the paper products: the power of undervalued stock
DESCRIPTION
This presentation was delivered on Jan 04, 2014 to Equity Pune group. In this presentation I discussed about an undervalued stock: the Paper Products.TRANSCRIPT
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…
2
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
12 Blog: http://dharmawat.blogspot.com/
A proxy to FMCG
Some customers include…
13 Blog: http://dharmawat.blogspot.com/
A proxy to FMCG
Paper Products is a part of an MNC
Parent Company: Huhtamaki
14 Blog: http://dharmawat.blogspot.com/
“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
15 Blog: http://dharmawat.blogspot.com/
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
17 Blog: http://dharmawat.blogspot.com/
Huhtamaki…
Huhtamaki Key Customers
18 Blog: http://dharmawat.blogspot.com/
Huhtamaki…
For Paper Products: Cross selling opportunities…
19 Blog: http://dharmawat.blogspot.com/
Huhtamaki…
For Paper Products: Advantage ‘Huhtamaki’
20 Blog: http://dharmawat.blogspot.com/
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
24 Blog: http://dharmawat.blogspot.com/
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.