Premium product to drive growth, near term issues transitory in nature, Maintain BUY
Huhtamaki’s Q2CY25 performance was better than our estimates. Revenue declined YoY by ~4% but grew by 0.4% QoQ because of lower volumes. Gross margins expanded by 370bps YoY & 44bps QoQ to ~34% in Q2CY25. EBITDA grew by ~33% YoY & by ~10% QoQ largely because of focus on key product portfolio and cost efficiency measures. Sluggish urban demand is impacting FMCG volumes coupled with higher inflationary pressure, early monsoon and increase in commodization rate of products led to muted topline. The company “blueloop” range of products will focus on increasing value-added proportion in its product portfolio, although the pace of growth is slow but will increase going ahead as demand environment improves. 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 its lost glory & achieve double digit margins in next 5-6 years. The stock price has witnessed correction in the last few months and factored in most of the negatives. We roll forward our estimates to June 27E & maintain our target multiple of 16x & BUY rating on the stock.
Q2CY25 revenue was almost flattish QoQ; EBITDA margins expanded because of operational efficiencies & better product mix
▪ The company’s Q2CY25 revenue declined YoY by ~4% but grew by small 0.4% QoQ. Lower sales volumes were due to weak demand from urban market, early monsoon, inflationary pressure and increase in commodization rate of products. The company has significant room to increase volume as current utilization is ~60-65% & its new factory of Blueloop will incrementally provide support to volumes along with better margins.
▪ The employee cost grew by ~9% YoY & by ~6% QoQ to Rs712mn and stood at ~12% of sales in Q2CY25 as compared to ~10% in Q2CY24 & ~11% in Q1CY25, while other expenses declined by ~2% YoY and by ~4% QoQ to Rs970mn.
▪ EBITDA margin expanded by 196bps YoY and by 61bps QoQ to ~7% in Q2CY25 led by improved product mix & better operational efficiencies.
▪ The interest cost declined by ~39% YoY but grew by ~1% QoQ to ~Rs31mn while the depreciation expenses grew by 9.5% YoY and by ~3% QoQ to Rs131mn.
Cost savings measures, noncore 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 roll forward our valuation to June 27E and the stock is trading at ~10x with an EPS of ~Rs21.8 per share. We are maintaining our multiple of 16x led by improved sales mix & better operational efficiencies & thereby arrive at target price of Rs 348 per share which is an upside of ~60% from current valuations. We have visibility of volume growth, strong balance sheet, cost optimization benefits & leveraging its blueloop brand which will increase its premium portfolio. The stock price has witnessed correction in the last few months and factored in most of the negatives. Thus, we maintain BUY rating on the stock.
Huhtamaki India Ltd – Q2CY25 Result Update – SMIFS Institutional Research
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