Huhtamaki India Research Report By ICICI Direct

Innovator in flexible packaging industry…

Huhtamaki India (HIL) was incorporated in 1935 as Paper Product Ltd. In 1999, Huhtamaki Oyj acquired majority stake (currently ~67%) from the erstwhile promoter and changed the name accordingly. HIL is the leading player in the flexible packaging industry, providing packaging & labelling solutions to its clients through its ~18 plants and two R&D centres across India. The major client includes Nestlé, HUL, P&G, Mondelez, Coca Cola, etc. Further, we believe strong client base, launch of innovative products (backed by strong R&D of parent) & focus on expansions (organic+ inorganic) would help HIL expand its footprint in the domestic & international markets. As a result, HIL may witness revenue, PAT CAGR of 10%, 20%, respectively, in CY20E-22E supported by higher margin and saving in interest costs.

Triggers

Focus on premium products to help drive margin for HIL

HIL has a strong support from its parent (Huhtamaki Oyj) to launch innovative user friendly packaging solutions for its key clients. It has launched various innovative packaging products such as packaging for Paper Boat, ID vada batter, Kinder Joy, stand-up pouches with closures (for rice brands), cone sleeves (Cornetto). Huhtamaki’s ‘blueloop’ is another innovative packaging solution launched in CY19, which can be recycled and is well accepted by coffee, confectionery, dry food, personal & home care, etc, industries. Currently the premium product contributes ~25% in overall topline, which commands higher margin (I-direct estimate: ~800 bps compared to company level margin). HIL aims to increase the proportion of premium products in total revenue in the coming years, which would help it to drive overall EBITDA margin up by ~100 bps in CY20E-22E.
F&B industry: Key driver for innovative flexible packaging

The flexible packaging industry in India is likely to grow at 10% CAGR to | 64,000 crore by FY23 from ~| 37500 crore in FY18 led by increased demand from the food and beverages (F&B) industry. The F&B industry contributes ~60% of total flexible packaging demand while the rest comes from the pharmaceutical, industrial chemical, personal care and other industries. We believe rising demand for packaged food among consumers, to maintain hygiene amid pandemic, and increasing government focus on food processing industry in India would help drive demand for flexible packaging, going forward, thereby benefitting a strong player like HIL.

Strong growth in exports business

HIL’s export revenue grew at 29% CAGR in the last five years led by client additions and penetration of soup cube across South East Asia and LatAm regions. Over the last five years, HIL has added various overseas clients in its portfolio through acquisition of business of Positive Packaging, Ajanta Packaging and Mohan Mutha Polytech. We believe robust global supply chain network along with strong backing of parent in launching innovative products would aid HIL in gaining market share globally.

Valuation & Outlook

A leadership position in the domestic flexible packaging industry, strong client base and focus on launching innovating products will be key drivers of revenue & PAT growth in CY20E-22E. Healthy balance sheet (D/E: 0.4x, RoE: ~25%, RoCE: ~24%) and backing of a strong promoter strengthen our belief on Huhtamaki India to command higher valuation. We value the stock at | 375 i.e. 16x P/E on CY21E-22E average EPS of | 23. We assign a BUY recommendation to the stock.