Huhtamaki India Ltd.
One-offs impacted profitability in Q1, On the verge of a Turnaround, Upgrade to BUY
The company reported good show excluding the one-offs. Revenue declined by ~8% YoY but grew by mere ~1% QoQ. Lower volumes on YoY basis impacted the topline. Gross margin expanded by 332bps YoY but declined by 44bps QoQ to 33.7% in Q1CY24. The expansion in gross margins on YoY basis is majorly because of decline in raw material prices & cost pass on to its end user industries. Despite revenue growth of 1% on sequential basis, EBITDA dipped by ~29% QoQ because of higher other expenses which grew by 14% YoY & 20.5% QoQ. Higher other expense is because of credit impairement which is a one-off. Adjusting for one-offs, EBITDA margins stood at 9.2% vs the reported 6.7% in Q1CY24. Last quarter the company received exceptional gains from land monetization of Thane & Ambernath to the tune of Rs3.7bn which has been used for debt reduction & for new capital expenditures in coming years. The company “blueloop” range of products will focus on increasing value added proportion in its product portfolio. The company is banking on this new set of range of blueloop to increase its visibility & offer niche products to its customers. This strategy will help the company to regain back its lost glory & achieve double digit margins in the coming years. Accordingly, factoring the positives, we upgrade to BUY rating on the stock with a target price of Rs 434 per share.
Q1CY24 revenue declined by ~8% YoY & grew ~1% QoQ; Gross margins expanded on YoY basis
The company’s Q1CY24 revenue declined by ~8% YoY & grew by mere ~1% QoQ. YoY decline is because of volumes which is expected to pickup in the subsequent quarters as demand starts to pick up. The company has significant room to increase volume as current utilization is mere 55-60% & its new factory of Blueloop will incrementally provide support to volumes alongwith better margins.
The employee cost grew by ~4% YoY & declined by ~2% QoQ to Rs617mn and stood at 10.1% of sales in Q1CY24 as compared to 9% in Q1CY23 & 10.4% in Q4CY23, while other expenses grew by ~14% YoY & ~20.5% QoQ to Rs1.02bn. Higher other expense is because of credit impairement (oneoffs). Adjusting for one-offs, EBITDA margins stood at ~9.2% vs reported 6.7% in Q1CY24.
The interest cost declined by ~30% YoY & 24% QoQ to Rs48mn because of debt repayment from the land monetisation money received last quarter; while the depreciation expenses dipped by ~39% YoY & 15% QoQ to Rs95mn. Change in useful life and method of charging depreciation on certain Property, Plant and Equipment led to decline in depreciation.
Cost savings measures, non core asset monetization & right strategy started yielding results
The company had embarked on ‘Project Parivartan’ (Transformation Project) which focuses on cost transformation, value added products, stronger price realisation to enhance better quality of growth to turnaround its performance. This strategy has yielded results for the company & we believe Huhtamaki is on the verge of a turnaround.
As the company is focussing on its value-added segment named “Blueloop” which has higher margins & better use case it also provides benefits like reducing input costs, wastage reduction, overhead optimization & improving productivity.
Valuation
We value the stock on CY25E & we assign price target of Rs 434, valuing the stock 18x (earlier 16.5x) CY25E EPS of Rs 24.1. We upgraded out multiple because of increased visibility of volume growth, strong balance sheet, cost optimization benefits & leveraging its blueloop brand which will increase its premium portfolio. At our target price, the stock offers upside of ~41%, thereby, we upgrade to BUY rating from earlier ACCUMULATE rating on the stock.
Click here to download Huhtamaki India Ltd – Q1CY24 Result Update by SMIFS Institutional Research
Leave a Reply