) Tax 135 128 177 198 Loans and advances 123 147 147 147

Tax/ PBT (%) 21.9 19.6 24.0 24.0 Other Current Assets 198 182 182 182

PAT 481 526 561 627

YoY (%) 28.7 9.3 6.6 11.8 Current liabilities 1,476 1,688 1,779 1,942

Preference Dividend 0 0 0 0 Creditors 941 1,054 1,133 1,283

Adjusted net profit 361 502 561 627 Provisions 227 241 253 265

YoY (%) (3.3) 39.0 11.6 11.8 Other current liabilities 308 394 394 394

Net current assets 1,033 1,004 1,052 1,213

Total assets 3,215 3,535 3,874 4,253

Key Ratios CY10 CY11 CY12E CY13E Cash Flow (in ` mn) CY10 CY11 CY12E CY13E

EPS (`) 7.7 8.4 8.9 10.0 Net profit 481 526 561 627

EPS - Diluted (`) 7.7 8.4 8.9 10.0 Depn and w/o 324 320 349 385

Adjusted EPS (`) 5.8 8.0 8.9 10.0 Change in working cap

387 (144) 37 137

CEPS (`) 12.8 13.5 14.5 16.1 Other income 83 137 140 161

Book value (`) 46.8 52.5 57.9 64.1 Others (171) (69) 0 0

Dividend per share (`) 2.2 2.4 3.0 3.3 Operating cash flow 164 785 733 713

Net D-E (x) (incl investments) (0.1) (0.2) (0.2) (0.3)

Interest Coverage (EBIT/Int charges)

78.5 106.0 125.0 139.6 Other income 83 137 140 161

ROACE 15.6 18.9 20.2 20.6 Capex 160 (410) (420) (462)

ROAE 13.0 16.1 16.2 16.4 Investments (84) (239) (220) (140)

Others (81.3) 20.2 0.0 0.0

Valuation Investing cash flow 78 (492) (500) (441)

PE (x) 11.3 8.1 7.3 6.5

Cash PE (x) 5.1 4.8 4.5 4.0 Dividend (160) (174) (216) (242)

Equity 0 0 0 0

Price/book value (x) 1.4 1.2 1.1 1.0 Debt (14) (4) (6) (6)

Dividend yield (%) 3.4 3.7 4.5 5.1 Others

P/sales 0.6 0.5 0.4 0.4 Financing cash flow (174) (178) (222) (247)

EV/sales (x) 0.6 0.5 0.4 0.4 Net change in cash 68 114 11 25

EV/EBITDA (x) 5.9 5.0 4.3 3.8 Opening cash 41 108 223 234

Closing cash 108 223 234 259

Source: ABML Research, company data

Standalone Financials


Page No. 15

Research Team Vivek Mahajan Hemant Thukral

Head of Research Head – Derivatives Desk

022-42333522 022-42333483

[email protected] [email protected]

Fundamental Team Avinash Nahata Head of Fundamental Desk 022-42333459 [email protected]

Akhil Jain Metals & Mining/ Midcaps 022-42333540 [email protected]

Sunny Agrawal FMCG/Cement/Midcaps 022-42333458 [email protected]

Sumit Jatia Banking & Finance 022-42333460 [email protected]

Shreyans Mehta Construction/Real Estate 022-42333544 [email protected]

Dinesh Kumar Information Technology/Auto 022-42333531 [email protected]

Pradeep Parkar Database Analyst 022-42333597 [email protected]

Quantitative Team Rizwan Khan Technical and Derivative Strategist 022-42333454 [email protected]

Jyoti Nangrani Sr. Technical Analyst 022-42333454 [email protected]

Raghuram Technical Analyst 022-42333537 [email protected]

Rahul Tendolkar Derivatives Analyst 022-42333532 [email protected]

Amit Somani Derivative Analyst 022-42333532 [email protected]

Advisory Support Indranil Dutta Advisory Desk – HNI 022-42333494 [email protected]

Suresh Gardas Advisory Desk 022-42333535 [email protected]

Sandeep Pandey Advisory Desk 022-30004011 [email protected]

ABML research is also accessible in Bloomberg at ABMR


Page No. 16

Aditya Birla Money Limited2nd Floor, Sheil Estate, Dani Corporate Park, 158 CST Road, Kalina, Santacruz (East), Mumbai 400 098 | Tel: +91 22 42333400

Our Rating Methodology

Stock Ratings Absolute Returns (R)

Buy R > 15%

Accumulate 5% < R ≤ 15%

Neutral -5% < R ≤ 5%

Reduce -10% < R ≤ 5%

Sell R ≤ -10%

Disclaimer:

This document is not for public distribution and is meant solely for the personal information of the authorised recipient. No part of the information must be altered, transmitted, copied, distributed or reproduced in any form to any other person. Persons into whose possession this document may come are required to observe these restrictions. This document is for general information purposes only and does not constitute an investment advice or an offer to sell or solicitation of an offer to buy / sell any security and is not intended for distribution in countries where distribution of such material is subject to any licensing, registration or other legal requirements. The information , opinion, views contained in this document are as per prevailing conditions and are of the date of appearing on this material only and are subject to change. No reliance may be placed for any purpose whatsoever on the information contained in this document or on its completeness. Neither Aditya Birla Money Limited (ABML) nor any person connected with it accepts any liability or loss arising from the use of this document. The views and opinions expressed herein by the author in the document are his own and do not reflect the views of Aditya Birla Money Limited or any of its associate or group companies. The information set out herein may be subject to updating, completion, revision, verification and amendment and such information may change materially. Past performance is no guarantee and does not indicate or guide to future performance. Nothing in this document is intended to constitute legal, tax or investment advice, or an opinion regarding the appropriateness of any investment, or a solicitation of any type. The contents in this document are intended for general information purposes only. This document or information mentioned therefore should not form the basis of and should not be relied upon in connection with making any investment. The investment may not be suited to all the categories of investors. The recipients should therefore obtain your own professional, legal, tax and financial advice and assessment of their risk profile and financial condition before considering any decision. Aditya Birla Money Limited, its associate and group companies, its directors, associates, employees from time to time may have various interests/ positions in any of the securities of the Company(ies) mentioned therein or be engaged in any other transactions involving such securities or otherwise in other securities of the companies / organisation mentioned in the document or may have other potential conflict of interest with respect of any recommendation and / related information and opinions. Analyst holding in the stock: NIL

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