Premium product to drive growth, Near term issues transitory in nature, Maintain BUY
Huhtamaki’s Q1CY25 performance was better than our estimates. Revenue was almost flattish YoY but declined by 1.5% QoQ. Sequential decline is because of lower volumes. Gross margins expanded by 32bps YoY & 452bps QoQ to ~34% in Q1CY25. While, EBITDA declined by ~6% YoY because of higher employee cost by ~9% however on QoQ basis EBITDA grew by ~48% largely because of focus on key product portfolio and cost efficiency measures. Owing to weak demand from FMCG players because of sluggish urban demand, flexible packaging players were impacted resulting in lower absorption. Also, the demand for premium products was impacted which led to higher sales of commodity products. The company “blueloop” range of products will focus on increasing valueadded proportion in its product portfolio, although the pace of growth is slow but will increase going ahead as demand environment improve. 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 next 5-6 years. The stock price has witnessed correction in the last few months and factored in most of the negatives. Thus, we maintain our BUY rating on the stock.
Q1CY25 revenue declined by 1.5% QoQ; EBITDA margins expanded because of operational efficiencies & better product mix
The company’s Q1CY25 revenue was almost flattish YoY but declined by 1.5% QoQ. Sequential decline was because of lower volumes. The company has significant room to increase volume as current utilization is mere 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 ~7% QoQ to Rs674mn and stood at ~11% of sales in Q1CY25 as compared to ~10% in Q1CY24 & in Q4CY24, while other expenses declined by ~1% YoY but grew by ~9% QoQ to Rs1,012mn.
EBITDA margin contracted by 38bps YoY but expanded by 211bps QoQ to ~6% in Q1CY25 because of improved product mix & better operational efficiencies.
The interest cost declined by ~37% YoY but grew by 2% QoQ to ~Rs30mn while the depreciation expenses grew by ~33% YoY but declined by ~8% QoQ to Rs127mn.
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
Currently, the stock is trading at ~9.9x CY26E. We are maintaining our multiple of 16x due to improved sales mix & better operational efficiencies & thereby arrive at target price of Rs 316 per share which is an upside of 61.3% 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 our BUY rating on the stock.
Huhtamaki India Ltd – Q1CY25 Result Update – SMIFS Institutional Research
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