Friday, April 29, 2011

Paper Products Ltd- perfect packaging for the future !

The Paper Products Limited (PPL) is consumer packaging company. 

Products and Solutions offered: Flexible packaging, Labeling Technologies specialized pouches, package protection and decoration technologies, specialized cartons, packaging machines, barrier metalized and holographic options, others- cylinders, blown films, webs.
The Company also offers decoration technologies, including Shrink Sleeves, Heat Transfer Labels, Pressure Sensitive Labels, Metalized Paper and Wrap Around Labels.
Paid up equity Capital: Rs.12.54 crores ( FV –Rs.2 per share)
Debt : Nil ( the company has availed of unsecured interest free sales tax deferred loan frpm AP Govt for its Hyderabad factory in accordance with the Govt’s sales tax deferral scheme
Cash and cash equivalents : Rs.50 cr
Market price : Rs.64.60 ( April 29, 2011)

1)      Huhtamaki  ( a Finland based company with worldwide operations  into consumer and speciality packaging). The company has a market cap of about USD 1.5 Billion and 2010 sales of about USD 2.9 Billion. It has about 12,000 employees in 31 countries and 53 manufacturing units worldwide. Huhtamaki holds 58.92% stake in PPL through its subsidiary Huhtavefa B.V.
2)      Suresh Gupta & family hold 4.96% stake in PPL
Manufacturing units: Four units (Thane, Silvassa, Hyderabad, Rudrapur). In 2010, PPL disposed off  its Nagpur unit  (where manufacturing operations were suspended from April 2008) and realised a net gain of Rs.13.9 cr.
Key customers: HUL, Nestle, Cadbury, Britannia, Glaxo Smithkline, Coca Cola, Perfetti, Dabur, Marico, P&G


Year ended Dec 2010:
Sales ( net of excise): Rs.704 cr
Profit before tax & Extrordinary items: Rs.46.27 cr
Net profit: Rs.48.12 cr  ( after accounting for Rs.13.9 cr gain from sale of Nagpur assets and Rs.2.86 cr income tax related thereto and one time income of about Rs.3.05 cr relating to provision reversal and insurance claim
Q1 2011:
Sales ( net of excise): 198 cr (35% growth yoy)
Operating profit: Rs.18.33 cr ( 54% growth yoy)
Operating profit has been taken above to reflect a clear view of the improving business fundamentals as in Q1 2010, the company had earned an exceptional income from disposal of Nagpur assets and hence NP figures will project a distorted picture.

Key highlights:
1)      2010 operating margins were under pressure due to a dramatic increase in Polyester film price from Rs.102 in Jan 2010 to Rs.235 in Oct 2010
2)      PPL has chalked out a 42 cr capex plan for 2011 which involves installation of an additional conversion line at Rudrapur , printer at Hyderabad and also labelling lines.
3)      EBIDTA margins which were about 18-20% in the first few years of the new millennium are now at about 7-8%. The company proposes to address this challenge through increased thrust and contribution  of NASP ( new products, technologies, processes) sales which currently contribute 27% of revenue but enjoy a higher margin.
4)      FMCG sales grew by about 14% in 2010 while PPL sales grew by 15%. Going ahead, as a result of key technological initiatives, expected new product launches and capex plans, PPL seems well placed to outpace the FMCG growth .

At the current market price of Rs.64.60, the stock trades at a PE multiple of less than 6.5 vis a vis the expected EPS of Rs.10 for 2011. Considering the pedigree of management, the well laid out  dividend payout policy ( wherein they share between 30-40% of EPS in the form of dividends) and the accelerated and profitable growth plan which the company has for the future, PPL presents a compelling investment opportunity at the current market price of Rs.64.60.

At the time of writing this report, the author /his family have an investment interest in the stock mentioned above. Under no circumstance does the information in this report represent a recommendation to buy or sell the above-mentioned stock.  This report has been prepared and issued on the basis of publicly available information, internally developed data & other sources believed to be reliable. This is just a suggestion solely for information purposes and does not constitute a solicitation to any person to buy or sell a security. While the information contained therein has been obtained from sources believed to be reliable, no responsibility (or liability) is accepted for the accuracy of its contents. Readers using the information contained herein are solely responsible for their actions and are advised to satisfy themselves before making any investments.


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